Scottish independence: New claim on currency union

Economists have made claims both for and against a currency union in evidence to Holyrood. Picture: TSPL

It would actually be in Scotland’s greater self-interest to use the pound unilaterally but a currency union would benefit both sides of the border, Professor David Simpson said.

The Harvard-educated economist, who has worked for the United Nations, World Bank, European Commission and Standard Life, rejects the argument that a currency union requires a political union to work.

The absence of a central bank with lender of last resort facilities is “an advantage, not a disadvantage” as it discourages the risky behaviour that sparked the recent banking crisis, he said.

Prof Simpson’s written evidence to Holyrood’s Economy Committee is backed by Edinburgh University politics professor Charlie Jeffery, who said a currency union is “perfectly feasible”.

The committee will also tomorrow hear from Glasgow University professors Jo Armstrong and John McLaren, who have called on the Scottish Government to spell out how it will boost Scotland’s productivity, save oil revenues without cuts or taxes and how much borrowing it would require.

Institute of Fiscal Studies director Paul Johnson will also outline the institute’s latest economic forecast, which offers “good news” for an independent Scotland provided it continues with the UK Chancellor’s spending squeeze.

‘Significant benefits of union’

Prof Simpson said: “A currency union based on sterling remains the most likely outcome following independence because it is in the best interests of not just Scotland but of England as well.”

He cites the “significant” benefits including no transaction costs, no exchange rate risks and financial stability.

He added: “It has been suggested that to work properly, a currency union requires political union, but the historical experience of those monetary unions between sovereign states that have been successful provides evidence to the contrary.

“It would be quite possible for Scotland to keep the pound following independence without entering into any formal currency union.

“Indeed, this would not only be possible but, if Scottish interests alone were to count, it would be desirable. It would deliver the main benefits of a currency union of low transactions costs, no set up costs, no exchange rate risk, without some of the costs.”

Ireland used the pound until 1979, while Panama, Ecuador and El Salvador use the dollar “without any interference by the Federal Reserve Board in Washington”.

He added: “The Bank of England would not act as a guarantor for Scottish banks or the Scottish Government.

“This is an advantage, not a disadvantage. It was precisely the implied promise of a bailout from the European Central Bank that allowed so many eurozone banks and governments to get themselves into a crisis of excessive debt.

“Many people imagine that without a central bank to act as a lender of last resort the result would be financial instability. The historical evidence suggests that the reverse is true.”

‘Feasible’

Prof Jeffery said: “Formal currency union between an independent Scotland and a residual UK is perfectly feasible.

“Currency unions between independent states are technically difficult to establish and run. They can require strict limits to fiscal autonomy, and they can need painful adjustments if the component economies move out of sync.

“But whether or not they are established and last has less to do with economics than with political will.

“Were there such political will in the Scottish/residual UK context, a sterling currency union would likely be far less problematic than the eurozone.”

Highlands and Islands SNP MSP Mike MacKenzie said: “Professor Jeffery and Professor Simpson are the latest experts to back the common sense positions of a currency union and continuing EU membership after a Yes vote. These sensible, evidence-based interventions from well-respected experts are a welcome contrast to the No campaign’s ‘Dambusters Strategy’.

“All the evidence makes clear that a currency union will be in the best interests not only of an independent Scotland but also of the rest of the UK - and as Professor Jeffery said, almost all independent analysis shows that Scotland would enjoy uninterrupted membership of the EU.

“After a Yes vote, the UK Government will put aside its scaremongering campaign rhetoric and negotiate a currency union in the best interests of businesses north and south of the border - ensuring cross-border investment and trade continues to thrive.”

‘Bank flight’ claim

Other economists have challenged the conception that a “dollarisation” of sterling would benefit an independent Scotland, insisting it would lead to a flight of banks and no control over monetary policy.

Dr Angus Armstrong, from the National Institute of Economic and Social Research, and Professor David Bell, from the University of Stirling have also submitted evidence to the Economy Committee.

Dr Armstrong said: “Unless cross border liquidity insurance is possible, dollarisation would in all likelihood transform Scotland’s financial system.

“Many institutions would change their domicile. Apart from the serious impact on employment, income and tax on Scotland’s second largest on-shore economic sector, it would mean a dramatic reduction in the export of financial services to the rest of the UK.”

Prof Bell said: “As far as Scottish businesses and consumers are concerned, dollarisation has the major advantage that there are no transactions costs and no exchange rate risk in doing business anywhere within rUK. It would give agents confidence that cross-border transactions could be carried out without any new risks.

“But there is a downside. It starts from the fairly innocuous proposition that dollarisation would mean that Scottish banks have to be responsible for Scottish depositors.

“These banks could be native Scottish banks or subsidiaries of rUK banks, but they would not have a lender of last resort. This means that they would have to be careful not to run short of cash at any time. The only way they can do this is to have a balance sheet that has a lot of cash or assets that can easily be converted into cash - making them less able to make loans to consumers or businesses.

“Dollarisation also means that the Scottish Government would have no control over monetary policy.”

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