It’s Not About about the Money Money Money

money-ball

With all the claims and counter-claims firing back and forth in the referendum debate, it’s no wonder that some folk can’t make up their minds. When Holyrood puts forward one position it is then contested by Westminster and voters are left having to ask themselves which bunch of slimy politicians they find most trustworthy. Who’s more likely to tell you the truth, Salmond or Cameron? Darling might be the face at the top of the no campaign, but as a minister whose party sits in opposition, and remains likely to do so following the next general election in 2015, he’s not in any position to make promises or guarantees. In the no campaign, Cameron is still very much in charge.

For some time the most contentious issue of the debate lay in whether an independent Scotland would gain automatic entry into the EU. Now, thanks to Jean-Claude Junker (and perhaps in no small part thanks to Cameron himself, who spent the run up to Junker’s expected appointment campaigning against the majority and certainly rubbed the president-elect up in all the wrong ways) this matter has been put to bed. Even the pro-union press has reported, somewhat unenthusiastically, that Junker’s office have made it clear that a ‘special case’ would be made for Scotland as we already satisfy all of the necessary criteria to be in the EU.

As one question is resolved another remains and the issue of currency is the next great hurdle. Salmond says we will use the £ Sterling, Cameron says he won’t allow it, even though a government insider has come out to say, months ago, that ‘of course’ Westminster would agree to a currency union following a yes vote. It is in everyone’s interests to do so. Again the electorate are left asking themselves who to believe: smug Alex Salmond or duplicitous David Cameron.

It’s understandable why the question of what currency might be used following independence is such a worry for many no voters and undecideds. People want to know if they’ll have a pocket full of pounds, euros or perhaps even ‘albas’ following the referendum, but again, when one side says one thing and another says something else, here we are again, stuck in the middle trying to make sense of the clues. In the UK, with no written constitution, so much is decided through the interpretation of precedent. Bearing this in mind, to try and get to grips with future possibilities, it makes sense to look at how such things have been approached in the past. So let us consider our Celtic cousins to the west.

Ireland declared independence from the UK in 1922, however the Irish Free State did not bring in its own currency until 1928. This new currency, the punt, was pegged at 1:1 to the British pound, meaning that both currencies held the exact same value. Sterling continued to be accepted in Ireland even if the punt was not accepted in the remainder of the UK. (A familiar experience for anyone who has ever attempted to spend their Scottish bank notes in London.) This situation continued for another 51 years. It wasn’t until the 1970s that the Irish punt broke away from its equal value standing with £ Sterling; an exchange rate was introduced on 30th March 1979. For anyone following the currency debate this entire scenario will sound familiar. Salmond’s argument certainly has precedent on its side.The question is, if it was OK for the Irish Free State to run its currency in this manner, why should it be a problem for Scotland?

Interestingly, Ireland, in terms of GDP per capita, now ranks as the third-richest country in Europe (behind Austria and Luxembourg but well ahead of the UK). However, we can’t just measure a country’s success in financial terms, no matter how much The City of London might want us to, so let us consider the Where-to-be-born Index (latterly known as the Quality-of-Life Index). This international ranking, measured by The Economist, takes into consideration material well-being alongside other considerations such as life expectancy, political freedom, job security, gender equality, crime, corruption and governance. Ireland ranks 12th in the world while the UK trails behind in 27th place.

Now, I know what you’re thinking. Ireland? Isn’t this the same Ireland whose banking system went into meltdown when the global recession hit and had to be bailed out by the European Central Bank? Well, yes, it is. Yet despite this great hardship Ireland is still doing better than the UK who had no European bailout. Before the banking crisis took hold Ireland was actually ranked 1st in the Quality-of-Life Index and was considered to give its citizens the best quality of life in the world. In the last ten years Ireland took a bigger hit than the UK, but Ireland’s citizens still fare better than we do. So here’s something that we can be sure of, Irish independence can only have been a good thing for the Irish, and even a small country, with a relatively small oil industry, can make a success of itself in difficult times provided it has full control of its own affairs.

