Scottish Independence: There is no need for Plan B

by Charlie_East_West on January 30, 2014

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Yesterday, the Bank of England Governor, Mark Carney gave an extremely considered and well articulated viewpoint of monetary union under Scottish independence. Yet, the No campaign immediately latched onto yet more false pretence scaremongering that Carney had effectively stated that Alex Salmond’s plans for sterling use were a busted flush, and that he urgently needs a Plan B.

What Mr Carney actually said was that a monetary union is possible and desirable in the event of independence. He also said that is would involve ceding some sovereignty as a condition of currency union – just as all countries in currency unions do. He rightly pointed out that workable terms and conditions would have to be put in place to prevent a situation like the recent Eurozone problems. He did not say that the rules are for only one country, and that Scotland’s use of sterling was unworkable. What he did allude to is that such workable rules apply to both England and Scotland within any new monetary union.

The key thing is Scotland can choose to cede a little sovereignty if independent and Scotland can also choose to leave a currency union if it ceases to be in its interests. So, there is no need for a Plan B. Why do the No campaigners find this so difficult to contemplate?

Is the British government really contemplating the reintroduction of capital controls in which sterling cannot be moved around freely? The recent No campaign reactions to an independent Scotland seeking to enter a formal currency union with the rest of the UK seem to indicate as much. Monetary union is an obvious route – based in the interests of pragmatism, continuity and mutual benefit. If capital controls are not being contemplated, then there is no question about Scotland being able to continue using sterling, and clearly therefore a formal and workable currency union would suit both partners best.

It is Scotland’s pound just as much as the rest of the UK’s pound – regardless of whether Scotland becomes independent. All Mark Carney did was to offer a pragmatic viewpoint that requests workable conditions for sterling under independence. The pound is a fully convertible currency, namely, that it can be bought or sold without government restriction. An example of convertible currencies in practice is Kosovo’s use of the Euro despite not being an EU member.

Also – keeping sterling is the obvious sensible path to take in the short term. The markets just wouldn’t accept a new currency to begin with. In the longer term and with the right conditions, a new currency could become viable. But, in the shorter term, the UK and Scottish economies are so closely interlinked that a separate currency might create unnecessary barriers: creating uncertainties for the many companies that operate across the border, for example, as the exchange rate between the pound and the new currency fluctuates.

To create an effective currency union between Scotland and the UK, there are three common criteria used to assess the viability of an optimal currency area:-

1. Integration of intermediate and final product markets with a high degree of cross-border trade relative to domestic trade.

2. Capital and labour market mobility to enable greater integration, specialisation and faster adjustments to shocks.

3. The extent to which nations have similar structures and cycles.

Scotland meets all three criteria in terms of continuation of sterling.

In the short term, the negotiating to keep the pound seems sensible but in the long term, Scotland should ideally seek to form its own currency so that all monetary ties are eventually severed and full control established. In the short term for stability, Scotland has to seek a currency union and then matters will be looked at once independence is actually up and running effectively.

The No campaign scaremongering attaches itself to so many different issues. Take the issue of the banking failures of RBS and HBOS. The No campaign persistently stated that if this had happened under the watch of Scottish independence, then Scotland would have to foot the entire liability.

The truth here lies within international convention. Banks which operate in more than one country get into these sorts of conditions, the bailout is shared in proportion to the area of activities of those banks, and therefore it’s often shared between several countries. In the case of the RBS, around 90% of its operations are in England and 10% are in Scotland, the result being, by that convention, the rest of the UK would have to carry 90% of the liabilities of the RBS and Scotland 10%. There is a precedent for this – Fortis Bank and the Dexia Bank, which are two banks which were shared between France, Belgium and the Netherlands, at the same time were bailed out in proportion by France, Belgium and the Netherlands.

On the issue of oil ownership, the No campaign continues to create a series of fear based messages indicating that Scotland has no guarantee towards ownership of the oil supply rights. Yet, according to the Niesr report which summaries a number of issues on Scottish independence – “The Geneva agreement on natural resources under the sea dictates that they are divided by the median lines. Most people accept that the Geneva approach is the standard approach. Which gives Scotland 91% of revenues.”

What we need is less talk of an immediate need for a Plan B, and more talk about how Plan A can work. This is what Mark Carney highlighted yesterday surrounding a currency union, and this approach is similar to what the Yes campaign have consistently highlighted. The No campaign continue to look the other way and just offer fear and loathing – whilst failing to provide any coherent vision of how Scotland would look if it remains within the UK.

The No campaign argue that the Yes campaign needs a Plan B, yet the No campaign do not have their own Plan A.

