The question of the currency that would be used by an independent Scotland has received a great deal of attention in the referendum debate. There are some questions about this issue that seem to me to be quite important, but do not seem to have been discussed.
1. If Scotland votes for independence, and negotiations begin, what currency arrangement would the Westminster parties suggest would be best? They are saying, at the moment, that this would definitely not be the pound. Do they want Scotland to have its own new currency, which would mean transaction costs for rUK companies trading with Scotland? If Scotland had its own currency, what do they suggest should happen around the division of the assets and liabilities of Bank of England?
2. What would currency union look like, and how would it work? It is interesting to consider the currency union arrangements in the Eurozone. The differing economic needs of the various countries are handled in three ways: (a) meetings between all the heads of national banks; (b) meetings of the finance ministers; (c) the budget plans of each country is subjected to peer review from other countries, in advance of being submitted to its own parliament. All of this seems fairly sensible. It has obviously been a struggle to make it work, because there are a lot of countries, and some of them (e.g., Germany and Greece) have very different economic needs and conditions. But it has held together for several years, has weathered a major economic storm, and appears to be leading to improved performance in some countries (e.g., recent recoveries in Ireland and Portugal). What is fascinating, is to reflect on why a similar arrangement does not exist at the moment in the UK, with regional (English regions, NI, Wales and Scotland) representation on the Bank of England monetary policy committee. The members of this committee are listed on the BofE website. They have no regional allegiances or experience, as far as I can see. This means that the stewardship of the UK currency, the pound sterling, does not operate in a fashion that allows for transparent consideration of regional differences.
3. Why wouldn’t a sterling zone currency union work? I cannot see that this has been explained. It has been loudly asserted by George Osborne, Ed Balls and many others that it would not work. On the other hand, the governor of the Bank of England, Mark Carney, has always said that he could make it work, if the politicians wanted it to work. The Eurozone currency union works, in a much more challenging situation where there are huge differences between national economies. In contrast the differences between the Scottish and rUK economies are minor. So what would make it impossible, or so undesirable that it is worth the costs associated with other arrangements? Having thought about this, I wonder if resistance to a currency is fundamentally about rUK sovereignty, and not wanting anyone else to have a ‘say’ in how the economy is run. In Scotland, I believe that all (or certainly most) of the budgets presented by John Swinney have been negotiated with other parties and agreed by the whole parliament. We have shown that we can live with that kind of open process. But maybe it is something that is not yet imaginable for the Westminster establishment.