Ireland is not the only nation to declare independence from the UK and then continue to use £ Sterling. Australia (currently ranked 2nd in the Where-to-be-born Index, just behind Switzerland) also maintained the pound for some time after becoming independent from the UK under the Constitution of Australia in 1901. This said, the currencies of Australia are a fair bit more complicated than those of Ireland, at various points Australia has used the Australian dollar, Australian pound, the holey dollar (essentially a vandalised Spanish dollar) and if you follow the money trail all they way back to the first 25 years of settlement, then, thanks to a shortage of coins, the real currency was rum.

It wasn’t until 1817 that the Bank of New South Wales was established and paper money was released, denominated in pounds. After federation in 1901, the Australian government took control of currency and later, in 1910, the Australian pound was introduced. However, the newly established Australian pound was pegged to £ Sterling at a rate of 1:1 and did not become officially distinct from the pound until 1931 when the United Kingdom itself abandoned the Gold Standard. Even so, the Australian pound continued to be used until 1966 when the Australian dollar was introduced.

Living in the UK and using £ Sterling, a currency union sounds like something rather novel. We are familiar, of course, with the Euro, but this was a union that we elected to stay out of. The truth is though, currency unions are not as rare as we might think. Aside from the Sterling zones that existed in various places in The Commonwealth there have also been many historic shared currencies, such as the Scandinavian Monetary Union (Sweden, Denmark, Norway), which itself was inspired by the Latin Monetary Union (France, Belgium, Italy, Switzerland, Spain, Greece, Romania, Bulgaria, and others). These are both now defunct, and have, in part, been replaced by the Euro. Then there is the currency union of the Hong Kong Dollar (covering Hong Kong and Macau), while the Singapore dollar and Brunei dollar are pinned to one another with a 1:1 exchange rate, the Swiss franc has been shared with Liechtenstein since 1924. Currency unions come and currency unions go. Some are replaced by independent currencies, some are replaced by new currency unions, while others simply remain.

If an independent Scotland was to enter either a formal or an informal currency union with the rest of the UK then this is something we would be committed to for the foreseeable future. That said, it is not something that anyone in government in Holyrood has the power to commit us to permanently. Future Scottish governments could set up a separate Scottish currency if they saw fit to do so, or we may find, say 30 years down the line, that the best thing for Scotland might be to join a more stable Euro, or perhaps the currency union between an independent Scotland and the rest of the UK will endure. This is not something that we know now, nor is it a question we can currently find the answer to. All answers are pure speculation because these are decisions that can only be made in the future. The real question that voters need to answer is whether they would like Scotland to have the power to make such decisions, or if that power should only be wielded by London.

£ Sterling, like the UK itself, has had a long and chequered history. The anti-independence campaign would have you believe that Scotland’s continued use of the pound would be like Panama using the US dollar. But anyone can see that we have more in common with a country like Ireland than any banana republic. There is nothing to stop an independent Scotland from using £ Sterling, nor is it even in the interests of the UK government to do so. So, when you go to cast your vote on the 18th of September, if the currency question is the one thing holding you back, then remember your Irish neighbours who said yes, and never looked back.

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  1. Scottie says:

    Good piece. Think it’s also important to understand that the very nature of our debt based monetary system and why there is so much debt.

    https://www.positivemoney.org/issues/democracy/

    A new so sovereign democratic currency might be the best option in the long term…

    1. Tony Philpin says:

      Sovereign money i
      s crucial in avoiding another crash and in having a stable monetary system. No banks creating Ponzi asset bubbles, better regulatory framework, ideally considerably higher rates of fractional reserves – and the joy of being able to stimulate growth in a Keynsian system without creating debts through the bond market. If any government seriously wants to avoid ‘boom and bust’ (and that perfidious soundbite will echo in Brown’s ears till his dying day) then sovereign money is an essential step.

