Irish Revival Too Late for Scots as Pound Row Rages

Scotland's Nationalist Leader Alex Salmond
Alex Salmond, First Minister of Scotland. Photographer: Simon Dawson/Bloomberg

Ireland is showing Scotland that the euro is nothing to be scared of after all.

As the Sept. 18 referendum on Scottish independence draws closer, the argument over currency remains at the center of the debate. Nationalist leader Alex Salmond plans to keep the pound as the best option for the new state, ruling out joining the euro. The main U.K. political parties say they won’t enter a currency union, with anti-independence campaign leader Alistair Darling using the pound as his main weapon.

Once a poster child for the nationalist vision of a small country with a strong economy, Ireland turned into a bogeyman after the collapse of its real estate market crippled its banks and pushed the nation into its worst recession on record. Six years on, shielded by European Central Bank President Mario Draghi, Irish borrowing costs are now lower than the U.K.’s in a revival that looks to have come too late for Scotland.

“If we’d had our own currency over the last number of years, we would be seen as a massive devaluation risk and interest rates would be a lot higher right now,” said Karl Whelan, an economics professor at University College Dublin and a former economist at the Federal Reserve.

Bond Yields

The yield on benchmark 10-year Irish government bonds was 1.79 percent on Aug. 29. That compares with a peak of 14.2 percent in July 2011, two months after Salmond’s Scottish National Party won the majority in the semi-autonomous Scottish Parliament that allowed it to plan the referendum. The equivalent U.K. security yielded 2.37 percent.

While polls show Scottish residents will opt to stay in the U.K., the lead is narrow enough to make it too close to call.

A Survation survey for the Scottish Daily Mail last week found that 47 percent of respondents would vote Yes, four points more than in a similar survey on Aug. 9. The poll, which excludes undecided voters, shows No voters down to 53 percent.

Ireland broke from the U.K. in 1922 and introduced the “saorstat” pound five years later. Until 1979, Ireland’s currency was linked to sterling on a one-to-one basis, when Ireland joined the European Monetary System.

In its most decisive break with the U.K. since independence, Ireland adopted the euro in 1999 following an intense national debate. Even now, opinion is still split among economists after interest rates plunged and poured more fuel on an economy already growing at least 5 percent a year.

Celtic Lion

In a speech at Harvard University in March 2008, Salmond spoke of building a “Celtic Lion” economy that could emulate Ireland, Norway and Iceland as small, independent, successful nations. “Why is it that Scotland looks out on this arc of prosperity to the west, to the east and to the north?” he told the audience, according to a transcript on the Scottish government’s website.

Within months, that vision started to sour as the U.K. was forced to bail out Edinburgh-based Royal Bank of Scotland Group Plc as it ran out of money. Anti-independence campaign leader Darling, who was U.K. chancellor of the exchequer at the time, said Scotland wouldn’t have been able to afford the rescue.

Opponents turned Salmond’s words at Harvard against him, describing Ireland as part of the “arc of insolvency” along with Iceland, which also suffered a banking crisis. Irish bond yields surged, locking the nation out of credit markets and forcing an international bailout in 2010.

Now, Ireland features little in Scottish campaign. The prospect of an independent Scotland in the European Union ever seeking to adopt the euro is remote, according to Megan Greene, chief economist at Maverick Intelligence in London.

Bad Timing

“It would take a really long time for Scotland to qualify,” said Greene, also a columnist for Bloomberg View. “If Scotland chooses to leave the U.K., everything is up for negotiation. Scottish debt would go through the roof and it would take years for it to comply with EU rules.”

In its first blueprint for independence, in 2009, the SNP-led government in Edinburgh proposed keeping the pound and joining the euro through another plebiscite once the economic environment was right. With a minority of seats in parliament, that bill was defeated before the SNP won elections again in 2011 just as a debt crisis threatened to unravel the euro.

Salmond says London-based politicians are bluffing on not sharing the pound and the position will change should there be a Yes vote. Nobel Prize-winning economist Joseph Stiglitz, who is part of a panel of advisers on an independent Scotland’s finances, said this month it was political bargaining.

Red Herring

What’s more, the nationalists say there’s nothing to stop Scotland keeping the pound, even if it’s outside a formal union and without the backing of the Bank of England.

“The notion of the Scots not being able to use the sterling is a red herring,” said Whelan, the professor at UCD. “The British political parties are largely scaremongering on this issue. They can’t stop the Scots using the sterling.”

Yet, to an extent, the scale of the European debt crisis obscured the potential benefits of euro membership to a small, independent Western European economy.

While the single currency took away the option of devaluation to restore Irish competitiveness after the crash and prevented Ireland from forcing losses on some bondholders, in the end it was the ECB that came to the rescue.

Irish lenders tapped the central bank for 93 billion euros of funding in January 2011, more than double Ireland’s entire tax take last year. Draghi’s 2012 pledge to do “whatever it takes” to defend the euro sent borrowing costs across the region plunging, allowing Ireland to re-enter international bond markets and exit its bailout program on time in December.

The Irish debt agency sold 500 million euros of a 2024 bond at 2.32 percent in July. For Iceland, which remains outside the euro, the yield on its 2019 bond is 6.3 percent.

“I would be wary of thinking of the euro a cure-all,” said Monique Ebell, a research fellow at the National Institute of Economic and Social Research in London. “That said, it does hold one advantage over sterling informality when it comes to backing up your banks in a crisis.”

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