Nationalists are in something of a no-win situation when it comes to the currency. But actually they’ve made the least-bad choice, according to US currency expert Lawrence White.
White is one of my favourite economists because he’s an expert in ‘Free Banking’ (where private banks issue competing currencies) and in particular Scotland’s unique and successful experience of it between 1697 and 1830 (see his IEA book, pictured left).
In 2008 (i.e. after Northern Rock, but before the euro crisis) I asked him to write a short essay on what would be the best currency option for an independent Scotland, and you can read it here: Whitecurrency08.
In short, he reckoned keeping Sterling would be best, even if Scotland lost its representation in the Bank of England decision making process.
Issuing a new Scottish pound would introduce unnecessary costs, both in the up front transfer and in ongoing cross-border trading, and the new central bank would have a difficult job establishing and maintaining inflation credibility. Meanwhile White believed that the ability to devalue as a way of alleviating an economic downturn is of no long-term benefit, and the role of a central bank as lender of last resort is overplayed – indeed having such a backstop makes private banks more reckless.
Joining the euro would invite a monetary policy unsuited to Scottish conditions. But since the Scottish economy is so integrated into the UK, and monetary and inflationary conditions are so similar, the monetary policy pursued by the Bank of England would suit Scottish conditions pretty well, even if the Bank no longer took the Scottish economic situation into account when making its decisions.
White’s case is very well made, but I still think it leaves the nationalists with problems. Even in the most benign conditions, independence would mean a loss of sovereignty over monetary policy and banking regulation, as Unionists are gleefully pointing out.
But with the colossal debt and monetary crisis that is engulfing Europe, I wonder if Lawrence White’s sanguine view of currency unions still holds true. I’ll ask him, and if he gets back to me I’ll report here.
The case of Greece shows how difficult it is to devalue by reducing wages and prices while maintaining a currency union with more competitive trading partners. Perfect economics is not always matched by political and social reality. The pressure in the EU is for fiscal integration to match the currency union. Whether that’s economically right or wrong, it doesn’t suit the SNP’s case for staying in Sterling while setting a different tax regime.
The political strain within the UK is already stark. The UK government is printing money like there’s no tomorrow while following relative fiscal austerity. This is the complete opposite of what the Scottish Government says it want to do, which is to take on lots more government debt. Such divergent policies would render a separate Scotland’s continued use of Sterling uncomfortable, to say the least.