  2. Les Wilson says:

    I fully understand why the SG want a CU, however, I am not totally convinced it is the most sensible idea for Scotland. I do trust the SG they are the only party (SNP) who have Scotland’s interests at heart. They are the best Government we have ever had.

    With a CU, they are trying not to scare the horses, however when you look at the spiraling UK debt level, you have to be concerned of our share of the UK debt. The UK were the ones who have taken it on and now accepted they are liable, so why would we want to be burdened for a very long time by accepting debt we did not incur.
    Trying to be nice, the UK is not going to be nice we see that every day, we should adjust our position to the pure benefit of Scottish needs, and we have many that need addressed.

    I watched the guy on tv who was heavily involved in the Irish pegging with Sterling, his suggestion was to do the same, others have suggested it too. So I feel a leaning towards that. The UK is emphatic there will be no CU, let us take then at their word, as we tried very hard to get them to agree to one, we sigh and keep the hi ground, everyone knows we tried. Take Westminster at it’s word, they deserve us to.

    1. Muscleguy says:

      There might be problems with the Scottish pegged pound too. Firstly the markets may well decide that we have taken our exports, including the oil out of the Sterling zone and so devalue Sterling accordingly. Also remember we will have effectively ‘sold’ our pounds into Scotpounds thus reducing the demanding for Sterling. So Sterling will fall, along with our currency. Note that without our exports counting rUK’s balance of payments will worsen considerably (they are currently bad enough) further depressing the pound, to which ours is pegged. The rUK’s ability to service its debts would decline as interest rates on gilts would have to increase.

      Considering rUK would still be our biggest trading partner their currency and economy tanking like that would not be good for iScotland.

      Most of those can be avoided, on both sides, with a CU which is why it makes sense for rUK to enter into it, despite current rhetoric. All the talk has been about risks on the rUK side of CU but they usually work on our economy tanking which it won’t or wrong about who would have to bail out ‘our’ banks. But the current debt, balance of payments and pensions time bomb in rUK mean their economy could well tank dragging Sterling down and reducing our export earnings (though demand may rise as they get cheaper to international customers).

      In a CU many of the risks of iScotland leaving the Sterling zone can be anticipated and worked on in advance. rUK needs to rebalance the economy anyway for eg. Crises apart the iScotland government would give warning of our intention to leave the CU even if not such period is agreed (unlikely). Reducing the surprise in comparison to say late failure of the CU talks and the hurried minting of a Scotpound in a couple of months. Not that we would have to issue new notes, just coins. Having our own notes would make it easier. Not to mention the billions deposited in the BoE to cover Scottish script issued would come back to Scotland to ‘buy’ Scotpounds with. A hit the BoE would not like.

      So swings and roundabouts but the Fiscal Commission Working group considered all this before coming to the suggestion of a CU being the best solution for both sides. Remember rUK’s economy not tanking is in our interest too.

    2. Scottie says:

      We are brainwashed to worry about national debt, yet the most worrying thing just now in the uk is the level of private debt. Ratio of Private debt to GDP is around 450%. Coupled with declining salaries, higher energy costs, and austerity, it’s a recipe for a complete repeat of 2008. The economy is flatlining whilst debt rises. It won’t work.

      Most of the growth we have seen Osborne boasting about is the expansion of the currency supply into another housing bubble (debt). It makes the growth graph look good and it will probably get Cameron re-elected but the next 12-18 months will be a car crash.

      National debt is cheaper (lower interest) than private debt and we own it in our pensions.
      Deficit spending is fine if it goes into boosting jobs and creating more tax payers, not propping up the banks.

  3. Phil Robertson says:

    An interesting interpretation of Irish economic history. Until the 1990s, Ireland was one of the poorest countries in Europe and neither its use of the pound nor of the punt were of much help economically to its populace. The turn-round in Irish fortunes cam with the membership of the EU and, consequently, the Euro zone.

