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How Ed Balls could wreck Salmond’s “sterlingzone”


Speaking in Glasgow a few months ago, George Osborne said currency union would impose “significant constraints on [an independent Scotland’s] economic sovereignty”. SNP leaders were quick to dismiss this warning in public, but privately they must have known it was far from an empty threat. The Chancellor, armed with standard Tory prejudices about Scottish profligacy, will do what he can to limit public expenditure north of the border, whether Scotland is part of the UK or not.
Nationalists may hope Labour’s shadow chancellor, Ed Balls, would offer less restrictive terms during the negotiations over any prospective post-UK “sterlingzone”. They shouldn’t bank on it. Balls economic record suggests he would be at least as uncompromising as Osborne – if not more so.

As an influential Treasury adviser at the time, Balls was one of the driving forces behind Gordon Brown’s decision to grant the Bank of England operational independence in 1997. The move completed Labour’s shift away from post-war Keynesianism and towards a form of monetarism based on “sound money” and rule-based spending constraints.

Over the following years, the Treasury tailored its fiscal and labour market policies to suit the Bank of England’s strict 2 per cent (now 2.5 per cent) inflation target. It did this by adhering to Brown’s ‘golden rule’ (that borrowing should only be used to finance capital, not day-to-day, expenditure), by refusing to lift Thatcher-era anti- trade union laws (which helped hold down wages) and by relaxing employment regulations.

In this way, New Labour gave up on an active fiscal policy as a means of securing growth. Credibility with the financial markets – something Brown tried to secure by sticking to Tory spending limits for two years and reducing the national debt over five – replaced the party’s traditional support for full employment as the guiding principle of its economic strategy.

This remains the case today. Under Balls’ influence, Labour has again promised to work within Tory spending limits and cut the deficit if it wins the next UK general election in 2015.
The implications for Scottish independence are clear. In a recent piece for The Scotsman, Balls reiterated his conviction that monetary and fiscal policies were tied to one another. His claim that “Successful monetary union requires a degree of convergence that limits a nation’s economic independence” wasn’t just pre-referendum bluster; it is a sincerely held belief.

Should he become chancellor, Balls will carry this belief into post-referendum currency talks. He will insist that an independent Scotland sticks closely to Westminster’s spending plans, avoids policies that promote inflation and, above all, sets out a clear timetable for the reduction of Scotland’s deficit.

Balls could offer a Westminster version of the Maastricht convergence criteria, meaning Scotland’s public debt would have to come down to below 60 per cent of GDP. (It is likely to be upward of 70 per cent by 2017.) Or he could present more stringent conditions, such as those the Troika have imposed on struggling eurozone economies. This might involve public sector redundancies and forced privatisations. Either way, it would be very difficult for the SNP to agree to Balls’ demands.

Of course, the SNP rejects the sterlingzone / eurozone parallel – and so it should. Scotland doesn’t face Spain’s 25 per cent unemployment rate, nor is it burdened with the same levels of debt as Greece. Indeed, as the First Minister often points out, Scotland’s debt and deficit levels are lower than those of the UK as a whole.

The real problem with the SNP’s currency proposals doesn’t lie in the remote threat of a eurozone-style meltdown. It lies in the influence the Bank of England has over UK macro-economic policy – an influence which grew during the Brown and Balls era.

Take Alex Salmond’s conference pledge to ensure the minimum wage rises in line with or faster than the rate of inflation in an independent Scotland. In one respect, it is a smart piece of political manoeuvring, signalling the SNP’s desire to provide a degree of social protection for those in employment. But it doesn’t go nearly far enough. Even a minimum wage that rose slightly above the rate of inflation would be insufficient to provide a decent standard of living for workers.

Yet an independent Scottish government that took a more radical stance – by, for instance, committing to a public and private sector living wage – might find itself at odds with UK Treasury concerns about the potentially inflationary effects of Scottish workers’ growing spending power.
Recent history, stretching back beyond Brown and Balls, tells us that the Treasury and the Bank of England will jealously guard the value of the pound – with little regard for the broader social consequences. There is a reason the UK has, as Nicola Sturgeon noted recently, “one of the lowest pay economies in the OECD”.

