By Ben Wray, Common Weal Head of Policy
THE SNP’s Growth Commission is expected to publish its findings in the coming weeks. This group had the task of solving the sticky economic problems of independence and the stickiest of all is which currency Scotland would use after leaving the UK. Certainly, 2018 is not 2014 and, after Brexit, it is increasingly Unionists who face doubts about the economics of constitutional upheaval. But Brexit also poses new problems for the independence project: the SNP’s model of a “currency union” with the UK, questionable in 2014, looks unthinkable in 2018, particularly if Scotland rejoins the EU.
This leaves the SNP balancing between two options. Former First Minister Alex Salmond has argued for a Scottish currency. However, rumours suggest the commission plans to propose “sterlingisation”, at least for a transition period until “tests” prove the case for a Scottish currency. Under sterlingisation, one nation state unilaterally adopts the currency of another without any formal agreement for unifying their institutions. Panama and El Salvador are the only countries of any size to adopt this voluntarily; others, like Zimbabwe, resorted to it when their currencies collapsed.
Worryingly, its effect on economies like Scotland’s are unknown. It is promoted by those ideologically committed to free markets. Many economists dismissed the idea in 2014 as there’s reason to believe it would lead to austerity, reinforce external control of the economy and weaken its resilience to another crash. Sterlingisation superficially resembles earlier currency union proposals but with added risks. Crucially, there is no lender of last resort facility and monetary policy would be set by the Bank of England without input from Scotland. A central bank isn’t just an afterthought. Its ability to set base interest rates and create money act as a safety valve, giving financial markets trust in the value of the national currency and, therefore, the national economy.
Without it, a sterlingised Scotland would have to take extra measures to reassure financial markets. This would probably lead to a tightening of fiscal policy by reducing public spending or raising taxes. For supporters, this “discipline” is a good thing. But it would be incompatible with the Scottish Government’s commitment to end austerity and reduce inequality.
Without the security of a central bank, Scotland would require commercial banks with healthy balance sheets to be confident it could ride out another crash. But Scotland’s financial sector remains over-leveraged and dependant on the state for solvency. The strongest argument for sterlingisation, frictionless cross-border trade, is increasingly questionable. Scotland’s trade is geared to UK conditions but Britain is following a radical new geopolitical course with serious implications for its trading future. The costs of cross-border friction are infinitesimal next to the risk of new financial crises.
Sterlingisation, rather like the eurozone, would be a radical experiment built on a wishful interpretation of free market economics. An independent currency, on the Nordic model, carries start-up costs and risks but also opportunities. It provides extra powers to soften the blow of crises, tackle inequality and boost investment. We hope the commission has given serious consideration to the risks of sterlingisation. Currency is not a technical matter. Sterlingisation carries implicit ideas about how economies should function and, on present assumptions, none will enhance social justice or Scottish sovereignty
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereLast Updated:
Report this comment Cancel