Peter Jones: Salmond right to commit to Sterling

Alex Salmond knows an independent Scotland would start with limited freedom. Picture: David Cheskin/PA Wire
Alex Salmond knows an independent Scotland would start with limited freedom. Picture: David Cheskin/PA Wire
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Alex Salmond is right to commit to a sterling zone, rather than rush ahead with a Scottish currency, writes Peter Jones

Impatience is understandable if you are a nationalist. You are itching to get your country out of the blight of London misrule, thirsting to get to work righting all sorts of wrongs, hungry to begin building the new and better nation. But the impatience some in the SNP are showing over what currency an independent Scotland should have is entirely mistaken.

Alex Salmond has set out the Scottish Government’s commitment to a sterling union very clearly.

“An independent Scotland will keep the pound because, first and foremost, sterling is Scotland’s currency every bit as much as it is that of England, Wales and Northern Ireland,” he wrote in a Sunday newspaper.

The argument is a bit specious – suppose the SNP was in favour of Trident missiles and he had written: “An independent Scotland will keep nuclear weapons because, first and foremost, Trident submarines are Scotland’s defences every bit as much as they are of England, Wales and Northern Ireland.”

It doesn’t take two seconds’ thought about political command structures and nuclear non-proliferation treaties, to realise that doesn’t work. And the argument doesn’t work with the currency either. If you want to leave a political union, you must face the prospect of leaving everything that is part of the union and not just the nasty bits you don’t like.

You can only hope to continue sharing the good stuff where it is also in the interest of the people to whom you are waving goodbye to carry on sharing those nice bits.

Here, the First Minister is on much more solid ground. A sterling area which encompassed Scotland would gain the benefit of not having to import the oil that the North Sea currently produces – worth about £40 billion on the positive side of the zone’s balance sheet – plus the £8bn export earnings of Scottish oil equipment and service suppliers, and another £4bn from whisky distillers. Then there is cross-border trade – about £36bn of Scottish exports to the rest of the UK (rUK) in 2011 and about £49bn of rUK exports to Scotland. Why would an rUK government want to erect a trading barrier by refusing Scotland the use of sterling, imperilling those rUK exports, which are about a tenth of total UK exports?

So Scotland would have some good cards to play at the negotiating table. They are not ace cards that trump everything, but they are good ones. And if you think about it a little longer, intriguing questions start to arise. How would Mr Salmond react if a negotiating rUK government said: All right, we’ll agree to a sterling zone, but only if you agree to keep the Trident subs where they are at Faslane?

The point, while it is getting ahead of things, illustrates the necessity of the Scottish Government having a fall-back position if the terms demanded by rUK for a sterling zone are unacceptable.

Which is where the argument for having a separate Scottish currency, pegged in value to sterling in the same way as the Danish krone is pegged to the euro, comes in. The other alternatives – unilateral use of sterling or joining the euro – are either economically or politically unacceptable.

Various old guard nationalists – former leader Gordon Wilson, ex-deputy leaders Jim Sillars and Jim Fairlie, and Dennis Canavan, chairman of the Yes campaign – have argued that having a Scottish currency should be Mr Salmond’s first choice.

Their argument is relatively simple. A sterling zone would leave monetary policy in the hands of the Bank of England, which is geared to the economy of London and the south-east of England, and fiscal policy would also be under the thumb of the Treasury.

A Scottish currency, on the other hand, would mean tax and monetary powers would be in the hands of Scots. So there would be freedom, real independence and an immediate start to all that vital nation-building work.

Actually, no, there wouldn’t. It is true that various non-aligned currency experts, such as DeAnne Julius, a founding member of the Bank of England’s monetary policy committee, have written favourably about a Scottish currency, correctly divining that it “does not depend on uncertain negotiations and probably has the most emotional appeal to those inclined to vote for independence”.

There are one-off transition costs, such as setting up a central bank, but as she, and indeed the Treasury in its currency paper, acknowledge, other countries have successfully done that in the past 20 years. There would also be transaction costs, adding perhaps between 1-2 per cent to cross-border trade flows and to currency purchases every time people crossed the Border. But this is not an insuperable onstacle.

The problem comes from Scots themselves, and from the financial markets. Since the majority of Scots are not nationalists and don’t share the nationalist faith that everything under independence will be fine, they might fear that the Scottish currency will lose value relative to sterling and shift their bank accounts south of the Border.

So capital controls would have to be introduced to stop that, as indeed they were with every other example of a new currency in recent decades. The markets may have the same worry, forcing abandonment of the peg to sterling as they forced sterling out of the European exchange rate mechanism in 1992.

The only way to prevent these bad things would be to run very tight fiscal and monetary policies, with negligible public spending deficits. Tax and spending would have to be set to allow for surpluses in years when there were strong oil revenues, a problem since they are also needed to pay for current spending on things like teachers’ salaries.

Mr Salmond, being a smart guy trained in economics, knows this. He also understands what other nationalists seem to refuse to accept – that independence is not an event, but a process. Under any currency choice, Scotland would start with extremely limited freedom and then over, say, two decades would gradually accrue more power to change things.

A sterling zone is the only option with the virtue of imposing few costs on the people being liberated and makes it more likely that those people will vote for independence. It would initially severely limit political freedoms, but surely, if you are a nationalist, the main point is to gain those political powers for future use, rather than to reduce the chances of getting them at all.