GROWTH COMMISSION RESPONSE: 8. CURRENCY – AN UNSOLVED CONUNDRUM

We have seen that the Growth Commission is unrealistically optimistic with its GDP per capita and GDP growth rate ‘gap’ assumptions, clearly over-estimates the savings available on day one, is extremely optimistic about the costs to build (and run) an independent Scotland’s administrative functions and fails to take into account any of the downsides of separation.

Even with all of this transparent optimism and despite recommending (implicitly at least) greater austerity than Scotland has experienced in recent years, the Commission fails to show how Scotland could get to the fiscal surplus that would likely be required to create an independent currency.

The Commission has therefore had little choice but to recommend “that the currency of independent Scotland should remain the pound sterling for a possibly extended transition period”.^13.203

Whilst this strategy of ‘sterlingisation’ may be the most pragmatic solution to the currency problem that independence would create, it would necessarily constrain an independent Scotland’s economic freedom, as several highly credible commentators have observed:

“[rUK] can’t prevent the Scots from using the pound, just as the USA can’t stop Ecuador from using dollars. But the lesson of the euro crisis, surely, is that sharing a common currency without having a shared federal government is very dangerous” – Joseph E. Stiglitz, University Professor at Columbia University, recipient of the 2001 Nobel Memorial Prize in economics^{2Scots Wha Hae, New York Times, 24th February 2014}

“I do not believe that [sterlingisation] would be seen as a stable and continuing position for a country as substantial as Scotland” – Professor Jeremy Peat OBE FRSE and Fellow of the Chartered Institute of Bankers in Scotland^{3Scottish Parliament Finance Committee, 21st May 2014}

“Scotland would have no control over money supply, relying on importing pounds through its balance of payments. It would likely have to run trade surpluses, which would require internal adjustment to achieve, depressing domestic demand and crushing growth” – David Folkerts-Landau, chief economist at Deutsche Bank^{4Deutsche Bank: Scottish independence would bring austerity on a scale never seen before, The Spectator, 12th September 2014}

“a new Scotland would have to run large budget surpluses for a long time to build up what would be a foreign currency reserve adequate to provide a makeshift lender of last resort for its banking sector” – Professor Anton Muscatelli, University of Glasgow^{5Scotland’s currency future: what economists think, FT, 5th September 2014}

“Scotland couldn't keep borrowing to pay for spending in excess of its tax take – the markets wouldn't allow it, especially a new state with no financial track record, with no central bank and borrowing in a foreign currency if sterling is adopted.” – Brian Ashcroft, emeritus professor in economics, University of Strathclyde^{6Has Scotland Already Spent Its Oil Fund?, Scottish Economy Watch, 10th July 2013}

The implications for the Scottish financial services sector in particular could be devastating:

“There will be no safety net for Scotland’s banks. There may be few Scottish banks in any case, as the larger ones would probably move south of the border to protect shareholders and reassure customers” – Dame DeAnne Julius, former Monetary Policy Committee member and Bank of England court director^{6Scotland’s currency future: what economists think, FT, 5th September 2014}

“The implications for Scotland’s financial-services industry could hardly be worse. Scotland is host to a large financial sector, which contributes 12.5% of its GDP. With no central bank supporting them, its banks and insurance companies would be seen as riskier investments and the cost of their borrowing would rise. Many would shift their headquarters to England taking highly paid staff and tax revenues with them.” – The Economist^{7No country for old money, The Economist, 11th September 2014}

In part A of the report, the Growth Commission make a point of singing the praises of Scotland’s Financial Services sector^{8“The financial services sector in Scotland has a long history and global reputation, particularly in high value areas such as insurance and asset management.” [A1.13]}. ONS employment data^{9Count and employees in the financial sector by region and district, IFS, 12th February 2018} shows that 192,152 people are employed in the Financial Sector in Scotland. With just over 8% of the population, Scotland has 19% of the UK’s Financial Sector jobs. But by the time we get towards the end of Part C, the Commission appears to accept the loss of large parts of the financial services sector in Scotland as an acceptable price to pay for independence:

“Financial support would not extend to holding companies of retail banks […] It is likely that the result would be that some companies would move their domicile to England in response, in expectation of broader support from the Bank of England. […] Indeed most, if not all, of the banks have already made clear in public statements that they would be headquartered in London for the purposes of regulation in the event of independence.”^10C3.28

The Growth Commission makes no attempt to quantify the economic impact of their proposed currency strategy or to quantify the reserves that would be needed before being able to consider creating an independent currency. The scale of reserves that an independent Scotland would need to accumulate to support its own currency has been estimated at between £30 billion and £300 billion.^{11Separate Scottish currency could cost as much as £300bn, The Scotsman, 23rd May 2018}

The Commission also fail to address the issue that having a stable, independent currency would very likely be a requirement for an independent Scotland to join the EU.^{12The formally stated economic accession criteria is “a functioning market economy and the capacity to cope with competition and market forces”}

“An accession country must have an independent central bank & a currency. It must have policies directed at price stability, make exchange rates a matter of common concern & an intention to join the euro. So using the £, Scotland can’t do this”  – Kirsty Hughes, Director, Scottish Centre on European Relations^{13https://twitter.com/KirstyS_Hughes/status/1001014056306782208}

Independence would create a currency problem. The Growth Commission offers perhaps the only credible solution given the fiscal constraints that exist – but this would still damage and constrain the Scottish economy compared to the alternative of simply remaining in the UK.

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Executive Summary

Context & Response

1. Smaller isn’t Necessarily Better

2. Stretching the Empirical Data

3. Failing to Make a Case

4. A Reality Check

5. The Truth about Austerity

6. Aiming Too Low

7. The Missing Model

8. Currency – an Unsolved Conundrum

9. Making the Case for Union

Endorsements