Lessons of the eurozone debacle undermine Salmond’s case for keeping pound, writes Ed Balls
The decision on whether to remain in the United Kingdom is one for Scots to make next year. I won’t have a vote, but I do have a strong opinion. Because it will affect all of us if Scotland decides to go it alone.
Sharing resources, risks and rewards is good for everyone in the UK. It benefits Scotland as it is the framework of the UK economy that stands behind the success of devolution. However, if the nations of our United Kingdom go our separate ways we would all be poorer for it, wherever we live.
Breaking up the UK after three centuries together would be a complex undertaking. Of all the complicated issues to be considered, few are as important as what currency Scotland would use.
This is about far more than the bank notes in Scottish pockets. It is about people’s mortgages, jobs and businesses, the taxes we pay and where our financial services are regulated. The global financial crisis was a reminder of how important these issues are.
It was listening to Alex Salmond pretending that he could promise that Scotland would continue to use the UK pound after leaving the UK that moved me to enter the debate. In fact, the only way to guarantee the pound is to stay in the UK.
The experience of the euro casts a long shadow over the referendum currency debate. Of course, the only reason Alex Salmond is proposing keeping the UK pound at all is because his long-preferred currency option, the euro, now seems too unstable and unpopular to place it at the centre of his referendum offer. It is ironic, then, that the Nationalists now propose establishing a currency union which is modelled on the institutions of the euro.
It is no secret that I was sceptical about the workability of the eurozone from its inception. Inside the Treasury, I argued that monetary union, without deeper fiscal, social and political integration, was a recipe for instability. Successful monetary union required a degree of convergence that limits a nation’s economic independence.
In the 1990s it was a matter of economic theory and best judgment. But today we have the lived experience of the eurozone, which has left us with very clear lessons.
A successful economic and monetary union requires a central bank ready to stand behind all countries and much greater economic and political integration – which is why the euro countries are now building both a banking union and much deeper and tougher fiscal rules and sanctions.
That’s why it is so strange that the SNP project, which seeks to dissolve the political and fiscal unions of the United Kingdom, should suggest establishing a eurozone-style monetary union.
Those very things that make a shared currency work, a truly integrated single market, common financial regulation and the ability to share out tax revenues around the country to even out economic imbalances, are what the Nationalists would have us dismantle. The promise that Scotland would continue to share a currency with the remainder of the UK simply isn’t one the Nationalists can make. Sharing something requires both partners to agree.
A monetary system isn’t an asset to be divided up between the two countries like a record collection after a break-up. The UK pound only exists through acts of the UK parliament. No legal or institutional framework exists for the sharing of the pound with another country. And it would require a very difficult and uncertain negotiation, with no guarantee in advance that an acceptable agreement could be reached for both the parties.
When confronted with this truth, the fall-back position of the Nationalists is to claim that Scotland could use the pound informally, without a central bank, a lender of last resort or any control over the monetary framework. It shouldn’t have to be said, but the currency arrangements followed by economies like Kosovo, Panama or Montenegro are too big a risk for a complex economy like Scotland’s. This has rightly been dismissed by Alex Salmond’s own economic advisers.
Without the backing of the Bank of England, large financial institutions such as banks or insurance companies would not base themselves in Scotland. In the real world, an independent Scotland could only use the UK pound if a deal could be struck with the rest of the UK.
For a country like Scotland, the choice between the economic costs of a separate currency or the loss of sovereignty as economic policy – interest rates, budget rules and financial regulation – are set by a foreign country is a poor one.
But if there is a Yes vote, the UK government that will sign-off the final deal on the terms of Scotland’s separation with Alex Salmond, including on the key issue of currency, will be elected at the next general election. As Labour’s Shadow Chancellor I hope to be Chancellor of the entire UK and will be working hard – first for a No vote in 2014 and then for a Labour victory in 2015 – to make sure that is the case. But whatever the general election result, if Scotland votes to leave the UK then the Chancellor would have to make decisions of fundamental importance to the economy.
How do we set-up a eurozone-style sterling-zone between these two separate countries? Can we convince taxpayers in the rest of the UK to carry the risks of being lender of last resort for Scottish banks? Is the euro experiment really worth repeating?
Alex Salmond cannot answer these questions, because they are not for him to determine. But here is one guarantee I can make. Whatever currency option Scotland ends up with after an independence vote, it will be less advantageous than what we have across the UK today. There will be a big cost in terms of jobs, investment and living standards. And we will all pay the price.
• Ed Balls is the Shadow Chancellor.