If the SNP is serious about taking Scotland in a more “Nordic” direction (and the decision of conference delegates to endorse The Reid Foundation’s Common Weal initiative suggests it is), it will have to break with what academics call the “Anglo-liberal growth model”, which combines wage suppression with high levels of private debt and an over-sized financial services industry.
Ultimately, Salmond’s sterlingzone plan is political; an attempt to reassure voters and investors that a Yes vote will not result in any significant disruption to the Scottish economy. Like the monarchy and NATO, it forms part of the SNP’s pre-referendum triangulation strategy. Ironically, in the ‘90s, as a leading advocate of the Third Way in the Labour Party, Ed Balls helped lay the groundwork for Britain’s current economic crisis – a crisis Scotland won’t be able to escape if it remains anchored to the UK pound.

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  1. Tuathair says:

    I’m not keen on your headline. Since when was independence policy “Salmond’s”? Whatever we think of the SNP’s sterling proposals, the idea isn’t solely Alex’s. This is reminiscent of Daily Mail style headlining – “Scotland will be ripped from the UK on one man’s whim”, etc. Never mind that the referendum and all the ensuing dialogue is the result of a democratic process! Also – and this isn’t just nitpicking – the Monarchy isn’t “like” NATO. The 2012 SNP Conference decided to remain within NATO (by the narrowest of margins), while SNP policy has favoured retaining the Monarchy for decades.

    1. nnels says:

      The SNP’s sudden spur-of-the moment decision to switch from a non-independent Euro to a non-independent Pound certainly appeared to be solely Alex Salmond’s idea. It certainly wasn’t arrived at though any obvious public consensus.

      Applying the kind of criteria Gordon Brown used for possible currency changes seems to be an unmentionable concept.

      1. Tuathair says:

        Agreed there wasn’t a ‘public consensus’ and it wasn’t the result of a resolution at the SNP’s conference. Therefore it was “solely Alex Salmond’s idea”? What irredeemable rubbish! So, he discussed it with no one, took no advice, didn’t consult anyone? If you know this to be true then let’s see some evidence. nnels, this isn’t a time to be adopting the mannerisms of the unionist establishment. Nobody is asking you to vote for the SNP or their policies. I favour a debate about a future Scottish currency, but we should be careful about the language we use.

      2. nnels says:

        Why are you asking me for evidence about the SNP’s secret wold of currency decisions? Asking the SNP about how this quite important decision was arrived at would be more apt. But my guess is ‘general wind direction’.

        Applying the kind of criteria Gordon Brown used for possible currency changes remains be an unmentionable concept.

  2. Peter A Bell says:

    It is well known that the rUK government COULD impose onerous conditions on an adapted form of the present currency union post-independence. What this article doesn’t address is the question of WOULD they. The fact is that maintaining the sterling zone is in the interests of the rest of the UK at least as much as it is in Scotland’s interests. It is even arguable that the rUK economy would derive the greatest benefit from such an arrangement. So why would they insist on terms that Scotland’s negotiators would be bound to reject?

    We must also bear in mind that Scotland has other options. Scotland can walk away from the currency union, if not painlessly, with no catastrophic effects. Using the pound outwith a formal currency union is still an option. As is launching an independent currency. The rUK negotiators, on the other hand, have no fall-back position at all. They are stuck with the pound as it is no matter what happens. (Barring something inconceivable such as joining the euro.) More to the point, they would be stuck with the pound, not as it is, but as it would be absent Scotland’s £50bn contribution to propping up the currency. That’s not a prospect that the Bank of England will view with equanimity.

    The author of this article is right about one thing. What they rather foolishly refer to as “Salmond’s sterlingzone plan” is certainly political. What else might it be? The mistake is to take an overly simplistic view of the politics involved. A view which regards rUK as being in a position to dictate terms which supplicant Scotland must accept. It’s a lot more complicated than that.

    It is even conceivable that Salmond and his team are pulling one of their devious political ploys. As with the so-called “second question” on the referendum ballot, it may be that they are planning on rUK either rejecting a currency pact or stipulating unacceptable terms. They then get to go into the referendum reassuring voters that there need be no economic disruption involved in a Yes vote, then they get to blame the rUK for the ending of the currency union while they go for the option they wanted all along.

    That’s politics! And few play the game better than Salmond.

    1. David McCann says:

      I think it very possible that Salmond may
      well have thought of a devious political ploy, and then what will the fUK (former UK) do?

      1. Peter A Bell says:

        It is certainly illuminating to approach the issue from that perspective. Should rUK insist upon ending the currency union, Scotland will be in a position to pretty much shrug it off and carry on. The question for those threatening to abolish the currency union the question is, as you say, what would rUK do? That is a very big question. And one that the media seem curiously reluctant to ask.

