Eddie Barnes: Discord for sterling’s bandleader

Alex Salmond is still hopeful over a currency union. Picture: TSPL

KEEP the pound. In 2001, that message, around which Tory leader William Hague based his failed UK general election campaign, sounded marginal and faintly shrill.

Today, in more turbulent economic times, it is a prerequisite. In the independence referendum campaign, pro-UK campaigners say the fate of the notes is a key issue coming through in focus groups.

Alex Salmond may be campaigning for Scotland to gain full power over its affairs, but he will keep the pound.

So, when George Osborne warned last week that the rest of the UK might say “thanks, but no thanks” to a pound-sharing deal, the SNP big guns came out in force.

Of course the pound would stay after independence, both John Swinney and Mr Salmond argued. After all, the government’s own fiscal commission “including the views of US economist Joseph Stiglitz and other members of the fiscal commission working group, shows that it is in the best interests of both an independent Scotland and the rest of the UK to have a sterling zone”.

Many pro-independence figures have had their say on the SNP’s rebuttal in the days since, with Yes Scotland chairman Dennis Canavan joining others last night in arguing that a separate currency is required to give Scotland the fiscal freedom it would want.

And while the much-quoted Professor Stiglitz has been trotted out by Mssrs Salmond and Swinney to bolster their case, he himself is a good example of that internal debate, and the dilemma the campaign faces.

Prof Stiglitz has been used by the SNP in the last week as a kind of economic pope. The 70-year old Columbia University professor and former Clinton adviser is one of the high priests of the austerity age. He is the holder of a Nobel prize for economics, and rated as one of the most influential thinkers on the planet for his critique of global finance.

Prof Stiglitz’s view on the currency appears to be nuanced. True, the fiscal commission concluded that the pound was the best option. But, speaking to MSPs in February, the professor was asked about what he thought of the report’s view that a currency union with the rest of the UK was essential.

It is worth quoting his reply to Labour MSP Ken Macintosh, available on the Scottish Parliament’s website, in full: “I will just say that the report to which you refer was a report of the collectivity of that group. We did not each agree on the weight that was associated with every recommendation. As with any group report, it gives a sense of the group’s view, although there were differences.

“For the report to have meaning, we all said that there should be nothing in it that we felt was so outrageous that we wanted to dissent from it. There was a broad consensus, but we did not all give the same weight to the recommendations.”

Prof Stigligz continued: “On the issue that Mr Macintosh raises, one important discussion was about transition versus the long run. There was concern about the factors that might make for a smoother transition, but there was also a discussion of the fact that, in the long run, Scotland will have to re-examine its institutions.

“It will be important to have a structure that has flexibility, so that over time the institutions will be able to adapt to the change in circumstances. As we thought about that issue, the two notions that were influential were the smoothness of the transition and the flexibility to move eventually to the institutional structure that is appropriate for Scotland. So …” Unfortunately, appearing by video link, Prof Stiglitz was then cut off. Perhaps he will set out his view fully another time.

What I read him saying is that commission members had a debate over the relative importance of a smooth transition into independence (for which a sterling zone would be required) and then the country’s long run “flexibility” (for which a sterling zone might not be so good).

In other words, it appears the group was aware of the need, initially, to keep things simple, but also the need, in the longer run, to give the new country the kind of financial room for manoeuvre that accords with independence. Retention of sterling doesn’t do that.

The final report reflected the trade-off between these two necessities. The report declares that all members of the group agreed sterling was a “sensible currency choice”. But it qualified this by noting the support was “On day one of independence …”

So why hasn’t the SNP adopted this formula? Mr Salmond could propose a reassuring message that the pound would stay to begin with, and then support a more “radical” plan to move to its own currency in the longer term. Economically, the danger is that even the acknowledgement of a shift in currency would make the plan vulnerable to market attack.

As Professor John Kay, a former adviser to Mr Salmond’s council of economic advisers has noted: “The existence of a commitment to change course at some time, even if couched in the vaguest possible terms, is a potential subject of speculative activity”.

This ended the currency union between Slovakia and the Czech Republic in just six weeks. Politically, therefore, such a message would allow the SNP’s opponents to print off millions of leaflets warning sceptical voters that independence would mean the end of the pound, pronto.

Could the SNP surmount these problems? Could the economic fears be quelled, as some in the camp believe, with a clear and unambiguous message that Scotland would only revert to a new currency once a set of yardsticks had been met? The cautious Mr Salmond may feel that such a plan is a risk not worth taking at a time when he has to ensure people are not scared off by his vision. Unfortunately, it appears that there are plenty of people on his own side who beg to differ.