Editorial: A currency union could kill both sides

Sharing sterling would threaten both Scotland and the rump UK

By Matt.Ross

20 Feb 2014

It’s obvious why the government has broken convention by publishing the Treasury permanent secretary’s advice to the chancellor that he avoid monetary union with an independent Scotland: most Westminster politicians are so disliked north of the border that any intervention by them is likely to create as many ‘Yes’ as ‘No’ votes. When their message is: ‘If you leave, you’re on your own,’ the dangers are magnified: many proud Scots will reply: ‘So be it!’ Hence the mobilisation of non-political voices – most obviously the Bank of England and BP chiefs – in favour of union. Despite the risks, though, London’s political leaders did have to break cover: these things need saying – and the Scots Nats’ response reveals their vulnerability.

If recent history has taught us anything, it’s that whilst currency unions can initially protect weaker members from the results of poor tax and spending decisions, those results are not eliminated. If an independent Holyrood followed the Scottish Nationalists’ tendency to spend more than the main UK parties, a currency union would enable them to borrow at interest rates tuned by international markets to the UK-wide economy; one run, of course, along the more austere lines that reassure currency traders and keep rates low. Yet such borrowing would come at a cost to the rest of the UK, creating upward pressure on interest rates and downward pressure on sterling. The people of England, Wales and Northern Ireland would, in short, be subsidising the public spending of an independent Scotland.

Given this, Scottish deputy first minister Nicola Sturgeon is on thin ice when she argues that a currency union would be in all of our interests – and still thinner when she refuses to acknowledge a case for giving non-Scots a vote on the matter. Alex Salmond’s warnings that separate currencies would create transaction costs are simply ludicrous: these arguments helped drive the euro’s creation – and its architects must now wish they hadn’t forged a monetary union without creating a political one.

We’ve also learned that when economic shocks hit a currency union, its members’ divergent positions and needs can pitch them into conflict, create vast costs and threaten economies. The euro crisis has been very dangerous and horribly expensive: if the markets see another, similiar currency union being created, they’ll price it to reflect not just its incorporation of a more free-spending but relatively small Scottish government, but also the danger that its integral tensions could bring it down at the next recession.

The Scots should think twice about currency union – and then keep thinking. For even currency unions made robust by their bigger members can end up rebounding on the smaller players: just ask Greece – at first happy to trade its ability to devalue for unearned low interest rates, it later found itself tied into an unhappy dependence on handouts from Berlin. If the Scots are wary of England now, just imagine how they’d feel if, in some future slump, Holyrood was forced to trek to London with a begging bowl.

For its own sake as well as that of the UK, Scotland must not win the right to spend without the responsibility to fully fund that spending. To tinker with the rallying cry of another, earlier campaign for independence from English domination: no representation without taxation!

Matt Ross, Editor. matt.ross@dods.co.uk

Correction: This article has been amended to note that sharing sterling would threaten the rump United Kingdom, not just England and Scotland.

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