Scottish independence: Keeping pound ‘sensible’
KEEPING the pound as the currency if Scotland became independent would be both “sensible” and an attractive choice for the rest of the UK, a group of leading economists said.
• Leading economists say keeping sterling as Scottish currency post-independence would be “sensible”
• Fiscal Commission Working Group, established by Alex Salmond, concede “practical challenges” ahead
• Strong links between Scots and UK businesses highlighted as advantage of retaining pound
Experts in the Fiscal Commission Working Group said Scotland was sufficiently large to have its own currency if the country opted to leave the UK in next year’s independence referendum.
But the group - set up by Scottish First Minister Alex Salmond to provide advice on the economic challenges and opportunities the country would face after independence - conceded there would be a number of “practical challenges” linked to establishing a separate Scottish currency.
The Scottish Government has already said it would want to retain the pound if the country votes to end the 300-year-old union.
The Commission stated: “On day one of independence, the members of the Working Group agree that retaining sterling would be a sensible currency choice that would be attractive both to Scotland and the UK.”
The group’s report, published today, highlighted the strength of business links between Scotland and the rest of the UK as one reason for retaining the pound in a “sterling zone”.
Commission chair Crawford Beveridge said: “We’re a very large part of the rest of the UK’s trade. There’s a great deal of flow between the rest of the UK and Scotland, in both directions.
“In an independent Scotland the earnings you would get from oil revenue and exports of whisky and other things would be useful for the sterling zone to have.”
Mr Beveridge, a former chief executive of Scottish Enterprise, added that keeping the pound would help provide “the stability for businesses to understand you could continue to do business here and across the border between Scotland and England without any currency risk”.
He said: “The indications we’ve got so far, from the technical discussions that have gone on, seem to agree that’s a sensible position.”
The Commission’s report said a sterling zone currency union would “be starting off from an institutionally and structurally stronger position compared to the euro arena”.
It stated: “All things considered, the current evidence points in favour of retaining sterling as part of a formal monetary union.
“This would also be in the benefit of the UK, given the trade links with Scotland and the nature of integrated markets, such as in financial services.”
Campaigners fighting to keep Scotland in the UK have argued the country could have to adopt the euro as its currency if it became independent.
But the Commission rejected this argument and said it was “not the case that a newly independent Scotland could be obliged to join the euro”.
Speaking at a press conference in Edinburgh, Mr Beveridge added: “For as long as we can see ahead, it makes sense to stay in the sterling zone.”
The Fiscal Commission he chairs includes Professor Andrew Hughes Hallett, a professor of economics in both Scotland and the US who has acted as a consultant for the World Bank, the IMF and the UN amongst others, and Professor Sir James Mirrlees, a Noble Prize winner who is Professor Emeritus at Cambridge University.
Professor Joseph Stiglitz, a Nobel Prize-winning economist who was one of the US Council of Economic Advisers for a period during the Clinton administration, is also a member, along with Professor Frances Ruane, the Director of Ireland’s Economic and Social Research Institute who was previously an Associate Professor of Economics at Trinity College, Dublin.
In its report, the Fiscal Commission set out that the Bank of England would continue to be the lender of last resort in an independent Scotland.
The economic framework proposed for an independent Scotland includes the Scottish Government gaining some formal input in the Bank of England - and its crucial interest rate setting Monetary Policy Committee - by being an explicit shareholder of the Bank.
On issues such as this, Mr Beveridge conceded more talks were needed, as “nobody has agreed to anything yet”.
He said: “Early discussions with the Bank of England and with our colleagues in Europe is something that is very critical for us to do.
“I think if we wait all the way up until we get to the independence vote that’s too late, we need to start these discussions now.
“We’re not talking here about pre-empting any decision the Scottish people will make in the referendum, there’s a lot of technical discussions you can have about how these things would work that can go ahead now and give some certainty.”
But he added: “The answers you get from people today are very different answers from the ones you would get the morning after a Yes vote in the referendum.
“It is sometimes difficult to ask very high level officials - the European Union being one case in point - to make a statement now until they are sure they have to go down that path.”
The Fiscal Commission also suggested there would be “merit in devising a ‘fiscal sustainability agreement”’ to promote stability in a monetary union between Scotland and the rest of the UK.
In its report it said that would cover both governments and would “provide the flexibility to develop policies to promote growth and maintain economic performance”.
Another key proposal is the establishment of a stability fund, which cash from oil revenues would be placed in and invested for the future.
The report said such a fund “could then be used to guard against future unexpected falls in revenue”.
It added: “With careful management of the public finances over time, such a fund could evolve into a more general wealth fund to promote inter-generational equity”.
Mr Beveridge said: “There obviously may be some needs that the Government has that would require some of that revenue to be spent on a revenue basis.
“But the hope would be each year we would be able to put something into that fund.”
Overall, the report concluded that independence would “provide Scotland with the opportunity to capture and deliver faster sustainable economic growth, with greater opportunities to tackle key challenges in sustainability and inequality over the long-term”.
It described Scotland as a “wealthy country” which is “on a par with many other successful independent countries”.
The Fiscal Commission highlighted a number of key strengths in the Scottish economy, including the energy sector, life sciences, food and drink and tourism.
But it said the country faced a number of challenges “not least tackling the long-term growth gap between Scotland and other comparable countries”.
It said: “It is clear that over the long-term, Scotland has not completely fulfilled its economic potential.”
The Fiscal Commission highlighted two main reasons it believed this to be the case, stating that the UK economy had underperformed in relation to other countries and “as a result, the UK economy, and by implication Scotland, has lost ground against its competitors”.
The report said that “more fundamentally” the problem resulted from the current constitutional arrangements which meant “the full range of economic policies cannot be tailored to the specific structure, opportunities and challenges of the Scottish economy”.
Mr Beveridge said: “Scotland has the clear potential to be a successful independent nation. A macroeconomic framework, that is based upon fiscal discipline and financial stability, is an important pre-requisite for prosperity, fairness, economic opportunity and security.
“The proposition the Fiscal Commission Working Group has put forward is a workable blend of autonomy, cohesion and continuity. It is a well engineered model designed for day one of independence.
“We have taken the status quo as a starting point, and ensured our proposals are robust, flexible and attractive to key partners in the rest of the UK and the EU, while at the same time providing significant policy autonomy to Scotland.
“The framework proposed would represent a substantial step-change in the economic powers of the Scottish Parliament and greatly increase the economic and social policy levers at the disposal of policymakers in Scotland.
“It would ultimately provide full control, in terms of economic sovereignty, to the people of Scotland.”
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