SNP's currency plan 'could spark £200bn economic crisis'

The estimate has come from Ronald MacDonald, Professor of Macroeconomics and International Finance at the University of Glasgow’s Adam Smith Business School, who has advised governments and public agencies such as the IMF and various central banks, including Europe’s, on currency issues.

He sets out his views in an analysis for Friday’s inaugural lecture of Our Scottish Future, a think-tank established by Gordon Brown, the former Prime Minister.

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Costs of £200bn would be more than Scotland’s entire annual GDP of £160bn and would result in Scots facing deep cuts to public services and significantly more expensive mortgages.

In his analysis, Prof MacDonald says a transition to a new and separate Scottish currency would closely mirror “sterlingisation,” which would be simply a more rigid form of a fixed exchange rate. But he argues an independent Scotland would need a more flexible floating exchange rate to absorb economic shocks.

He claims the advocates of sterlingisation, or a fixed exchange rate with a separate currency, have “put little or no thought” into the design of an effective currency regime and, thus, the viability of such for an independent Scotland.

Prof MacDonald points out the latest Scottish Government data on Scotland’s current account balance reveals a deficit of approximately £16bn which represents about 10 per cent of Scotland’s GDP; international capital would not regard this underlying macroeconomic fundamental as credible.

“With sterlingisation, £10bn per annum would be draining out of the Scottish banking system and Scottish banks would have no access to Bank of England reserves to replace these funds. To meet the demand for sterling in Scotland the Scottish Central bank would need to sell sterling denominated bonds to raise sufficient foreign exchange reserves to support the regime.”

Prof MacDonald notes this could be around £100bn but says: “However, to persuade international capital markets to hold such bonds, they would need to be sold at ever higher rates of interest resulting in a worsening financial position which would clearly not be sustainable.”

He goes on: “In other words, the proposal to use sterling informally post-independence would lead to a classic currency crisis in which the regime would have to be abandoned in favour of a separate currency floating freely in international markets, with all of what that would entail.”

The Scots academic points out, in the case of the alternative proposal of a separate currency fixed one to one against sterling, the outcome would be very similar to that of sterlingisation.

“Clearly, any attempt to impose such ill thought-through currency regimes on an independent Scotland would be hugely costly," he declares.

“The costs of a currency crisis alone would be between £30bn to £100bn on top of reserve losses of £100bn and this before we factor in the inevitable loss in value of a Scottish currency.”

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Prof MacDonald adds: “Given this, it is surely now time for there to be an open and objective debate regarding the most appropriate currency regime for an independent Scotland and what that would cost.”

In April, the SNP at its conference voted to back a new Scottish currency in the event of independence.

The party leadership had wanted an independent Scotland to continue to use sterling until a separate currency could be “safely and securely established" but conference instead called for a new currency to be introduced "as soon as practicable".

Nonetheless, the decision marked a significant policy shift from the SNP's position ahead of the 2014 independence referendum, when Alex Salmond, the then First Minister, said Scotland would continue to use the pound in a formal UK-wide currency union; an arrangement rejected by Chancellor George Osborne at the time.