Monday, 22 April 2013

Ten a Penny - Westminster's Current Currency Threats

George Osborne, the UK Chancellor, has made a number of threats since the referendum on Scottish Independence was announced…

He claims that Pound Sterling could be denied to an independent Scotland, that the currency union that the Scottish Government is proposing could never work and that he would put up as many obstacles as he could in an attempt to punish us for voting Yes.  There are only two reasons for him to say this:

1 – George Osborne doesn’t understand how currencies work
2 – He is intending to radically alter the role of the Bank of England, Pound Sterling, and Scottish Bank Notes, with massive implications for those considering a ‘no’ vote.

"Trust me, I have the interests of the common man at heart," George Osborne (probably)

Judging from his past utterances I believe that the first option is the most likely.  Mr Osborne probably doesn’t know that Scottish wealth and exports are providing a great deal of the value to the Pound.  This story from Newsnet Scotland ( highlights the precarious situation that the Bank of England without Scotland would find itself in.  Without the £135 per second generated by Scotch whisky exports ( the currency would be forced to weaken very fast and very hard.  If Mr Osborne understood this, then he wouldn’t be making the statements above.

Another reason why the chancellor is wrong is because the Pound is one of a number of fully convertible currencies (  This means that it has few restrictions on the manner and amount that can be traded for another currency.  It isn’t possible to say ‘our currency has immediate value on a foreign exchange (advantage of a fully convertible currency) but not in Scotland’.  It is an either or situation.

Finally, currency unions are actually very common.  You can see from this map just how many nations actually share currencies without having to share economic, social or foreign policy.  It’s difficult to imagine how Scotland and the UK cannot have what all of these nations currently enjoy.

"Currency unions cannot work without political unions, except in the nations above, but none of them really count...stop looking at them!" George Osborne (probably)

There is only one circumstance where the above statements could be wrong.  At the moment, currency is dealt with by the Bank of England independently from Westminster.  They are unlikely to support the vast reduction of influence which would result from Scotland having a rival (and significantly stronger) currency, nor the loss of fully convertible status.  It stands to reason that if Mr Osborne does understand finance, and that his threats are real and not just scare tactics, that his only option is for him to directly control the bank’s actions.

Taking away the fully convertible status of the Pound would result in nations around the world returning their holdings of Pound Sterling.  International trade would become much more expensive, as every transaction would have to be converted into Dollars or Euros, with business bearing the additional costs.  London would lose its status as a global centre for finance and the value of savings would plummet, leaving millions impoverished.  We suspect that this isn’t very likely.

There is only one thing that Mr Osborne can do, although it depends entirely on us voting ‘no’ in the referendum.  At present, three Scottish banks (HBOS, Royal Bank of Scotland and the Clydesdale Bank) are permitted to issue currency (this arrangement also exists for certain banks in Northern Ireland).  Every one of these notes is backed by a Bank of England note, which guarantees their value.  Mr Osborne has claimed that independence threatens the continuance of this setup, however only the opposite can be true.

After independence we will either have a formal agreement with the Bank of England which will maintain the current arrangement, or we will have an informal alliance, where Scottish bank notes will continue to be printed and used as before.

Official advisor to the Treasury

The only circumstance where Scottish notes can cease to have value is after a no vote.  This could be Mr Osborne’s strategy, as at the moment having our own currency mixed in with that issued by the Bank of England makes independence much easier for us.  It would cost us nothing to switch from sharing notes to simply printing more of our own, and it would be straightforward for us to leave a currency union if that was in our interests.

When it comes to currency, independence gives us flexibly and influence, with the worst settlement being status quo.  A no vote gives us uncertainty, and makes us vulnerable to the whims of Osborne and his successors.  I know which option I’m more comfortable with.

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