U.K. Rules Out Pound for Independent Scotland Amid Euro WoesGonzalo Vina and Peter Woodifield
The British government closed the door to a formal agreement with Scotland for its continued use of the pound if it votes to become independent next year, citing the tumult in the 17-nation euro region during the debt crisis.
A study prepared by the Treasury in London said an official currency union between Scotland and the rest of the U.K. is unlikely to work well without political union.
“Abandoning present arrangements would be a deep, dark dive into uncharted waters,” U.K. Chancellor of the Exchequer George Osborne told company executives today in Glasgow, where he and Chief Secretary to the Treasury Danny Alexander were making the case for Scotland keeping the status quo.
The governing Conservative Party, its coalition partner the Liberal Democrats plus the main opposition Labour Party are united in favor of preserving the U.K., which was formed by the Act of Union in 1707. The Scottish National Party, which runs the semi-autonomous government in Edinburgh, is campaigning for independence and set a referendum for Sept. 18, 2014.
The pound has raised British emotions ever since then Prime Minister Harold Wilson told voters that its value in their pocket hadn’t changed following a devaluation in 1967. Successive governments have taken steps to keep the U.K. out of the euro since the common currency was formed in 1999.
“Currency is pretty fundamental,” Michael Moore, Scottish secretary in the U.K. Cabinet, said in an interview in his office in Edinburgh yesterday. “The pound in your pocket is something people care about and so understanding the issues about the currency is something there is a real appetite about. There are a lot of people asking about it.”
Entering into a sterling union would bring a “fundamental asymmetry in the degree of exposure to fiscal and financial risk” between both an independent Scotland and the remainder of the U.K., according to the Treasury’s report. Edinburgh is home to Royal Bank of Scotland Group Plc, which was bailed out by the U.K. government in 2008 as losses mounted.
Germany and France have called for closer political ties in the euro region after a debt crisis ignited in Greece in late 2009 as budget spending was set by governments while official borrowing costs were set by the European Central Bank in Frankfurt. That allowed countries to pile on debt at interest rates that reflected more fiscally prudent countries.
“The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties,” the Treasury said today.
A shared currency union is the best option for Scotland and the rest of the U.K., the Scottish government said in an e-mailed statement. It was responding to a report by the Fiscal Commission it set up which recommended earlier this year that Scotland should keep the British currency.
“The sharing of the pound between an independent Scotland and the rest of the U.K. is the common-sense position supported by the Fiscal Commission,” Scottish Finance Secretary John Swinney said in the statement. “A sterling zone is also in the overwhelming economic interests of the rest of the U.K. every bit as much as it is in the interests of Scotland.”
The Bank of England could remain as lender of last resort and his government could sign a fiscal stability pact to stop a future Scottish government getting too indebted, Scottish First Minister Alex Salmond said last year.
Swinney said that he wants financial regulation in an independent Scotland to be controlled from London. He said the Treasury’s report added nothing to the debate on independence and dismissed the idea that Scottish banks would lose the ability to issue their own bank notes.
Three commercial banks, RBS, Lloyds Banking Group’s Bank of Scotland and Clydesdale Bank, print their own Scottish pound notes under an agreement dating back to 1845. As of Feb. 29, 2012, there were 3.8 billion pounds ($5.8 billion) of the notes in circulation, the Treasury said.
“This arrangement would need to change in the event of independence,” the report said.
The Treasury outlines four currency choices for Scotland outside of the current U.K. Having dismissed a currency union, it said that Scotland could use sterling without any formal agreement, leaving authorities in Edinburgh without control over monetary policy.
An independent Scotland might also find that, as a member of the European Union, it would have to adopt the euro unless it is able to negotiate an opt-out, the Treasury said. The final option would be the creation of a new currency which, according to the report, may increase transaction costs, increase volatility of its exchange rate and increase flows out of Scotland toward bigger and more established currencies.
“Those who argue for change need to answer these basic questions” about future currency arrangements, Osborne said in Glasgow. “The SNP does not have straightforward answers to these basic questions. You cannot ask people to separate without having basis answers to basic questions.”