Ever since the Westminster parties united to rule out forming a currency union with an independent Scotland, Alex Salmond has faced demands to reveal his "plan B". Would Scotland form its own currency? Would it seek to join the euro? Or would it use the pound without permission? (As Panama and Ecuador use the dollar). In his interview on the Today programme this morning, Salmond gave the clearest hint yet that he would pursue the latter course. "Of course the pound is an internationally tradable currency," he said. "It's not a question of keeping the pound, it's a question of whether there would be agreed a currency union."
It's easy to see why Salmond is attracted to this idea. After the events of recent years, the euro, to put it mildly, lost its former appeal it, while the creation of a new currency, with an unknown exchange rate, would create unavoidable instability. But the option of using the pound without the approval of the approval of the rest of the UK (known as "sterlingisation") is far from a safe alternative. It would leave Scotland with no central bank, no lender of last resort (who would have bailed out RBS and HBOS?) and no control of its interest rates (which would be set by a foreign country: the rump UK). For these reasons, the Scottish administration's own Fiscal Commission warned that sterlingisation, "though an option in the short-term", "is not likely to be a long-term solution". It said: "International evidence suggests that informal monetary unions tend to be adopted by transition economies or small territories with a special relationship with a larger trading partner (e.g. between the UK and Jersey, Guernsey and the Isle of Man). Advanced economies of a significant scale tend not to operate such a monetary framework. Though an option in the short-term, it is not likely to be a long-term solution." Awkwardly for Salmond, for instance, a functioning central bank is a precondition of EU membership.
Here's Alistair Darling's response to the interview:
It’s quite clear that a currency union is off the table. Alex Salmond needs to tell us what will replace the Pound. Adopting the Panama Plan, which is rejected by his own Fiscal Commission, would leave Scotland with no financial back-up and no central bank to stand behind its banking system.
On top of that, the Panama Plan would mean Scotland’s interest rates would be set by what would then be a foreign country. Worse than that, a separate Scotland would have to make substantial cuts in public spending. The Panama Plan would cost jobs and put up the cost of mortgages.
The idea that an advanced economy like Scotland's would follow the lead of Panama or the Isle of Man is simply not credible.
The currency we use isn't just about the pound in our pocket. It keeps down costs for our mortgages, credit card bills and car loans. Leaving the UK means losing the strength and security of the Pound, which would result in higher costs for Scottish families. Why would we want to take that risk?
But worse for Salmond, Paul Krugman, exactly the kind of economist revered by social democratic Scots (and an agonistic about independence), has derided the idea on his New York Times blog. He wrote:
It’s true, as pointed out here, that England, I mean the rump UK, I mean continuing Britain, whatever, can’t prevent the Scots from using the pound, just as the United States 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.
In fact, Scotland-on-the-pound would be in even worse shape than the euro countries, because the Bank of England would be under no obligation to act as lender of last resort to Scottish banks — that is, it would arguably take even less responsibility for local financial stability than the pre-Draghi ECB. And it would fall very far short of the post-Draghi ECB, which has in effect taken on the role of lender of last resort to eurozone governments, too.
Add to this the lack of fiscal integration. The question isn’t whether Scotland would on average pay more or less in taxes if independent; probably a bit less, depending on how you handle the oil revenues. Instead, the question is what would happen if something goes wrong, if there’s a slump in Scotland’s economy. As part of the United Kingdom, Scotland would receive large de facto aid, just like a U.S. state (or Wales); if it were on its own, it would be on its own, like Portugal.
Now, Scotland would presumably have high labor mobility — assuming it manages somehow to join the EU (although that too would be surprisingly tricky) it would be under the Single European Act, and it sort of shares a common language with England (even if you sometimes wish there were subtitles). But that’s not necessarily a good thing: what we’re seeing in places like Portugal is large-scale emigration of young workers, leaving a diminished population to bear the fiscal burden of caring for the elderly.
Again, I can understand Scots grievances. But if they really want to do this, they had better get real about money.
Salmond's hope is that the spectacle of English Tories vetoing a currency union, and of Labour siding with them, will redound to his political benefit (although the most recent polls continue to give the No campaign a comfortable lead). But his policy credibility is being shredded.