{ 20 comments… read them below or add one }

George_East January 30, 2014 at 11:31 am

I agree that sterling is the only realistic option for Scotland, at least until there is a proper fiscal union in the Eurozone. The only other option would be to go down the pegged currency route (in the way that the Danish Kroner is pegged to the Euro) but in order for that to work the peg would need to be at a realistic level to withstand any initial FX trader attacks.
The reality of Scotland having its own currency would be that it wouldn’t really. It would still need to borrow mostly or even fully in sterling or euros and would therefore have even less control. The experience of Hungary and Latvia are lessons in what happens when you have a small currency and foreign denominated borrowings. It can be absolutely disastrous.
I don’t see this as anything more than a recognition that there is no such thing these days as complete sovereignty, particularly for a small state.

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Charlie_East_West January 30, 2014 at 11:37 am

Sovereignty issues are completely futile. I complete agree with your last point George. The whole Britain/Europe fiasco was created around perceived loss of sovereignty issues.

For me, it is bugger all to do nationalism or sovereignty, and everything to do with the major economic and social policy issues. The Yes campaign have offered a white paper blueprint for independence. Where is the No campaign’s vision for Scotland within the UK?

The No campaign has been existing in a prism of neoliberal scaremongering. My increasing preference towards independence has bugger all to do with Scottish nationalism, and everything to do with what is best for Scotland. Under the auspices of independence, Scotland has the opportunity to develop even better socially progressive policies and develop an economy that is similar in function and form to the Scandinavian countries. Both are eminently achievable given Scotland’s left of centre voting preferences, and its core economic wealth generators such as renewables, oil, food and drink, financial services, legal industry and tourism.

If I thought Scotland did not have the economic capabilities for independence, then I would agree with the No campaign. But, as it is, I think Scotland does have the economic capabilities, and independence would in the long term develop these capabilities even further – free from neoliberal controlling mechanisms based at Westminster.

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Charlie_East_West January 30, 2014 at 12:19 pm

As The Scotsman Newspaper pointed out today, there is another option – The Hong Kong Solution.

“The Hong Kong dollar was pegged to the American dollar. In fact, this is very much the situation today. Since the Banknote (Scotland) Act of 1845, Scottish banks such as RBS, Bank of Scotland and Clydesdale Bank have had the right to issue notes, on the condition that they hold an equivalent quantity of English banknotes.

Similarly, the Hong Kong Monetary Authority has at any given time a reserve of American dollars equal to the amount of Hong Kong dollars in circulation.

In the event that an independent Scotland cannot reach an agreement with London, the Hong Kong option would be a possible solution, though one that would require a high level of fiscal stability in Scotland.”

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Jackie_South January 30, 2014 at 11:37 am

I guess the challenge is that, as we have seen with the Euro, monetary union can be an unhappy place: surrendering monetary policy is no small economic decision. Of course, in the short-to-medium term that is already what Scotland (and much of the rest of the UK) already has. That’s less important at the moment but was more of an issue in the late 90s-early 00′s boom years when interest rates were set at a pace that most suited the City rather than Scotland, Wales, NI and north England.

I guess what I dislike most about the independence movement, given the arguments you have set out, is the selfishness of it all: Scotland keeps most of the oil money – stuff the rest of you. When Londoners talk about how more of the wealth generated in the capital should be kept there to sort out its own problems (given that it still has some of the most deprived neighbourhoods in the country) it is decried by others as being selfish for potentially denying money to other hard-pressed areas.

I can’t see why the same is not the case with Scottish independence, if as you say the balance sheet works in their favour.

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Charlie_East_West January 30, 2014 at 11:55 am

Jackie – the Yes campaign are not developing a “stuff the rest of you” approach – they have already stated that they would take their proportionate share of the UK national debt, and as a trade off from that, they would expect fair dues on their oil share as set out by the Geneva Agreement as divided up by median geographical lines. This path is no different to other countries that have been granted independence.

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Charlie_East_West January 30, 2014 at 12:03 pm

Of course the elephant in the room within the oil ownership debate is Orkney and Shetland. They potentially own 1/4 of the Scottish median line oil rights and also the massive untapped reserves which lie west of Shetland; what, too, of the immense marine energy resources off Orkney, so central to Salmond’s vision of Scotland becoming a green energy powerhouse?

So what happens (as is being whispered within those islands) if Orkney and Shetland votes No to independence and yet the rest of Scotland votes Yes?

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George_East January 30, 2014 at 12:18 pm

Isn’t the ultimate Orkney and Shetland model for Scotland, Denmark’s relationship with Greenland or the Faroes ?

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Charlie_East_West January 30, 2014 at 12:26 pm

George – ultimately, yes, it should be.

George_East January 30, 2014 at 12:12 pm

I would be highly tempted by a ‘stuff the rest of you’ approach if I was Scotland. It is different to London as always having been a sovereign entity – the Act of Union recognises that (ie the Union of two equal but separate Kingdoms).
I see it more akin to the Czech and Solvak separation than anything else.
I don’t think independence is going to happen but I would certainly vote ‘Yes’ if I was Scottish. Hard to see any reason why a separate nation should continue to be bound by a union with a larger partner which is apparently resolutely committed to a political philosophy at odds with the overwhelming majority of its population.