        There are many more such questions. But the biggest question of all is why these questions are not being put to the anti-independence campaign.

    2. Jamie says:


      Please read Osborne’s currency speech. His fear is that currency union without significant fiscal constrainst would endanger the value of the pound. The Treasury would rather lose Scottish foreign currency earnings than lose control of the pound.

      Look also (as the piece invites you to do) at Ed Balls’ record at the Treasury under Brown – as well as the policies he is currently committed to. What you’ll find is spending constraints, a desire to secure credibility with the financial markets, low wages and low inflation. He will expect an independent Scotland to remain within this framework.

      You are quite right that Scotland has other options. The logic of my piece is that Scotland should adopt a separate currency.

      And by the way, one state using one currency does not amount to a currency union.


      1. Peter A Bell says:

        I understand the arguments for an independent currency. I agree with those arguments. But I also understand the politics to which you refer.

        The anti-independence campaign was going to attack whatever proposal the SNP came up with. Which option would you prefer to have your opponents condemning? The one you know you are likely to end up adopting? Or the one that, for all its obvious merits, you recognise may be not be achievable?

        There will be an independent Scottish currency. It is only a matter of time, and some political manoeuvring. Two of the most important things a political operator must do are; keep as many options as possible, and turn every situation into a win/win. This what the SNP has done by proposing that the currency union is maintained. They are seen to be supporting the sensible option. But there is no need for them to rule out other options or speak against them. Their opponents are forced into doing all the negative stuff.

        And it’s a win/win situation. If the negotiations lead to a form of currency union being retained, the SNP are vindicated while the other side are seen to have made an embarrassing climb-down.If the currency union is ended, Scotland’s negotiating simply moves to another option while the other side gets all the flak for any unfortunate consequences. The SNP can say that they tried to be reasonable, but rUK simply wouldn’t play along.

        Politically, the strategy is as close to faultless as one might wish for. Suppose, for example, the likes of Carmichael was cornered and forced to say what would work instead of a currency union. He would have to speak in favourable terms of one of the options that we will almost certainly end up with anyway. Even now, by focus all their attacks on currency union, the unionists are at least implicitly favouring an independent currency.

        While the MSM are telling us that Salmond is up against it, the truth is that he’s running rings around his opponents. As he has been doing for years now.

        Scotland and England are two nations within a union. The fact that the union is old enough to be taken for granted by some doesn’t alter this fact. What we have at present is effectively a currency union. It just doesn’t seem like it because there is also political union which prevents Scotland following significantly different policies from those imposed from the centre.

        Which raises an interesting point. And another difficulty for the anti-independence campaign. They are currently making a big show of jam tomorrow promises about greater fiscal autonomy for Scotland if we vote No. But this is the very thing that they say makes a currency union unworkable. If economic divergence between the economies of two independent nations within a currency union causes insurmountable problems, how are these problems to be avoided when it is two countries within a political union but each with fiscal autonomy?

        The two situations are, in all significant respects, identical. Either the unionists are lying about currency union and fiscal autonomy being incompatible, or they are lying about allowing Scotland meaningful fiscal autonomy if we vote No.

        Again we are left wondering why the MSM are not quizzing the unionists on such inconsistencies and contradictions.

      2. There are a couple of problems for sterling if, what becomes the English Parliament persuades the Bank of England to buy Scotland out of the pound. Sterling as is, is the UK Currency. What no one has addressed is the reality that after the 19th of September, on a Yes vote, there is no UK as it ceases to exist.

        Under the conditions of the Treaty of Union the mainland of Britain will revert back to having two sovereign countries and parliaments England and Scotland which will then negotiate the unraveling of shared powers, assets and other obligations they held jointly as the UK (Lord Cooper, 1953; McCormack vs the Lord Advocate). What to do with sterling will be part of those negotiations and not solely a decision for the English Parliament. We need to stop using the term rUK as how can the English crown be united with itself in its own parliament? Wales is subsumed under the English crown and Northern Ireland is, technically, a directly ruled English Crown dependency. We share Liz but she wears two separate crowns with very different conditions to keep them on her and her successors head. (Claim of Right 1689)

        The real problem for Ed Balls or the Gideot is the City makes quite a lot of money out of Scottish exports in sterling exchange and financing deals which will in turn prop up the English Treasury to be. The Bank of England relies on Scotland for 40+% of its Sterling foreign exchange earnings and would be very happy to hold Scotland’s predicted sterling cash surplus from its oil, gas and reusables earnings.

