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Time to talk currency

It’s time to stop taking at face-value the idea that an independent Scotland would have ‘no option’ but to accept Sterling or the Euro as a currency. The independence debate could be quite different if supporters of independence would be less afraid of talking about the possibility.

The Euro crisis and economic and political turmoil in many Euro-zone countries, shows the difficulties of shoehorning into a single currency independent states with huge variances in productivity, tax base, infrastructure and demographics. The union of West and East Germany shows it can be done, but perhaps only by merging the countries and massive transfers of wealth between regions/nations.

The Euro example has natural resonance in Scotland and generates fear and uncertainty. Would we be forced to join the Euro? How much debt would we have? Could we keep Sterling? Would interest rates rise? How could we pay our way? Would we just go broke like Greece, Portugal, Ireland etc.?

The Euro issue is simply answered – No!

It is unfortunate the SNP ever had a policy in favour of joining the Euro but it is clear that post independence Scotland would only join the Euro-zone, if such exists, as and when its people wished.

It is even more unfortunate, although understandable, that having ditched that policy, the SNP government now insists that we would retain Sterling and enter a Sterling zone with the Bank of England as lender of last resort. This gives rise to the obvious questions raised by the NO campaign: Why should England lend to a foreign government at the same rates as it can borrow? Would not the fiscal rules imposed on a Scottish government be even tighter than at present and hence borrowing be constrained and austerity maintained?

All of these problems are overcome if we start to view ourselves as a genuinely independent country with the right to determine our own monetary and currency arrangements.

Fortunately we are not the first country to secede from Great Britain, and we have lessons to learn from Ireland.

The United Kingdom of Great Britain and Northern Ireland came into being in 1927 after the secession of the Irish Free State in 1922.

From 1922 to 1928, Sterling was the currency in Ireland. In 1928 a Free State pound was issued, valued at 1 pound sterling and both currencies freely circulated in Ireland and to a degree in the UK. Following a referendum in 1937, a new Irish constitution was introduced and with it a new currency the Irish Pound. This remained at par value with sterling until 1979 when Ireland joined the European Monetary System. From then until it joined the European Monetary Union in 1999 the Irish pound freely floated against sterling.

This can provide a precedent for Scotland’s currency development. A period, following the independence vote, when the pound sterling freely circulates without a separate currency. Then Scottish banknotes are printed and a currency board ensures the Scots currency is tied to sterling in a form of monetary union or just a fixed exchange rate. After some years, when Scotland and England’s economic interests diverge the Scots currency floats against all currencies. This may happen earlier if the English Government and the City of London try to destabilise Scotland. At a possible later time we choose to enter union with another currency.

The above is a process with no fixed time-lines. But by accepting these are options, and not tying ourselves in knots at this time we undermine many of the arguments against independence.

Unionist scare stories about UK scrutiny of Scotland’s budget and the lender of last resort would vanish if we made clear that should these threats become reality we could establish our own currency as Ireland did.

Worries about debt also reduce in a separate currency. All independent currencies can print money if necessary and devalue if comparatively unproductive. In general this fiscal freedom is rewarded by the markets lending at lower yields. This, not Osborne’s ridiculous claims about austerity, is why the UK with the most unbalanced budget and almost highest debt to GDP ratio in the EU still borrows at low rates. Having your own currency means you can always repay debtors!

If we are to tackle poverty and unemployment, invest in infrastructure and jobs and exploit our natural resources to grow our wealth, we will need a national regeneration plan which will require huge capital investment for many years. These needs will differ from an English government dominated by the City of London and global financial markets. To create a Scotland we deserve we require our own currency.

Gordon Morgan