Independence: The smart way to a new Scots currency, by Stuart Mackintosh

In the run-up to the referendum in 2014 nationalists punted and failed to answer questions around currency and independence, a stance that weakened the case for separation.

In 2022 Scots voters should be told what they can expect and plan for if a majority votes to leave the UK. So, what currency pathway should politicians adopt?

Many nationalists sit in the ‘Go Now’ camp. These activists maintain we should create our own central bank, and immediately move to a Scots Pound.

Proponents say institutional and currency arrangements are a simple matter, that the break can happen suddenly, disjunctively, and there is nothing to worry about.

Advocates of Go Now further say the central bank should pursue full employment before price stability (a radical type of dual mandate not seen in other central banks) and start printing money, adopting a version of Modern Monetary Theory.

In reality, if we were to Go Now, it would carry huge risks for Scotland.

A new central bank would have no time to establish itself and build market credibility. The currency, although beginning at 1-to-1 against Sterling, would come under immediate pressure, and the central bank would have little or no reserves. The currency could depreciate sharply, investors would shrink away from a weak central bank with problematic monetary and currency stances.

Prices would rise, and interest rates would rise. A damaging break would cost the country and its citizens, who want stability and certainty, not volatility and shrinking purchasing power.

The realities of operating a small open economy, slashing large government deficits, and beginning to run a central bank and floating currency, make Go Now an unwise option.

More prudent nationalists suggest Scots should ‘Go Slow’ on the currency and central bank. This position was adopted by the Sustainable Growth Commission.

It suggested Scotland Go Slow and have an extended interregnum after independence during which the central bank would be set up, Scotland would continue to use the Pound Sterling, and monetary policy decisions would be left to the Bank of England.

The Commission proposed a series of six tests to meet before adoption of a Scottish currency, namely: achieving fiscal sustainability; ensuring credibility of the bank; ensuring the currency meets the needs of Scots and has wide support; sufficient foreign and financial reserves; ensuing the currency fits investment patterns; and the need to balance economic and trade cycles.

Andrew Wilson and the Commission were honest about the difficulties in the institutional and currency transition, hence the desire to set tests and ensure economic and financial stability with the continued use of Sterling.

But I worry the tests could extend Scotland’s tie to Sterling almost indefinitely, as they may never all be met simultaneously, and could be used by critics for avoiding making the leap, much as Gordon Brown’s tests ensured the UK never made the jump to the euro.

A sensible desire for stability and a smooth transition should not result in Scotland using Sterling for the long-term.

All other advanced economy states have their own currencies, perhaps pegged to a stronger currency like the US dollar. Scotland should not outsource its monetary policy indefinitely.

A better option is to “Go Smart”.

A Go Smart approach bridges the gap between nationalist camps. At the outset it would a timeline and date upon which a Scots Pound replaces Sterling.

Scotland would not rush, we must be prudent, clear and deliberative in our approach, and yet still decisive.

This approach has clarity and transparency. Voters, businesses, investors would know years in advance that by date X we will have a Scots Pound overseen by a strong established central bank.

Setting a timeline for success would be galvanizing. We all have experience with the dangers caused by lacking urgency, stalling, and subpar outcomes.

Just as we set target dates in the rest of our personal and professional lives so too should nationalist politicians be clear about the pathway and currency adoption end-date. Making a date commitment would help harness and speed necessary convergence of policies and practices – i.e., help the Scottish Government, central bank, and businesses solve the six tests Andrew Wilson raised.

So, how long is long enough before date X arrives? It took the European Union 10 years to prepare for the adoption of the euro; the date was agreed; it was held to.

Fashioning a credible central bank and Scots Pound should not take longer than Europe took to set up the European Central Bank and the single currency.

In no more than 10 years Go Smart can provide certainty, and can reassure voters, investors and businesses. We can all begin to plan for a clearly understood goal, adjusting gradually, changing strategies, and pulling forward necessary shifts.

Once issued, the Scots Pound would be set at 1-to-1 to Sterling. It may fluctuate, but it would be likely considerably more stable and stronger due to the careful prudent transparent preparatory steps taken in the years prior to adoption by a maturing central bank and Scottish Government.

Finally, and crucially, the Go Smart approach would address unionist fearmongering head-on.

A Go Smart date with a smooth transition using Sterling and then our changeover to own currency, if clearly understood, and backed by a strong independent central bank, with a price stability mandate, would help create the foundations for a prosperous dynamic growing Scottish economy reflective of our hopes and aspirations.

Dr Stuart P M Mackintosh is Executive Director of G30, the consultative group on international economic and monetary affairs, and author of Creating the National Bank of Scotland and the Scottish Pound: Establishing an Institutional Pathway and a Timeline for Success