        It is predicted that sterling without Scotland will see severe devaluation and within two years the Scottish ‘merk’ will be worth £1.20 sterling from parity. This has impacts on England’s ability to import energy from Scotland, reliant as it is for 11% of its National Grid base load and 15% of its peak demand from Scottish generators. The National Grid are already warning London and the SE will exceed current maximum capacity by 2017. The HVDC link to France is at full capacity, the HVDC link from Holland was stalled off the Essex coast because of planning protests and the public rejection of fracking across GB no longer makes the shift to gas generation as viable as it looked 18 months ago. All the while the Nuclear plants across GB are reducing output as a result of failing heat exchangers, plants whose replacements should have come on line by the middle of this decade. Plants which still await the cutting of their foundations.

        So the reality is it will be the Bank of England and the City of London who will inform Ed Balls or the Gideot of their negotiating stance. If they wish to keep the value of the pound high and continue its use as a reserve currency they need Scotland to remain an active member of the sterling zone. Alisdair Darling admitted as much in an interview in January this year.

  3. jinglyjangly says:

    If we don’t like the terms for a currency zone on offer, we just use Sterling anyway
    they cant stop us, its an internationally traded currency, only difference would be that we would have no influence on the setting of interest rates, which we don’t have now…
    Remember Eddie George saying pre 2008 crash, that unemployment in the north was a price worth paying to help the south
    It is more in South Britain and Northern Irelands interests for us to continue to use Sterling than ours, the doubling of their balance of payments deficit will cause an increase in borrowing costs and the possibility of them being unable to service their debt.
    Ie they will go bankrupt if Scotland uses its own currency.

  4. deewal says:

    For a moment there i thought i’d clicked on a Better Together link. Hope the MSM don’t read this Fearbomb.
    Thank you Tuathair for your retort and Peter A Bell for your excellent view on this subject.

  5. Peter, I think the point is not that the rUK would impose unwanted restrictions on an independent Scotland, but more the BoE would.

    Whilst Westminster’s now permanent austerity policy is to prevent further downgrades, interest rates are being kept artificially low to prevent inflation. The warning signs are very clear. Capitalism has reached its Rubicon – hedge funds squeezing yet realised profits has created a global financial crisis that, no matter how you dress it up, it hasn’t even eased. This is apparent with real falls in income and rising prices.

    What the SNP want to achieve in social policy does not sit within an austerity framework, it barely sits in a capitalist framework. However, despite your reluctance to consider the euro, the reserve markets suggest that as a currency, it has potential, and at 12 trillion GDP, its no small concern. What is also quite clear is the UK already trades mostly with the EU, so if an independent Scotland did go for it, how would that be anymore of a hurdle to either Scotland, or the rUK?

    1. FlimFlamMan says:

      The rUK treasury or the BoE might cause additional problems with a ‘sterling zone’, but the real problem comes from simple accounting. Independent nations must have their own currencies, unless they can run persistent current account surpluses.

      Use of a foreign currency means acquiring that currency before you can spend, and export income is the only sustainable way of acquiring it. That’s why Germany does well with the Euro, and why China can get away with a peg to the US Dollar. For deficit countries the Euro is a millstone, and deficit running Argentina was wrecked by its attempted Dollar peg.

      I don’t know what an independent Scotland’s position would be, but given that climate change means most of the oil needs to stay in the ground it seems persistent export surpluses would be unlikely. A Scottish currency is the only viable option.

      1. Colin Dunn says:

        ” given that climate change means most of the oil needs to stay in the ground . ”

        I keep seeing this said, and no it doesn’t. There are many other uses for oil than just burning it.

      2. I am unsure that any country is truly ready for a divorce of fossil fuels, and I’m fairly certain an independent Scotland would not be in surplus without oil extraction IF an independent Scotland wanted to provide the social benefits that I/we would prefer realised. The US Dollar is quite clearly on the decline, and, at the risk of seeming venture-ist, the safest bet is to go with the strongest, local currency.

      3. FlimFlamMan says:

        Colin Dunn:

        Fair enough; I’ll change my statement to “most of it must not be burned”, but that includes later burning, after it’s been made into plastic (or whatever the alternative use is).

