Comment: Scottish money and debt post-independence

'The currency adopted... is merely the unit in which the assets and debts build up." Picture: PA
'The currency adopted... is merely the unit in which the assets and debts build up." Picture: PA
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The question what currency Scotland would use if it became independent comes up in every debate.

It is crucially important. Mr Salmond has confused people, with a series of pronouncements; some are inaccurate, some untrue, others distorted or non-sequiturs. But in reality the issues are ones that everyone can understand.

He says that Scotland would demand as its “sovereign will” a currency union, without political union and with total independence, and says that if this is not conceded Scotland would refuse to take on its share of the UK’s debt. To support this he says that if rUK ‘keeps the pound to itself’ and takes all the financial assets, it should also shoulder all the liabilities. It is good tub-thumping stuff but not much more. The facts are as follows:

Firstly, a currency (the pound) does not, as he implies, have the liabilities; it is the country which has the national debts and liabilities, and the national assets. The currency adopted in the future is merely the unit in which the assets and debts build up over years past are thenceforth measured.

Secondly if Scotland becomes independent there will need to be a fair sharing of assets and liabilities. The process of negotiating this will need to take place for all national assets and liabilities, whatever currency Scotland decides to adopt. Some assets, like roads, obviously belong to one party or the other; but others such as defence forces and establishments, and even oil and gas, will have to be subject to negotiation, as will the attribution of debt. This debt has been contracted over time on behalf of the UK as a whole and Scotland has benefited as a consequence.

So the debt needs to be divided up too and any negotiating on division of assets is going to be inextricably linked to division of debt.

Thirdly, the question of a future currency union between Scotland and the rest of the UK would be a separate issue. In a successful currency union, as is the case with all the UK today, countries have to accept that transfers of their own taxpayers money would take place to support other countries for reasons like fiscal shortfalls to cover welfare, pensions or other areas provided by government or if, for example, banks get into trouble. Mr Salmond and Mr Swinney are suggesting that the promise of such support would be in the interests of both Scotland and the rest of the UK, something that is highly questionable to say the least.

On the one hand the people in the rest of the United Kingdom have not been consulted about this and if they were, they would doubtless take on board the fact that if Scotland were independent, they would have no say over its economic, social, or political policies, and consequently on whether there would be a fiscal deficit or not. So if things went wrong economically in an independent Scotland, taxpayers in the rest of the UK would be on the hook. So the ‘sovereign will’ of the rest of the United Kingdom in turn would likely refuse to agree to such a currency union with an independent Scotland given the lack of central economic or political machinery to protect them.

On the other hand, from Scotland’s point of view, Mr Salmond’s stated aim of using the pound whilst maintaining independence involves a fundamental inconsistency. Though nominally independent, it would not be able to set its own interest rates, with knock on implications for control of its economic destiny. Its independence would evaporate. And without centralised economic government, there is bound to be disharmony and trouble. This is what is happening in the Euro area. Given the lack of political union the poorer countries are struggling with cuts and wage reductions in an attempt to regain competitiveness.

Finally the threat to walk away from its fair share of liabilities, an attempt to make reneging on the debt seem like a good idea, is shabby, and in no one’s interest. For the rest of the UK it would leave a grudge, and would hardly be sensible place to start a new relationship.

And for Scotland the apparent attraction of such a course is illusory. There would be a price to be paid. People considering whether to lend to Scotland, or invest in its debt, would remember the refusal to pay, and would want a higher interest rate to compensate for the risk of repetition. New states need unquestioned integrity and willingness to honour debts. So all interest rates would go higher: mortgages of course, but all borrowings - and welfare, education and pension promises - would be harder to meet.

• Sir Martin Jacomb is the former Chairman of Prudential

• Sir Andrew Large is the former Deputy Governor of the Bank of England.

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