Currency arrangements that survive the test of time need to be coherent in all circumstances and without ambiguity. Part of any robust union is that there is a full commitment to make it work.
The white paper restates the Fiscal Commission Working Group’s position that Scotland should enter into a sterling union with the rest of the UK.
However, the white paper goes on to say that it would be “open to people in Scotland to choose a different arrangement in the future”. This implies that even if a currency union is agreed by 2016, it may not be Scotland’s choice in the years thereafter.
Presumably, in the same vein, there may also become a time when the people of the rest of the UK also change their mind. If citizens on either side of the Border have no guarantee that the sterling union will continue to be the preferred option in future, then the arrangement is fragile because of this possibility.
Suggesting that the currency union may not be permanent leaves the system exposed. An example of this is the Czech and Slovak currency union after the amicable divorce in 1993. Because the Czech and Slovak currency union was conceived of as temporary, it lasted only five weeks.
We have argued that the higher the level of debt an independent Scotland inherits, the more vulnerable the currency union would be.
The reason is that in case of a shock – say a drop in oil revenues – the small country in a monetary union would not be able to use interest rates or exchange rates to adjust.
The only alternatives would be to increase borrowing or to impose austerity. When the level of government debt is already high, it can be difficult and expensive to increase borrowing. This would leave austerity. We all know that austerity is painful enough, and at some point leaving the union and regaining the ability to use monetary policy could become an attractive option.
As a sovereign country, Scotland would not be able to commit to remaining in the monetary union in perpetuity. The white paper acknowledges as much. When citizens perceive the political commitment to a currency union is on the wane, this undermines its resilience.
To unconditionally commit to a currency union in perpetuity requires political union. The euro has survived precisely because there is a high degree of political commitment. Scottish independence is a political move in the opposite direction.
• Dr Angus Armstrong and Dr Monique Ebell of the National Institute for Economic and Social Research are being funded to examine currency and fiscal options for Scotland
Question of Scots share of debt left hanging in the air
One of the key issues that gets less attention than it deserves in a document of 649 pages is an independent Scotland’s national debt.
The white paper makes two proposals for allocating Scotland’s share of the UK national debt – which now stands at £1.2 trillion and will rise to around £1.6 trillion by the time Scottish independence might come around.
First, Scotland could take its population share of the UK debt, based on the argument all UK citizens have an equal stake in the debt and that Scotland should therefore be allocated a share of debt equivalent to its share of population.
Second, Scotland’s liability could be based on its past record of fiscal deficits and surpluses. This amounts to arguing Scotland should only be responsible for the part of the UK debt that relates to revenues and spending in Scotland.
If you use this method and start the clock in 1980, when oil was about to come on stream, Scotland’s national debt is lower than if calculated with the population method.
Both arguments have merit. But having opened the argument, the white paper does not come down on one side or the other. Instead, it argues the “Scottish Government will service the share of the debt allocated to Scotland”.
This is as close as it gets to acknowledging the outcome will be a matter of negotiation and so cannot be determined before the referendum. It is clear the rest of the UK would press for the population share approach.
Another consideration is the ownership of the debt. The white paper says: “The Scottish Government does not envisage that a proportion of UK debt would be legally transferred to Scotland on independence”.
If Scotland’s debt remains part of UK debt, then the need for Scotland to issue its own debt is avoided. It is clearly to Scotland’s advantage to pay interest on debt at UK rates if these are lower than could be achieved on Scottish debt.
The white paper does not explain why the rest of the UK should agree to this arrangement, when the benefits seem to be focused on Scotland.
• David Bell is professor of economics at Stirling University