      4. Re Atypical Scot’s perfectly accurate “I am unsure that any country is truly ready for a divorce of fossil fuels” and FlimFlamMan’s equally accurate ““most of it [oil] must not be burned”

        Whether we’re ready for it or not, we can change politics and economics but we can’t change the brute facts of nature, as Yeb Sano, the Philippines’ lead negotiator at the UN climate change summit being held right now in Warsaw, and on the 6th day of his hunger strike in solidarity with those killed and suffering Typhoon Haiyan, knows only too well:


        Scotland has a quarter of Europe’s wind and tidal resource. WE CAN kick the oil habit AND make the society we want, but if WE can’t show the world how a country can kick the habit then we’re all going to be kicked into non-existence by the end of the century. (End of shouty capitals!)

        Regaining independence has to involve reasserting interdependence rather than continue fueling extinction.

        The difference in ‘realisms’ strikes me as very similar to the difference between the fearful and we-can’t-do ‘realism’ of the No campaign, and the hopeful and we-can-do realism of the Yes campaign.

  6. mrbfaethedee says:

    Committing to a Scottish currency before independence gifts a massive uncertainty to the No camp.
    No one can predict how wildly the new currency would fluctuate. No one could be sure that it wouldn’t be targeted hard by currency speculation.

    Once the underlying independent Scottish economy is bedded in and its state is clear to external parties, these risks would all but disappear. At that point it would be a better time to begin transitioning to a new currency.

    UK agenda the price to pay for a smooth transition? Probably.
    Worth paying? Probably.

    1. FlimFlamMan says:

      Can fluctuations in Sterling be predicted?

      As for speculators; the easiest way to target a currency, or nation, is if the nation in question has no control over the currency it uses. A Scottish currency plus capital controls – which even the IMF now reluctantly admits are a good idea – are how to deal with speculation and ‘hot money’ flows. That and avoiding things like currency pegs. Pegged currencies get targeted precisely because, absent export income, they are vulnerable.

      1. mrbfaethedee says:

        No, fluctuations in Sterling can’t be predicted.
        But it doesn’t take specialist knowledge to realise that a nascent state, with a brand new currency, and an untested economy is far more likely to be subject to wild variations than a strong currency and state which predates mosy of the nation states on this globe and is still stronger than most.

        In what way is it easy to target sterling at the moment? If sterling was easy to target at the moment it would already be bleeding the juice of arbitrage into the pockets of speculators.

        Bear in mind, my point is not about vulnerability – everything can become vulnerable – it is about relative vulnerability and the choice between going ‘all-in’ at birth, or taking some shelter as you find your feet.

        I don’t know anyone who wants to stick with sterling, but that doesn’t mean we necessarily jump to a Scottish currency right at the point of independence.

      2. FlimFlamMan says:


        Sterling isn’t easy to target, but an independent Scotland that used sterling would be, unless it ran persistent currant account surpluses.

        Scotland doesn’t have control of sterling now of course, but it is currently part of a genuine union, with fiscal transfers and so on. Scotland is no more vulnerable, in currency terms, than Yorkshire or Bristol or any other part of the union.

        In the absence of sustained exports, leaving the union but keeping sterling would instantly paint a target on Scotland, just as keeping sterling but trying to peg it in the ERM painted a giant target on the UK. The result was Black Wednesday.

        Did Soros et al target sterling before we joined the ERM? No, because there was no mechanism to do so. We had our own currency and we let it float. As soon as we joined it was obvious – though apparently not to our government – that, as a current account deficit running nation, we would not be able to maintain the peg if we were pushed.

        1. mrbfaethedee says:

          The problem with your point is that we’re talking about currency speculation – Sterling (as Scotland’s currency) being targeted, not Scotland being targeted.
          As you concede in your last comment – Sterling isn’t easy to target. So I take it you accept the original point I made – that adopting Sterling would protect Scotland from *currency speculation*? You might be arguing that it weakens our position in other ways and so should be avoided, and those points may be of great interest, but specifically on the adoption of Sterling protecting us from currency speculation in the early days of independence I assume we agree.

          Re: your point about Soros/Black Weds :- Sterling as the shared currency of Scotland and rUK being somehow equivalent to the earlier pegging of Sterling to ERM is not an equivalence I accept. So I can’t accept your premise.

          Along with others in the thread I don’t see Scotland keeping most of the oil in the ground. However, I’ll reiterate – I think Scotland having her own currency is the most desirable option in the longer term, but it doesn’t have to come straight away.

          You talk about a target being painted on Scotland as a result of sharing Sterling, that’s a different topic to the one I was talking about (i.e. that using Sterling in the first instance would protect Scotland from *currency speculation*). Maybe you could put a post up about your concerns about how Scotland (rather than her currency) would be targeted, if she maintained Sterling at kick-off.

