Alf Young: Major currency roadblock ahead?

Sir John Major insists an independent Scotland shouldnt use stirling. Privately, many in the SNP agree. Picture: TSPL

Imagine the former PM’s vehemence if he realised the SNP only wanted sterling as a transitional currency, writes Alf Young

THERE was a touching moment in the Holyrood debating chamber on Tuesday afternoon. Scotland’s Future – a white paper, prospectus, manifesto, call it what you will, as epic in scale, when you add in supporting documents published in recent days, as War and Peace - had been launched on Glasgow’s riverside. MSPs were getting their first chance to discuss it.

Veteran Labour member Malcolm Chisholm welcomed the commitment to more extensive, free child care, but asked why it couldn’t be introduced now. Then he turned to the SNP’s aspiration to keep sterling in an independent Scotland. Didn’t Nicola Sturgeon understand that, “even if there were a currency union, there would be no fiscal independence?” Was she not leading “project wish against project reality”?

Scotland’s deputy first minister responded with what sounded like genuine respect for a political opponent. She then confessed “a sneaky wee feeling that … in his heart of hearts” Chisholm would be “as inspired by the white paper as I am”. It was a brief shaft of peaceful, respectful banter before the relentless war for Scotland’s constitutional detiny resumed.

I then watched, with mounting despair, Nicola Sturgeon and Alastair Carmichael, head-to-head, trying to stick verbal bayonets into each other, on STV on Wednesday evening. On Thursday I saw that fine singer, Eddi Reader, orchestrate an emotion-fuelled car crash of a performance on BBC’s Question Time, a master class for all five politicians present in how to alienate your audience.

We all pride ourselves on what’s come to be called the Scottish Enlightenment, that great wave of intellectual inquiry and thought that marked the late eighteenth century. Now, despite the blizzard of words on Scotland’s constitutional future, we seem to have lost our capacity for calm reflection on the choice we all face next September. Fervour is crowding out reason and mutual respect.

Those looking for a rational basis on which to make up their own minds will, it seems, have to make do with high-octane assertions on both sides of the argument. If we go on like this, whatever future Scotland chooses, the first task will not be to make good on political promises. It will be to heal our nation’s bruised and battered soul.

Let’s look again at that core issue of which currency an independent Scotland would use. The white paper is clear. Retaining sterling as part of a formal monetary union with the rest of the UK is “the right one for Scotland”, one that “reflects the modern partnership that we seek between the nations of these isles following independence”.

The white paper mentions the findings of the SNP government’s fiscal commission working group, which, after examining four post-independence currency choices, decided a sterling monetary union would be “the best option”.

I’ve just re-read the fiscal commission’s February report from which this unqualified conclusion is drawn. I have to say its actual conclusions, particularly those in its technical annex assessment of the currency choices available, are rather more equivocal than that. Here are the two key paragraphs of that detailed annex, repeated verbatim.

Paragraph 14 states: “Retaining sterling would be a practical option for Scotland immediately post-independence. In addition to the long-term structural benefits that are highlighted below, retaining sterling would assist with a smooth transition to independence (eg practicalities of sharing assets and liabilities and establishing the necessary economic, financial and fiscal institutions). It would ensure a functioning monetary system from day one of independence.”

However the very next paragraph goes on to argue: “Over the medium term it may well be in Scotland’s interests to move to an alternative arrangement, should either the performance of the Scottish economy change or the preferences of the Scottish people change. It may also be in the interest to retain sterling. That would be a decision for the future.”

Elsewhere the commission is clear what other currency option might be preferable, once the transition to independence is complete. In paragraph 110 of the annex it states: “Establishing an independent currency would allow the greatest policy activism and discretion for Scotland, which many countries have found to be advantageous.This includes the setting of interest rates to reflect macroeconomic conditions, such as growth, inflation and asset prices, in the Scottish economy. It would also provide the greatest opportunity to align fiscal policy with monetary policy.”

Of course, there are plenty of people on the Yes side of this debate, from the chairman of the Yes campaign itself, Dennis Canavan, and former SNP deputy leader, Jim Sillars, to the Green Party and sections of the radical left, who agree with Malcolm Chisholm that a formal sterling currency union spells no fiscal independence at all. They want an independent Scottish currency from the start.

No doubt the SNP has eschewed that more-radical currency option for now because, with Yes still behind in the polls, it is reluctant to advocate choices that might stir fresh uncertainties in voters’ minds. Treading the Scotland-will-be-transformed-but-all-the-symbols-of the-British-state-you-cherish-are-safe-with-us line was designed to banish such doubts – but it’s tightrope none the less.

When it dawns on those urging Scots to remain part of the UK that the SNP’s apparent commitment to an enduring sterling monetary union post-independence is, in reality, a transitional currency fix which “might well” be replaced, in the medium term, by a currency an independent Scotland can call its own, the kind of hard-ball talk we heard this week from Sir John Major can only intensify.

The former UK prime minister is already arguing a formal sterling monetary union “cannot – will not – happen” because Scotland cannot expect to secede from the rest of UK and still expect the Bank of England to set monetary policy for two diverging jurisdictions, while acting as lender of last resort for both. When he and others realise that Alex Salmond and his fiscal advisers already see that union as something approaching a transitional convenience, their hostility will surely intensify.

It’s an ugly prospect on both sides. A bitter rammy over who gets what assets. Clear threats from our First Minister that no sterling monetary union means an independent Scotland will walk away from any share of the UK’s national debt or other liabilities. The markets, especially the bond markets, would have a field day with that. The creditworthiness of both sides could be junked.

Perhaps, if and when Alex Salmond meets the new Governor of the Bank of England, Mark Carney, for “basic discussions”, we might see some of the heat and hype taken out of these exchanges. But, unless present trends are reversed, currency wars rather than a currency truce seem on the cards.