Why on earth would politicians seeking to deliver an independent Scotland believe it should have its own currency? It is a question worth asking, for while I believe a Scottish currency is a perfectly rational economic position to take, politics must come into it and this is far from settled, even in the minds of nationalists.
If you think Brexit has shown that leaving our 42-year-old relationship with the European Union is difficult then just imagine how problematic it would be for Scotland leaving the 312-year-old United Kingdom that has included a currency union with England for three centuries. That little difficulty explains why the SNP has had more positions on a Scottish currency Nicola Sturgeon has had foreign trips.
The country will need a new central bank with no track record and carrying a huge share of UK public debt. Even the SNP’s Growth Commission report admits (but underestimates) the Scottish Government annual deficit will require severe austerity like nothing seen before, to bring it under control. Gone will be the annual transfer of give-or-take £10bn from the UK. Local councils are crying now under SNP cuts, but they will be screaming until hoarse after Scexit.
Then there’s the unhelpful low price of oil providing little in the way of revenues. The chances of the Scottish currency appreciating in value are not good.
A Scottish currency will need a central bank with access to currency reserves, probably of at least £40bn. To help, economist and former SNP MP George Kerevan suggests all Scots’ deposits in Scottish bank accounts be converted to the new currency. If, as is highly likely, the currency then depreciates against Sterling the value of those deposits depreciate too. We are talking here about life savings losing value overnight and from then on. That’s not a clever way to sell independence.
Similarly, all mortgages, loans and purchases made in the UK by Scots using Sterling before independence shall need to be paid back in the equivalent Sterling value to avoid default. Again, as the Scottish currency depreciates the amount that has to be paid back rises. That’s not a smart way to sell independence.
Of course, the new Scottish currency could appreciate and the reverse of these examples would be true, making Scots more prosperous, but is that a risk voters will be willing to take?
Why then is the SNP leadership banging this particular drum now? The first reason is to kick into the long grass the currency issue that has never been answered adequately in the past – the second is to set up a reasonably quick route back into the EU – which it knows will entail Scotland eventually joining the Euro (and Schengen et al). To join the Euro you first need to have a central bank and currency to convert from – you cannot convert from Sterling, another country’s currency – so creating a new currency smooths the path to EU membership and the adoption of the Euro.
A new report published tomorrow demonstrates how, beyond any doubt and using the EU’s own statistical output, the Euro currency project has been an economic catastrophe. In the mid-nineties the Eurozone countries and United States enjoyed roughly the same share of World GDP. In 1994 the US economy accounted for 24.9 per cent of global GDP, compared with the Eurozone’s 24.5 per cent.
Today the US economy is some 30 per cent larger – having broadly held its global share at 22 per cent of global GDP, while the Eurozone share has declined considerably to 15.1 per cent. The US experience shows advanced economies can perform strongly, that decline is not inevitable because of the emergence of developing countries – but more the product of poor policy choices.
The massive scale of the lost opportunity that the EU’s economic failure has cost the UK can be gauged by comparing the trade the UK enjoys with the EU now with what it could have been if the Eurozone economy had grown at the same rate as the US over the last 20 years – estimated by Global Britain economist Ewen Stewart at around £355bn last year – not the £273bn it achieved.
Put bluntly the EU’s economic failure over the last 20 years cost the UK £82bn in lost exports between 1997-2017, or around 3.5 per cent lost GDP each and every year. Far from being the catalyst for UK prosperity the EU has been a dragweight. This lost EU demand is a major factor behind the UK’s massive £96bn trade deficit with the EU. It largely explains why the UK manages to trade at a small surplus with the rest of the world, excluding the EU – but performs so disastrously with the EU.
Now the US is pulling away even more. Annualised growth in the Eurozone for 2018 against 2017 was 1.6 per cent (UK 1.4 per cent) while in the US it was 2.9 per cent – worse still, the trend is quickening with the Quarter 4 comparison being 0.2 per cent for the Eurozone (1.3 per cent for the UK) and 3.1 per cent for the US. There can be no doubt from the evidence that the EU’s poor performance is a drag on the UK’s exports.
It therefore makes no economic sense for Scotland, independent or within the UK, to bind itself to the EU and the Eurozone. Scotland firstly needs to make the most of its close and highly beneficial relationship with the rest of the UK and secondly needs, like the whole of the UK, to focus upon and exploit the opportunities that lie with doing business in the emerging economies.
Scotland’s best approach is to remain in the UK with the Pound Sterling and to trade with the wider world, focusing on growth in the emerging markets rather than the declining Eurozone.
Independence represents a triple whammy of creating significant barriers to our social and business relationships with England, our most important trading partner – then switching to a sub-optimal currency that is highly likely to lead to immediate impoverishment for Scots – and worse, then adopting another currency that comes laden with controls and regulations that are the antithesis of independence and bring even slower economic growth – just when Scotland needs rapid growth to save it from a bad decision to leave the UK.
Currency will remain a problem for the SNP until the good politics of controlling public expenditure makes sound economics possible.
l Brian Monteith is a director of Global Britain