Sunday, 5 May 2013

Do Independent countries have the right to their own currency?

One of the things that independence grants a country is choice. For example, an independent Scotland could decide to join the Euro. Alternatively, it could decide to set up a Scottish pound. There would rightly be a great deal of indignation in Scotland, if someone else tried to limit our newly won independence by saying that we did not have a choice in these matters. Being a sovereign nation would mean that we would have the right to have a currency that was different from that in the rest of the UK (rUK). If we did not have that right, we could not properly be called independent at all. Independence is always a relational concept. I am independent as I am independent from something else. But if Scotland became independent from rUK, it follows logically that rUK would become independent from Scotland. They too would gain independence. Not only us. But it would be unjust if we were to deny to newly independent rUK something that we would demand for ourselves. Just as an independent Scotland would have the right to choose a currency different from rUK, such as a new Scottish pound, or the Euro, so newly independent rUK would have the right to have a different currency from Scotland. For either side not to have this right would be to imply that were not properly independent.

The Scottish government has expressed a desire to retain pound sterling after independence. This is a perfectly proper and reasonable aspiration. But no supporter of independence would want to say that Scotland could not at a later date change its mind. Perhaps, in time the Euro would prove to be such a success that we would want to join it, or perhaps we might decide that having our own currency would be better still. No one could force us to retain the pound if we did not want it post independence, and we would resent it deeply if anyone tried. But by the same token we could not force rUK to retain a currency union with us if they did not want to.

At the moment the UK government, in an official paper, is saying that it probably would not be in rUK’s interest to maintain a currency union with Scotland post independence. This has been met with some indignation by the SNP. They have argued that it is in everyone’s best interest that Scotland retains the pound. This is because they think that it would be beneficial economically to rUK to retain Scotland’s economy within a sterling zone, not least because it would help rUK’s balance of payments. They have even gone so far as to suggest that if rUK were unwilling to allow Scotland to remain in a sterling zone, then they would not accept a share of the UK’s national debt. This share could amount to around 125 billion pounds. It’s always tricky to know for sure what’s going on when we get into economics. One side comes up with a set of figures and economic arguments that look very sensible, only for the other side to come up with a set of figures that are equally hard to dispute. In this case, it might be better to look at the psychology of the situation.

The SNP seem pretty keen to keep the pound post independence, even going so far as to make threats if they don’t get their way. The UK government,  on the other hand, does not exactly appear to be begging an independent Scotland to stay in the pound. It may well, of course, be just as the SNP suggest that it would be foolish for rUK not to keep Scotland in the sterling zone, but then if that were the case, it would hardly be necessary to resort to threats. If it were so self-evident that it was in rUK’s interest to keep Scotland in the pound, there would be no need to persuade at all. Naturally, this might all be a bluff in order to discourage Scots from voting for independence and that in the event of independence, everyone would see sense. But again, it would be a fairly feeble bluff if it were so obvious to all concerned that monetary union between rUK and an independent Scotland was so self-evidently desirable.  

The best argument in favour of currency union between rUK and Scotland is the example of the Republic of Ireland, which retained the pound after independence and kept it until the 1970s. Currency unions between independent states are clearly possible. We already have a currency union between the UK and the crown dependencies  (Jersey, Guernsey, Isle of Man) and the overseas territories (Gibraltar, the Falklands etc). Why couldn’t we have a currency union between an independent Scotland and rUK? There are some limitations and constraints on all sides from being in a currency union and to say the least the crisis in the Eurozone has ably demonstrated that monetary union without political and fiscal union is at best problematic. But if both rUK and Scotland considered a currency union to be in their own economic interest, no doubt it could be made to work.  

But here’s where it looks more difficult for the SNP. If rUK really did not want a currency union with Scotland, then it could not be forced. Scotland could continue to use the pound unilaterally and unofficially, but this would not be a currency union. For a country as developed as Scotland, with a large banking sector, this is hardly a serious option. A Scottish government under these circumstances would have no control whatsoever over monetary policy. To become independent only to have the status of Kosovo, Montenegro or Panama is hardly a pleasing prospect.

The threat of not accepting a share of the national debt, can likewise hardly be considered as serious. Having refused to accept a share of the UK’s national debt, Scotland would not exactly appear to be a trustworthy country to lend money to. Trying to sell bonds on the international market, quite possibly in London would be tricky at best. The credit rating of an independent Scotland would hardly be helped if we had  just shown ourselves willing to renege on our debts. Most importantly however, if relations between rUK and Scotland deteriorated to the extent of Scotland walking away from the debt we had built up together, it would mean that the post independence negotiations had effectively reached deadlock with neither side willing to cooperate with the other. Relations between the two nation states would be characterised by recrimination and hostility. This would be a disaster for everyone no matter on which side of the border we live.

In the end, we in Scotland have to accept that in the event of independence, rUK would have a perfect right to have a different currency from us. We might regret this, we might think it foolish, we might even think that they are acting against their own best interests, but that really is their business. After all, they might think it foolish for Scotland to leave the UK. A supporter of independence would hardly let that influence his judgement. These are matters on which reasonable people can disagree. So if there were to be a difference of opinion about economic self-interest between Scotland and rUK, Scots would have to extend the same right to those south of the border to disagree with us. An independent Scotland could not force them to have us in a currency union, nor should we want to force them.

An independence supporter who is completely unwilling to accept the possibility of losing the pound should seriously consider whether he really understands the concept of independence. It might indeed be possible to remain in a currency union with rUK. No one will know for sure until the negotiations begin after a “yes” vote in the independence referendum. But recognising the fact that the people living in rUK would clearly have the right to judge for themselves and make their decision independently of us as to whether they thought it was in their own economic interest to remain in a currency union with Scotland, means accepting that it must be possible that Scottish independence would lead to us losing the pound. Even if we were to disagree with the rUK position, even if we desperately wanted to retain the pound, we would have to allow them the choice. Otherwise we would not be respecting their independence. Honesty therefore requires supporters of independence to admit that a vote for independence might also be a vote for losing the pound. After all, the UK government has stated its official position that it is unlikely to be in the rUK’s interest to retain a currency union with an independent Scotland. This we must assume would be their negotiating position in the event of Scotland choosing to vote for independence.

This need not discourage independence supporters. There are advantages that come with having an independent currency for which reason most newly independent countries, like Latvia or Ukraine made establishing their own currency one of their top priorities. An independent Scotland, of course, could do likewise. It may be that we would have no alternative but to do so.

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