Fresh doubt cast on SNP plans to keep the pound

Political Editor

Friday 14 December 2012

An independent Scotland would need to create its own currency rather than enter a monetary union with the UK that would see it surrender fiscal sovereignty to London, a former Bank of England analyst has warned.

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Magnus Gardham Political Editor

Mark Allan, a specialist with AXA who at one time gave advice to the Monetary Policy Committee, questioned the SNP's plans to keep the pound in a briefing paper for investors issued by the global asset management giant.

It emerged after Deputy First Minister Nicola Sturgeon yesterday signalled a significant shift in the Scottish Government's tone on the issue of Europe. She said an independent Scotland would have to negotiate with the EU on the euro, border controls and keeping a share of Britain's cash rebate. The AXA report said: "An independent Scotland almost certainly means a new currency." It added Scottish Government proposals to enter a currency union would "surrender almost all fiscal sovereignty to London". It also warned an independent Scotland would have to take on £120billion of national debt at a time of falling North Sea oil production. The claims came after Mr Allan's former employer dismissed suggestions it was in a dialogue with Holyrood over a possible sterling zone. Mr Allan claimed: "First Minister Alex Salmond said an independent Scotland would continue using sterling, effectively giving birth to a 'sterling zone'. I doubt this will be possible." He argued the Bank would place strict conditions – possibly including a common tax policy with England – on Scotland as the price of currency union. He added: "Given the Scottish Parliament already has substantial autonomy on domestic issues, if the first act of an independent Scotland was to surrender almost all fiscal sovereignty to London in order to continue using sterling, one could reasonably ask: what was the point of independence? "Facing such a choice, an independent Scotland would surely have to issue its own currency and make its own way in the global financial markets." The report, which is part of AXA IM's Investment Essentials series, warned the UK Government would deter an independent Scotland from using sterling without a formal agreement, although that option would be open to the SNP. Mr Allan stressed the currency, national debt, declining oil production and banking regulation were not "insurmountable barriers to Scottish independence". He added: "The process of separation is likely to be rocky, but ultimately the long-term decision is a political rather than an economic one." Mr Salmond faced questions on his plan to join a currency union yesterday after The Herald revealed the Bank of England had dismissed his Government's claims of a dialogue over the move. The First Minister said the Government had sought and received "factual information" from the Bank following a meeting with governor Sir Mervyn King. Mr Salmond's spokesman later declined to give details of the contacts or what questions had been asked. A spokesman for the pro-UK Better Together campaign said the AXA document "concludes that the case for independence is nonsensical and the case for staying together with the rest of the UK is strong". Scottish LibDem leader Willie Rennie said: "This report highlights the idiosyncrasy of the SNP's fiscal policy for an independent Scotland, whereby a fiscal stability pact would mean spending decisions could be controlled by a foreign bank." A Scottish Government spokesman said maintaining the Bank of England as Scotland's central bank after independence was "part and parcel" of SNP plans to keep the pound. He added: "An independent Scotland would establish a credible fiscal framework to ensure Scotland's public finances were put on a sustainable footing. Estimates are that North Sea oil and gas contributed £11bn in revenues last year, with £1.5 trillion of oil and gas left to be extracted, putting Scotland in a stronger financial position than the rest of the UK."

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Fresh doubt cast on SNP plans to keep the pound

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