      3. FlimFlamMan says:

        Sterling is difficult to target at the moment, but as we saw with the decision to enter the ERM, Westminster governments are capable of making boneheaded decisions which make sterling instantly and massively vulnerable. Not a year (month?) goes by without damagingly bad decisions coming out of Westminster, it’s just that most aren’t directly related to currency.

        Initial use of sterling is a bet that the rUK government won’t do anything stupid during those first few years – or decades; however long it takes to introduce a Scottish currency – of Scottish independence. That’s not a bet I’d be willing to place. So even on the narrow definition of currency speculation I don’t accept that use of sterling is the safe option.

        The connection between ERM pegging by the UK and use of sterling by an independent Scotland is the fact that it places both governments in the position of having to acquire foreign currency; to prevent sterling falling below the peg range in the first case and simply as the source of all government – and private – spending in the second. Without a current account surplus there’s no sustainable way of acquiring that foreign currency.

        As it happens an independent Scotland probably would run those surpluses, at least to begin with, thanks to oil extraction. That doesn’t negate the danger of currency speculation, and doesn’t address the question of what *should* happen to the oil. My hope is that an independent Scotland will invest in transitioning to an economy that isn’t based on the burning of fossil fuels, but that approach, and the resulting loss of current account surpluses, would require a Scottish currency.

        I could go into detail on that subject, but luckily I don’t have to since an actual economist, Bill Mitchell, has done it:


        Mitchell is one of the handful of economists who predicted the 2008 crash, and not in vague, hand-wavy “bad things will happen” terms but detailing the problems that were building up and the effects they would produce.

        1. mrbfaethedee says:

          Fair enough, but we could simply elide ‘Westminster’ from the first para. Where does that leave us? Yes, govts sometimes simply make bad decisions. As you say, most of them (even Westminster’s) have nothing to do with currency. The risk isn’t seeming that big.
          I accept that in the narrow *currency speculation* area I was talking about, you may not be willing to take the gamble that way. To me it looks like you have no good reason for it though, by comparison to other options – as you say, governments sometimes make bad decisions & they’re not usually currency related.

          Re: your 3rd para – the second part of your explanation of the connection between pegging and shared currency – that govts acquire currency through spending (borrowing from central bank, I assume?). Isn’t that simply what all govts do? Borrow money at interest from Central Bank?
          It seems that all you’re saying is that running a current acct surplus is a good thing (I agree).
          I don’t see how sharing Sterling at the outset prevents that happening, or how having a new currency at the outset guarantees it.
          I hope an indy Scotland tries to quickly get away from deficit spending, but (while i appreciate your patience in trying to get across to me) I don’t see how choosing a new currency at indy over sharing sterling serves that agenda any better.

          Form the article you linked to –
          ‘A sovereign government in a fiat monetary system has specific capacities relating to the conduct of the sovereign currency. … it can spend whenever it wants to and has no imperative to seeks funds to facilitate the spending. ‘
          Sounds both responsible and sustainable (not!). Sounds more like like the continuation of unthinking growth.

          TBH – I don’t have any background in economics, so your appeal to an authority in a relatively niche school of economics (MMT) isn’t something I can really get into without an investment of time I won’t/can’t give. My gut feeling is that an economic model based on a monetary system with currency value predicated on the obligation to pay taxes isn’t one that I’ll find it easy to warm to, and to be fair starting from a blanket acceptance of fiat currency isn’t going to convince me that this is the new economic model we need.

          The petro economies aren’t based on burning fossil fuels, they’re based on selling hydrocarbons. They have many uses, that we burn most of them is a separate issue.
          I note that you’d like a ‘transition’ to a non-fossil fuel economy; that’s great, but why not also a ‘transition’ to a new currency?

      4. FlimFlamMan says:

        I appreciate your engagement, and I apologise in advance. Well, not in advance; I added this paragraph when I saw how long the damned thing is, even after some editing.

        We can’t simply elide Westminster, and for a pretty fundamental reason: the people of an independent Scotland can change their government if it does something stupid. They can’t do the same with the government in Westminster (they can’t do much even now, but after independence ‘not much’ gets awfully close to ‘nothing’ (not *absolutely* nothing, in case someone proposes warfare)). Decisions made by foreign governments affect all nations of course, but deliberately tying the prosperity of an independent Scottish people to policy set in Westminster (which should probably read ‘the City’ when it comes to economic policy) is asking for trouble.