    So, if you are using Ireland as your model economy, then it would point to joining the Eurozone.

    The difficulty with a formal sterling currency zone is that, in equity, over 80% of the influence over policy would remain with rUK, giving Scotland very little say in what happens.

    Which does point you towards the Panama analogy. The pejorative “banana republic” shows a further lack economics knowledge. Panama has a democratically elected government and is the second largest economy in Central America. It is also the fastest growing economy and the largest per capita consumer in Central America

    1. “The turn-round in Irish fortunes cam with the membership of the EU and, consequently, the Euro zone.”

      This is can be disproved by looking at the fact that Irish growth catch-up occurred in the nineties. The Euro didn’t exist until 1999. Remember that the country joined the EU in 1973. So growth doesn’t correlate with either EU membership or Euro usage. More likely to have been due to changes in economic policy.

      “The difficulty with a formal sterling currency zone is that, in equity, over 80% of the influence over policy would remain with rUK, giving Scotland very little say in what happens.”

      So, for this to be acceptable we would need to be okay with a situation that pertains now, and would pertain after a no vote. This seems like a difficulty that will exist with a yes or a no, so can be coped-with.

      1. Phil Robertson says:

        “This is can be disproved by looking at the fact that Irish growth catch-up occurred in the nineties. The Euro didn’t exist until 1999. Remember that the country joined the EU in 1973. So growth doesn’t correlate with either EU membership or Euro usage. More likely to have been due to changes in economic policy.”

        As regards the Euro, note the word “consequently”.

        The earlier improvement can be largely ascribed to two factors both of which the Irish government can take responsibility for. The first was the prevalence of poverty in Ireland whereby they benefitted hugely from the European Structural Fund. Secondly they did achieve significant inward investment but largely because they were within the EU and had lowish tax rates. It was the being in Europe that was important not the currency.

        So to imply, as the article does, that Irish economic fortunes were improved in any way by using the pound or the punt flies in the face of logic.

  4. Stan says:

    Could someone explain how it can possibly be progressive to further divide the human race? Surely we need more unity. This sums up my views… http://theoccasionalpigeonuk.blogspot.co.uk/2014/07/ukip-and-snp-in-shock-merger.html

  5. bjsalba says:

    Is Panama actually a banana republic? Perhaps a closer look is in order. As I understand it, not having a lender of last resort inclined the Panamanian banks to prudence. As a result, they sailed through the Credit Crunch relatively untouched.

    Panama might not be such a bad example to follow.

  6. bringiton says:

    I believe that a large part of the objection to a CU from the London establishment is political.
    Whatever arrangements are put in place would mean that the decision making process on monetary matters would be opened up to external scrutiny.
    The Westminster establishment functions on secrecy and abhors the prospect of openness and transparency.

  7. Reblogged this on charlesobrien08 and commented:
    just need people to understand

  8. Adam Neilson says:

    The only member of Cameron’s cabinet with significant experience and qualifications in economics is Vince Cable.
    As what much of Cable has said about London and ‘The City’ is identical to what Yes Scotland, numerous other pro-independence groups like Academics for Yes, and the Scottish Government have said, I’d bet my pension that Cable is ‘the Cabinet insider’ (and the Guardian has always been a big fan of Cable – and it’s mutual).

    Cable’s an economist. He knows that the SG, the Fiscal Commission, and a host of the planet’s most experienced and highly acclaimed economists, are right. He will know all the reasons too, and unlike Balls, Alexander, Osborne, and Darling – will actually understand them.

  9. People keep throwing Panama out as some sort of bad example we shouldn’t try to be like.

    Panama has a stable, low-inflation, high growth economy. If an independent Scotland did as well as Panama we’d be doing very well indeed.

    http://en.wikipedia.org/wiki/Economy_of_Panama

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