by Alex Porter
Until recently the euro was a 'safe-haven' currency. Firstly, it was a safe-haven for international investors such as Jim Rogers who rightfully believes the US dollar is "deeply flawed". Secondly, it was a safe-haven for Alex Salmond who figured that Scotland could be independent and embrace the euro instead of sterling. Recent events in the Eurozone have spoiled the First Minister's party and he has now decided Scotland, come independence, has no choice but to stick with sterling.
The problem Salmond has with a Scottish dollar/pound is that the polling research says an independent Scottish currency does not play well with the electorate. Should the veteran independence crusader be a prisoner of focus groups though? Can you imagine Ghandi or Mandela fearing focus groups? No, they gradually won over the doubters with conviction and reason.
An independent currency is at the very core of the Scottish cringe. The farce of past campaigns to save Scottish bank notes while Scotland had no tax powers was evidence of this insecurity. As long as we had a picture of Rabbie Burns on our fivers who cared about actual economic powers like setting interest rates..?
Understanding that the lack of popularity for an independent currency is entirely about self-confidence isn't rocket-science. Control over money equals independence as we discover when we leave home as teenagers and start paying rent. By advocating sterling, Salmond is betting on the cringe. Instead of savouring the debate, familiarising the electorate with the idea of a Scottish currency and eagerly looking on as a nation grows in confidence Salmond is sending out the message that Scots are too feart to discuss grown up matters like money. This attitude is worse than Jim Sillars's jibe that Scots are "90 minute patriots". Sillars was posing a searching question whereas Salmond is being complicit, albeit unwittingly, in inhibiting Scottish expression.
During the heat of the referendum debate this issue will return again and again. Unionists such as Alasdair Darling, on whose watch Britain was bankrupted, already sense SNP discomfort on the subject and will keep the nationalists on the back foot continually right up until autumn 2014. The issue will gnaw away at the confidence of the electorate leading ultimately to a 'No' vote. Be warned that Scots will not take a leap in the dark led by a party exhibiting clear symptoms of focus group paralysis.
Aside from the psychological factors keeping sterling makes no sense economically. An independent Scotland's economy will diverge from England's rapidly post-independence. England will have a financial services economy and Scotland a petro-economy akin to Norway's.
As events in the Eurozone now make abundantly clear, it makes no sense to have very different economies with the same currency unless you have a central fiscal (tax) authority. Whatever the SNP does mean by independence, control over taxation is a crucial part of their prospectus.
Unfortunately the lesson from the Eurozone, where there is only one nation still standing with AAA status, is to be ignored by Salmond and Swinney. In reality there is absolutely no question that a single currency for Scotland and England would cause friction between the two nations as monetary policy will not and cannot be tailored to both parties economic needs. Scottish business will look to Europe, draw the parallels and lose confidence in Salmond's sterling policy.
So, if we were to consider an independent Scottish currency what would it look like?
One advantage of having oil is that it guarantees future earnings for a Scottish exchequer. When Scotland borrows money on international markets investors will look at the oil reserves and believe that Scotland can pay the debt back. By contrast, without oil, England will look like an increasingly bad bet to investors and England would lose its AAA status if it hasn't already by that point. With GDP falling and Westminster unable to borrow at sustainable levels, England will then have no choice but to print more money, thereby depreciating the pound further, to meet its debt repayment obligations. The consequence of this will be a dramatic rise in inflation South of the border.
With a separate currency Scotland would be able to shelter from England's inflation. Being backed by oil means Scotland's currency will be strong and will rise against sterling. This means that the legacy debt Scotland carries over from being part of the UK will become cheaper to repay. True, Scottish exports will become more expensive but as imports will be cheaper Scottish citizens will experience a rapid increase in their quality of life.
If you thought this issue was all hypothetical and can be parked until after the referendum think again. In a short period of time the bond markets will realise that North Sea oil may soon no longer be underwriting English debt which is around £1 trillion. When that happens the UK will be downgraded.
Politically the UK being downgraded presents an opportunity and a danger for the Nationalists. The SNP could point to Norway's oil and AAA status and suddenly Scottish business, sensing a major opportunity, will be listening closely to this idea of a Scottish dollar. Representing self-interest and pragmatism to Scottish boardrooms will be a boon for Salmond at a time when the 'uncertainty caused by the referendum' will be blamed for the UK's downgrading. This rating event will cause deep consternation in London and politicians will thrash about looking for a scapegoat - it will all be Scotland's fault.
Have the nationalists positioned themselves for this eventuality? No, because they can't see past the cringe and so they don't see the prize which would accrue from resisting London's Jedi mind-tricks. The rewards of weathering a political storm and being proved correct in the currency debate would make the case for Scottish independence, rightly or wrongly, invinsible. Scottish companies would see a competitive advantage and shareholders profits by abandoning sterling. Salmond really would be walking on water.
Another advantage of pursuing the case of an independent currency would become apparent as it would entail drawing attention to the UK's deficit and accumulated debt crises. As the scale of the UK's escalating debt problem comes into focus the more weight will be lent to the case for Scotland running for the lifeboats.
The SNP though have no such ambition and to justify the security blanket approach the SNP's Stephen Noon points to Scotland's co-ownership of the Bank of England as evidence that Scotland already has a currency - sterling. It is an interesting point but meaningless in effect. The reality is that in a single currency system there is only one monetary policy and no-one on either side of the debate will contest the fact that Bank of England interest rates will never be geared towards Scotland's economic requirements.
Is there a compromise which can bridge the gap and move the currency debate from cringe to ambition? Fortunately there is. Scotland can, perhaps only temporarily, have two legal tender currencies upon independence - sterling and the Scottish dollar.
At first glance this option may seem odd but it has merit. For a start business transactions can remain in sterling until businesses find it less convenient. Competition between the two currencies would be healthy. Another benefit would be hedging currency risk: in a world where all major currencies are in trouble a sudden jolt to sterling such as a rapid inflationary rise would mean Scotland can quickly move to reduce exposure by accelerating the transition to the $SCOT.
Yes there is a downside as many businesses would be accounting in two currencies but that's what happened when the euro was phased in and the transition went smoothly. In this joint currency scenario Scotland would develop its own currency apparatus while gradually evolving a suitable monetary policy. As the economies of both nations continued to diverge so sterling would be phased out in a way which made economic sense.
It is a dream solution for Salmond who would derive considerable political cover. Firstly, he could reassure Scotland's business community and electorate that sterling will be available upon independence and simultaneously argue that he is offering genuine, upfront independence on the referendum ballot paper.
So the question Salmond has to answer is why can't an independent Scotland have the best of both worlds?
They say that having a “foreign” central bank making decisions about borrowing and interest rates fundamentally undermines the case for independence.
However,the whole point of being independent is that a Scottish government would make policy decisions based on what was in Scotland’s best interest (sorry about the pun) at the time i.e. as in all things,being independent gives you choices.
Most people will not care what currency they use (dealing in paper money transactions is becoming rarer due to debit and credit card usage) but will be concerned about mortgage payments and savings/borrowing rates.
Anyone who can predict what state currencies will be in several years down the road and consequently what central banks will be setting interest rates at would be a very rare beast (in fact could make a bundle at the Turra Show with a tent and a crystal bowl).
It is a very sensible policy to stick with Sterling,initially,but have the alternative to make changes should circumstances dictate.
Our country our choice.