        You say the risk isn’t big, and that I have no good reason to avoid it given the other options, but one option – Scottish currency, any and all government debt denominated in that same currency, floating FX (no peg) – removes the risk. Currency speculators operate by exerting pressure on governments between the rock of commitment to maintaining a minimum currency value and the hard place of lacking the foreign funds to do so. An independent, floating, Scottish currency avoids the risk, however small, of being put in that position.

        “…(borrowing from central bank, I assume?). Isn’t that simply what all govts do? Borrow money at interest from Central Bank?”

        What governments do depends fundamentally on whether or not they have their own currency, and superficially on the particular rules they have set up around spending.

        Having your own currency means *you* create that which you spend. In most nations the creation is split between a treasury and a central bank, and most have rules that make it look like the government has to tax or borrow (from the private sector; many nations have rules that prevent their treasuries ‘borrowing’ directly from their central bank) in order to acquire funds before it can spend. The rules are at best accidental relics of the Gold Exchange Standard, which did require governments to tax or borrow, and at worst a deliberate obfuscation of the capacity of sovereign states, and the real spending constraint they face. How is it remotely reasonable to claim that a government has to tax away or borrow the currency that it and only it can legally create, before it can spend that currency?

        So what is the real constraint? It is simply the capacity of the economy to produce goods and services, and that capacity can include things like decent working conditions and environmental protection, which should cover your concerns about sustainability and unthinking growth.

        If a nation does not have its own currency then it genuinely does operate under the financial constraints we’re told all governments face, in addition to the real constraints, since it has to somehow acquire the foreign currency that it uses.

        I’m not saying a current account surplus is a good thing, I’m saying it is a *necessary* thing if a government uses a foreign currency. In general a surplus is a bad thing; why would a nation want to send the real goods and services it produces to other nations in return for money? If the nation doesn’t have its own money, its own currency, it makes sense. For nations that are part of a fixed exchange rate system (such as the ERM, or the Gold Exchange Standard) it makes sense. For nations that have their own currency it makes more sense to keep the goods and services.

        MMT may or may not be easy to warm to, but it does accurately describe the way sovereign economies actually function, right now, in terms of currency creation and its effects; they way they have functioned since Bretton Woods collapsed in the 1970s. That has enabled MMT economists to make accurate predictions about the crash, its consequences, and the consequences of government responses. That’s not something that can be said about mainstream economics.

        And finally (I could say anything here; nobody is still reading) the matter of petro-economies. The vast majority of the oil is burned; if there was a battery breakthrough tomorrow and non-aviation transport went electric the demand for oil would drop rapidly, and the demand for future production would collapse. In terms of what actually happens to the stuff petro-economies are based on burning fossil fuels.

        So why not an extended currency transition to go with the energy transition? Because changing currency involves planning, but the switch itself happens literally overnight. You can flip a switch to change the denomination of bank accounts but there’s no switch that will create offshore wind farms and pumped hydro stations overnight.

    2. I understand the reservations about commitment prior to independence. My motivation is to acquire information regarding the real downsides to full EU integration against a separate currency or sterling dependency. I accept the ‘safe’ yes vote gain option is to suffer at the hand of the BoE, but I’m bewildered regarding the negativity towards the euro. If we subtract the British ‘poundland’ propaganda regarding it, I just want to be given a rational explanation why the euro is treated as such a taboo?

      1. Peter A Bell says:

        The propaganda is enough to make the euro taboo. There are political impossibilities that defy any practical reasoning.

      2. FlimFlamMan says:

        The problem is with using a foreign currency, whether it’s the Euro, Sterling, the US Dollar or anything else. Without persistent exports it’s a disaster waiting to happen.

        The Euro – a monetary union – would be, or rather could be, fine if the nations using it were also in a fiscal union, but without that fiscal union the Euro nations are all users of a foreign currency, with the problems I noted above.

      3. nnels says:

        The more sensible route for a petro-economy would be a free-floating independent currency, or a currency tied to the dollar, or the dollar. The pound and the euro are geared towards competitive exports, oil is a non-competitive export sold at globally fixed dollar prices.

        The SNPs currency policy is entirely political, based on general wind-direction. They haven’t even bothered to adorn their decision with actual currency criteria.