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Charlie_East_West January 30, 2014 at 12:29 pm

I have a hunch that the Yes vote might just sneak it. The polls are narrowing towards 54% No / 46% Yes…and the No vote is distinctly softer than the Yes vote.

Critically for the Yes campaign, a large percentage of the undecideds are tending to move towards Yes in the polling data.

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George_East January 30, 2014 at 12:32 pm

The polls will certainly narrow.
I am less convinced that that one poll reflects the current position. It is always dangerous to take one poll on its own. If you look at the polls overall, No is still pretty comfortably ahead.

Charlie_East_West January 30, 2014 at 12:36 pm

The polls have been slowly narrowing for the past six months. But, the latest polling is a substantial move towards the Yes campaign. But, I agree – we need evidence of other polls over the next few weeks before it can be seen as a momentum shift.

Also – it is expected that the turnout for the referendum may reach 85%. So, there will be a lot of potential new voters. The actual result may not reflect the advance polling data.

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George_East January 30, 2014 at 12:59 pm

It will be interesting to watch the polling movement. Every referendum that has been held in this country has seen a polling movement to the status quo in the run up to the vote (and the literature on referenda worldwide suggests that this is usually the case). My guess is this will likely be different, but it is just that, a guess.

The most recent poll was in fact against trend. There was a big uptick of support for the No campaign around Christmas. It does look like something of an outlier. The data is here:

http://whatscotlandthinks.org/questions/should-scotland-be-an-independent-country-1#line

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Tincks January 30, 2014 at 2:13 pm

Long time reader – first time poster

Should a UK govt have ever decided to enter the Euro there would have been a referendum of all the citizens of the UK.

Should Scotland vote for independence and seek a currency union with sterling this would mean that the UK rump would be asked to go into a currency union with a foreign country. Do you agree then that this would require a referendum of the N Irish, Welsh and English to attain their consent to such currency union?

Surely anything else would be profoundly anti-democratic? What would be the consequences for a newly independent Scotland of a no vote?

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Charlie_East_West January 30, 2014 at 2:22 pm

I don’t agree that it would require a referendum of N Irish, Welsh and English for Scotland to use Sterling. For instance, France and Germany did not have a referendum when Estonia or Latvia signed up to the Euro.

Even, if such a referendum did happen – it is in the interests of the UK and an independent Scotland to have a currency union – for the reasons I highlighted earlier.

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Tincks January 30, 2014 at 2:51 pm

As someone who believes in the EU and would vote to remain if there were a future referendum I nevertheless accept that it has a democratic deficient. One of central problems that are causing such resentment across the continent is the lack of democratic accountability in the establishment of the Euro.

Greeks who never voted for the Euro are faced with the consequences of the bailout terms. Germans who never voted for the Euro have to fund the bailout.

It is profoundly undemocratic for governments of sovereign nations to enter currency unions without referenda of their citizens.

On a broader point, I believe the Scots are entirely within their rights to seek to leave the Union if they choose. Good luck to them whatever they decide. What bugs me is what happens in the event of a divorce.

The legal eagles on this blog are no doubt aware that the divvying up of the home, assets and cash need to be the subject of a negotiation between the two parties. Alex Salmond’s case for a yes vote seems to be predicated on saying, and I paraphrase, “It will all be ok, because these are our terms for the divorce settlement”.

Well whilst either party can seek a divorce they can’t be sole authors of the terms. It the arrogance, (and that is what it is), of this approach that troubles people.

Divorce impacts on both parties. Both have a right to help determine the eventual settlement.

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Charlie_East_West January 30, 2014 at 3:14 pm

Tincks – many thanks for your comments. You raised a lot of interesting issues which are ripe for debate.

With regards to your comment, “Divorce impacts on both parties. Both have a right to help determine the eventual settlement.” – both the Scottish and Westminster governments will be equally involved in the break up negotiations. Hopefully both sides will be willing to compromise, rather than one side left feeling scapegoated or victimised – which happens in many cases of a messy divorce.

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George_East January 30, 2014 at 2:42 pm

Tincks – welcome aboard. We always welcome our readers to comment at Allthatsleft.

I agree with Charlie East-West, I do not see that there would be a need for a second referendum. The currency union and the terms of that union will be part of the overall deal.

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Charlie_East_West January 30, 2014 at 5:58 pm
Krackerman January 30, 2014 at 8:52 pm

Dude – A UK government decided to join the Euro in 1992 by taking us into ERM I – I don’t recall any referendum on that and there won’t be one on EU membership or Euro membership. The UK IS NOT a democracy after all.. Or do you think we are getting a referendum now on Scottish Independence due to the election in 2011 of the SNP or due to the claim of right allowing the SG the ability to UDI if it feels it is the settled will of the Scottish People???

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