WHAT does “monetary union under an independent Scotland” really mean? If an independent Scotland is to have a shared currency with the rest of the UK, then both sides will need to agree a treaty.
Would such a treaty actually give Scotland more power than simply devolving further responsibilities?
The Scottish Government believes it can establish a monetary union with the rest of the UK after independence. But to do so means agreeing the terms with Westminster. Irrespective of political haggling over the desirability of a monetary treaty the one certainty is that most of the bargaining power will lie with Westminster. Although Westminster will not want to appear totally unreasonable, any treaty will be on its terms.
With the removal of political representation at Westminster following a Yes vote, the flexibility of a parliament will need to be replaced with a treaty. This will be neither flexible nor short. It will have to cover all aspects of monetary union starting with the role of the Bank of England. It will need to set out any representation Scotland would have on the various Bank of England committees and particularly the monetary policy committee which sets interest rates. The rules for the MPC cover such factors as inflation rates, currency strength and economic stimulation. These would need to be clearly defined. The MPC would also need to assess the relative weighting of the Scottish economy in making decisions and there would need to be agreed principles on how new money would be issued, and on quantitative easing. Any new money would then need to be shared between Scotland and the rest of the UK in some pre-agreed way. Self evidently none of this is easy.
Presumably, the Bank of England would still be the lender of last resort in the event of a banking crisis. If so, the Bank of England would continue to regulate the banks across the monetary zone. Therefore a guarantee would need to be provided by each government, or a fund would need to be created to maintain liquidity and cover potential bank defaults.
It would also be natural in such an arrangement for the Bank of England to be responsible for the issuing of government debt for Edinburgh and London. Would this be done separately by each nation, or pooled as combined debt and then allocated between the nations?
Of course, monetary union only works where the nations involved are prepared to have broadly similar attitudes to public sector borrowing, including off-balance-sheet debts such as unfunded pension liabilities. The Eurozone crisis has demonstrated that a single currency in regions with widely differing attitudes to fiscal debt and economic management causes tension. So Alex Salmond would have to agree with George Osborne.
So what does all this mean in practice? Would Scottish independence with a monetary union really deliver more control for the Scottish Government than delivering more welfare and revenue raising powers as set out in Devo Plus?
Under the proposals for Devo Plus, Westminster would retain full control over monetary policy and the Bank of England, but Scots would have their proper representation on these matters through elected MPs. Westminster would reserve certain taxes such as VAT and national insurance to pay for the services it provides such as defence and foreign affairs. Other taxes would be devolved to Holyrood to cover its spending responsibilities such as health and education. This could give much greater flexibility to Holyrood to adapt its fiscal and welfare policies to create the right environment for the Scottish economy and its people.
The reality for Scotland’s economic future is that Devo Plus would give Holyrood ministers far greater powers to shape policy to a Scottish agenda than independence. Alex Salmond would be better off with Devo Plus. Those in politics who want the best of both worlds, a stronger Scotland within the UK, will consider their options in the early part of 2014. Devo Plus provides a cogent case that underpins exactly that outcome.
There is a saying: “be careful what you wish for”. It would be ironic if we ended up with a Yes vote, but in the process had tied ourselves to a system which no longer gave us any political representation without controlling many of the important powers needed to reform Scotland. That would not be independence nor would it be in Scotland’s interests.
Tavish Scott MSP is a former leader of the Scottish Liberal Democrats