  7. Dave McEwan Hill says:

    Can we factor into all this waffle the fact that we are in control here. Having the power to keep Scotland in Sterling or take it out gives us a huge ace in any pre independence negotiations They will be biting our arm off for us to stay in as if we leave Sterling willl crash. Scotland in a currency coalition will have huge power over the bank’s policy – not the other way around. Of course they can’t say that and they know we have all the power here so they are confused and trying to muddy the waters
    It’s time some of our “clever” commentators got up to speed and stopped underestimating the acumen of our First Minister .
    Of course our initial currency position is not neccessarily permanent either.

    1. Is our GDP that huge a percentile of the UK’s? Last I looked it was about 10%.

      1. braco says:

        This is a post I left in response to Grahamski over on Derek Bateman’s blog. I think it comprehensively answers your question.

        As part of the UK and £Sterling, Scotland currently exports (excluding Oil and Gas) far more to the rest of the world than our % population share of UK exports would suggest, I don’t need to list the different sectors do I?

        Agreed? Good.

        Given that fact, we should then consider the real problem facing rUK’s economic position should Scotland for any reason no longer trade in £Sterling.

        At the moment oil landed in the UK from the North Sea is worth circa £40 billion per annum (of which England, Wales and NI consume circa £36bn per annum). At the moment it is an internal market within the UK and any dollar requirement is offset by an equal and opposite contra trade back to sterling.

        After independence the trade in Scotland’s oil will be international and (unless Scotland uses sterling) there will be balancing contra trade and a rUK will have to find £36bn worth of dollars to purchase its oil from a non-sterling Scotland (or other foreign supplier).

        This sum is roughly equal to 1/3 of the current UK foreign exchange earnings (plus Scotland’s other overperforming world export sectors adds up to approx. 40%) .

        Of course, not only does this oil trade cause rUK a balance of payments deficit. It simultaneously generates a Scottish current account surplus.

        The reality is that a separate Scottish currency (say pegged to the dollar or a basket of currencies) would be an economic disaster for the rUK economy and I rather suspect that (despite general Unionist scoffing) the rUK Chancellor will agree to almost any Scottish demand to keep us within a sterling zone.

        It is an all too common mistake to consider North Sea Oil in terms of Government tax receipts. It’s real value is in the context of the balance of payments and current account.

        Additionally, the dollars flowing into Scotland (remember we only consume circa £4bn of the oil landed) would generate the volume and flow of funds necessary to develop a viable international capital market.

        I think the above adequately explains the theory, practicalities and risks the rUK would be taking in denying agreement on continued shared currency with Scotland after Indy.

        It also explains why no serious player with power in Downing Street or the Treasury is proposing a policy of refusal, even as an initial bargaining position, such would be it’s damage to the current UK£ Sterling and therefor our economy.

        (with great thanks to Alasdair Stirling!)

        Numbers are from 2011-12 but you get the idea.

  8. nnels says:

    The ‘Common Weal’ concept does seem to be bandied about as a cure-all, without anyone knowing what it stands for. Here it is:


    It could be straight out of a Tony Blair speech from 1997. I think the description is ‘malleable’, rather than ‘Nordic’.

    1. braco says:

      the problem with Tony Blair’s speeches from 1997 was not in the content, it was in the fact he and the NewLabour project had absolutely no intention of acting on that content. ‘Ethical foreign policy’ anyone?

      Cynical is what it was and debilitating and endemic political cynisism throughout the UK electorate is what it has bread.

      ‘Common Weal’, I would proffer is the opposite of politically cynical, and an attempted antidote to the poison, of which Blairism was just the latest UK establishment incarnation, masquerading as a solution back in 1997.

  9. Wullie says:

    Good piece on this in todays Herald by Ian Bell.

  10. Jim says:

    Scotland’s GDP is indeed higher than that of the UK and we have a better exporting record and a better balance of payments. Scotland not being part of a Sterling-Zone will have an adverse affect on the rUK’s already quite poor Balance of Payments and they know it., although if that is their preference so be it.

    There is also no reason why an independent Scotland cannot use other bargaining chips in order to get a satisfactory sterling zone deal. We have plenty of them.

    I’m surprised at the content of this article. It’s not a scenario that a pro-independence supporter should be asking pro-independence colleagues on what is in effect a public forum. Sorry Jamie. I usually like your work, but not this piece.

    1. braco says:

      Totally agree Jim. Especially with the adoption of BetterNo language tactics. ‘Salmond’s sterlingzone’ etc… purile. Disappointed.

  11. Tony Philpin says:

    A key benefit of our own currency would be our ability to reduce the currently abysmally low levels of capital retention under fractional reserve banking and reshape the money supply to avoid the current ponzi system – also insuring against future bank collapses


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