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Why Scotland can and should have its own currency
What is sterlingisation?
The Growth Commission recommended that an independent Scotland should initially retain pound sterling without any agreement with the UK government (an arrangement also known as ‘sterlingisation’). A new Scottish currency should be launched “in the long term” if – and only if – six stringent economic tests were met.
Why? According to Andrew Wilson, rushing into a new currency “would be short-term risky, politically difficult, and it would make the cost of government borrowing more expensive... The monetary policy situation that we have now would continue until such a time that it’s no longer in our interests.”
At the moment, as part of the UK, there are benefits because the UK is a monetarily sovereign country, i.e. it issues its own currency, benefits such as in times of crisis (e.g. a pandemic) central bank creation of money, manipulation of interest rates, fiscal transfers and currency revaluations. The Scottish Government (SG) can benefit from these levers but with sterlingisation they would disappear. Scottish banks would no longer have access to Bank of England liquidity facilities, so could experience regular bank runs; monetary policy would be set in London by the Bank of England, who wouldn't take any consideration of Scotland’s economic circumstances; and fiscal (tax) policy would be constrained by the terms set by investors willing to lend sterling, most of whom would also be in London. If the point of independence is to gain more control over Scotland’s economy, this is a strange way of going about it.
For a sterlingisation regime to have the slightest chance of surviving, Scotland would also need to build up a vast stockpile of sterling reserves. Tens of billions would be needed to provide credibility to bond markets and ensure the banking system can function, and if the Scottish Government wanted to underwrite retail bank deposits (which are currently guaranteed up to £85,000 in the UK under the Financial Services Compensation Scheme)https://www.niesr.ac.uk/sites/default/files/publications/dp434v2.pdf up to £120bn would be needed.
How would the SG obtain the sterling needed?
- Tax more than it spends to create a fiscal surplus, but that leads to austerity
- It could run a Current Account surplus, i.e. export more than we import, thus earning sterling
- It could borrow on financial markets but would then be vulnerable to currency speculators
- It could sell national assets by a programme of privatisation
The consequence would be that large public investment programmes which are likely to be needed at the start of a new country would have to be postponed to a distant wish list. It is also easy to see that these choices are likely to be difficult or painful or both. Deficits would be likely, not a serious problem if a country has its own currency, but if one has to borrow in someone else's currency to fund the deficit big problems soon emerge. Financial markets would demand ever higher interest rates on Scottish debt, the finances would become unsustainable and a new Scottish currency would have to be launched out of necessity. In other words the worst possible start for the new currency.
At present, most polling shows that a majority of Scots want to keep the pound, principally because they are ignorant of the problems which would arise. This is why the SNP itself needs to learn then educate the public as to why a central bank and our own currency is necessary. Sterlingisation is a policy for dependence. not independence.
This is a summary of an excellent Open Democracy article by Laurie MacFarlane.
Further information
Richard Murphy at Tax Research UK
"Trying to run Scotland without its own currency would be like.. a carpenter without a saw." 30/12/20
Richard Murphy videos You Tube
"Will Scotland need its own currency?" 10/9/20 5min. 36 sec.
"How are you going to pay for it?" 8/7/20 5min 28sec.
"Why do we need a National Debt?" 24/7/20 7min 01 sec.
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