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Bluff and counter bluff on currency

ON April 23 last year, amid the grand oak panelling and splendid stained glass of the Trades Hall in Glasgow, Chancellor George Osborne unveiled the Treasury's analysis of an independent Scotland's currency options.

It concluded that the case for the UK accepting Alex Salmond's proposal for a currency union in the event of a Yes vote was "not clear". Mr Osborne said the UK's 58 million remaining citizens would lose some of their sovereignty over monetary policy and expose themselves to new economic risks if an independent Scotland, and its banks, got into difficulty. Would the rest of the "UK family," as he put it, agree? Could a currency union be made to work?

Then, pausing dramatically as he conjured up his most portentous frown, he added: "Frankly, it's unlikely, because there is real doubt about the answers to these questions." If the Chancellor appeared to be hamming it up a bit at the time, his performance now looks like something straight out of a pantomime, given the un-portentous words he had come to deliver. Compared with the UK parties' current position on the currency issue, his comments sound ultra-cautious.

How things have changed. Within a year, Mr Osborne had ruled out a currency union altogether, backed by his opposite numbers, Ed Balls and Danny Alexander, from Labour and the LibDems respectively. If there appeared to be a few millimetres of wriggle room even then (Treasury Permanent Secretary Sir Nicholas Macpherson's controversial open letter in support of the stance advised against currency union "as currently advocated"), that surely vanished yesterday when the three main UK parties all indicated they would use their election manifestos to rule out a currency union in the event of a Yes vote. It would be in the best interests of everyone, north and south of the Border, said Alistair Darling.

For the SNP all this remains a bluff. The loss to a formal sterling zone's balance of payments of Scottish exports, or the creation of transaction costs if a new currency were created, would make a UK Government come to its senses, it says. And that's not all, Alex Salmond insists. Without a currency union and shared Bank of England, an independent Scotland would not take on its share of the UK national debt, he warns, depriving the rest of the UK of £5 billion per year in repayments. A Yes vote, he adds, would also give him a "sovereign mandate" to demand his monetary pact.

For the voters, the question has ceased to be a simple one of "what would the currency be?" and morphed into an impossible exercise in assessing potential negotiating positions. Who is to be believed? Who has the stronger hand? Unfortunately, those seeking impartial, definitive guidance can give up now. Expert opinion is nuanced, difficult to interpret and, of course, divided.

Take, for example, Mr Salmond's argument that refusing to shoulder a share of UK debts would force the creation of a currency union. Some economists have acknowledged it would leave an independent Scotland's finances in a strong position. Others refuse to treat the threat even remotely seriously, warning the consequences for an independent Scotland's borrowing costs and efforts to join the EU make it a non-starter.

Or, leaving aside the question of debt, how about sterlingisation, which seems to be emerging as Mr Salmond's unofficial Plan B? In a letter in today's Herald, Eamonn Butler, director of the free market Adam Smith Institute, says there "just isn't a problem" with Scotland continuing to use the pound without a formal deal.

Yet Dr Angus Armstrong, of the National Institute for Economic and Social Research, argued this week the arrangement would cost an independent Scotland large chunks of its financial services industry, as banks relocated down south to avail themselves of a lender-of-last-resort facility.

Would, as Alistair Darling insists, a currency union impose unacceptable constraints on an independent Scotland's economic policy-making? Might the issue of Trident, as an unnamed UK minister suggested, unlock economic doors for an independent Scotland? These are just a handful of dozens of questions, each of which has scores of answers. Happy pondering.

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Finance

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