Scottish Independence - Hard Talk over the pound

[Chinahand]

I don't think I'm missing the point at all. [1] The Scots keeping the pound and having the Bank of England means a total surrender of Scottish economic policy. They'd have no, or very few, economic levers to pull. It's devo max. [2] Pegging is the next stage and plenty countries do that. [3] Others just use someone else's currency. Isle of Man, Vatican, Andorra, Kosovo , Panama

Now I'm not understanding at all - the Nationalists want to keep the pound - your option [1]. The way they do that is via a formal currency union which means the Bank of England is bound to consider Scotland in setting monetary policy.

 

For the Scots that is the best outcome, not the worst.

 

If they just peg - your [2] then the consequences are the consequences you incorrectly see for [1] - no control of economic leavers - the BoE will set economic policy for it's own interest and Scotland will either have to follow or introduce capital controls - both deeply problematic.

 

Just using someone else's currency [3], as Zimabwe does, is the worst of all worlds - because of seignorage - the advantage a central bank gains from printing it's currency.

 

If a country simply fixes its currency, it will use purchases (and sales) of the other country's bonds to balance the capital and current accounts to stop currency appreciations (or falls). Those reserves will pay interest. If you "dollarize" your economy you will use physical dollars which pay no interest. That forgone interest is a real cost to the economy (it's one of the reasons Bell keeps asking people to use Manx notes and not UK ones).

 

A currency union is what the Scots want - not fixed, or dollarized. That gives them more influence over monetary policy than either of the other two options.

 

The unionists want to make independence as painful (and expensive) as possible and so are refusing to hand over that influence to them.

 

Is is a real issue and both the Nationalists and the Unionists realise that - hence today's announcements.

[woolley]

In the last 15 years the pound euro rate has varied by 45 cents to the pound, from €1.05 to € 1.50, hardly gravitational pegging

Sure it's more than that, John. I had between €1.70 to €1.75 in 2000/2001.

[Chinahand]

@ Chinahand: it's really no different from, say, the Isle of Man and London having the same currency. Or, say, Skelmersdale, or Cornwall ? Or Liverpool in the 1980s? All of these places basically have a currency which is fixed against the London pound - and yet there would be a good case for regional interest rate differences (or even currency controls).

 

Yep, and that can hurt - remember when the Governor of the Bank of England said yes, when a journalist asked if unemployment in the North was a worthwhile cost of high interest rates to damp down a boom in the south.

[ScotsAlan]

It was the collapse of the Scottish Pound after a disastrous Caribbean adventure went badly wrong that led to union in the first place

Panama. The Darien Scheme.

 

I look forward to exchanging my Manx British passport a full Scottish one.

 

Say what you want about the Scots, but they do seem to have a good parliament. It's open to the people and every vote seems to be free. There is no whip and all that.

 

There are exciting times ahead.

 

Lots of lessons for the Manx nationalists to learn from the Scots.

 

Erm... edit to add... Adam Smith invented what we are talking about after all. It can't be his fault that Scotland fails in it independence bid. That would be too ironic.

[John Wright]

Given comparative size of population and economies there is little or chance of the BoE considering, or actually taking into account Scots needs, that's what the arguments about the euro central bank and the peripheral euro zone countries are about. That leaves tax rates as the only economic lever.

 

Pegging allows manipulation of both the interest and tax rates. A real monetary union negates playing with interest rates, so option 2 actually gives more independence than 1 and with no real disadvantages over 1.

 

I agree just using someone else's currency can have the effect you state for Zimbabwe, but the IOM uses sterling and issues it's own notes and coins, so could Scotland. The Scots banks do that now. Money in circulation is an interest free loan to a government, effectively.

 

The reason this is important is political, not economics. Brits, including Scots, are attached to the pound, who knows why, and Salmond recognises that and he also recognises that if he wins and has to negotiate EU membership then a commitment to enter the Euro inevitably comes with that, and because of media antipathy that's a no no anywhere in the UK politically. He has to obscure that.

[Donald Trumps]

What happens to the Bank of England's investment in RBS then?

[woolley]

 

 

 

Say what you want about the Scots,

Cheers mate.

[Truth Seeker]

Scotland will have to adopt the EURO if it can't use the Pound, that did not work out too well for Ireland.

[Cambon]

Scotland will have to adopt the EURO if it can't use the Pound, that did not work out too well for Ireland.

Scotland can use buttons. They don't need the pound or the euro the currency they use is simply a means for receiving and making payments, and of course accounting. Scotland's best chance is to piggy back the pound but WITHOUT any attachment to the monetary policy. If they attach themselves to England's monetary policy, England will use it to their advantage, at cost to Scotland. If they keep outside England's monetary policy, they can then use those policies to their advantage. If the currency takes a dive, they can easily swap out.

 

The moronic british politicians saying "If you go independent, you cannot use the pound" are full of bullshit.

[Chinahand]

Cambon, how are the Scots going to keep prices etc aligned to the pound?

 

It can only be done by maintaining a compatable monetary policy or else inflation and differences in the supply and demand for currency across the border will cause exchange rate differentials.

 

Again you're missing the point - without a currency union using a foreign country's currency (known as dollarization) or fixing the exchange rate, is perfectly possible, but it has a significant cost in giving up monetary control of the currency.

 

The Nationalists don't want to do that - hence the arguments been made today.

 

They 'could' carry on with the pound without a currency union, but they know it isn't economically sensible so want a union, but the Unionist parties are saying No.

 

This is a real issue, it is about the economic credability. Yes, there is the electorate's attachment to the pound, but the Nationalists know they can't just carry on saying they'll use the pound without a currency union. To do so would be to lose credability with business and finance.

[Chinahand]

Scotland's best chance is to piggy back the pound but WITHOUT any attachment to the monetary policy.

Just to emphasize where I disagree with what you are saying.

 

That is like saying Scotland could piggy back on using the channel tunnel, but WITHOUT any attachment to timetabling or the gauge of the railway.

 

It really shows you don't get currencies - without compatible monetary policy (which involves significant monetary attachment) there will be unsustainable capital flows which would break the currency link - ask John Major during the ERM crisis, or Argentina when it thought it could piggy back to the dollar without consideration for monetary policy. You can't do it.

 

Look up the impossible trinity if you disagree, but don't expect a Nobel Prize for economics to turn up.

[Chinahand]

The FT doesn't pull any punches:

 

Mr Osborne is right to have come to this judgment and to have presented it so emphatically. The risks of any currency union have been amply demonstrated by the travails of the euro. The eurozone’s experience shows what happens if a currency union is forged without stringent commitments to banking union and robust fiscal arrangements. ...

 

A currency union would put UK taxpayers on the line for any emergency support that might be needed for Scotland’s banking sector, which far exceeds the Scots’ national income. It would require Scotland to agree to a degree of constraint over its public finances that few advocates of independence accept. Above all, Scotland’s absolute commitment to a sterling union cannot be guaranteed. ... Investors would also be unnerved by the reluctance of Scottish politicians to accept the necessary fiscal and debt obligations. ...

 

 

Mr Salmond’s options are constrained. ... [and] could well wreck an independent Scotland’s international credibility. He could propose that Scotland should have its own currency or adopt the pound informally, mimicking the way Panama uses the US dollar. But either approach would force Scotland’s financial sector to migrate to London, seeking a credible lender of last resort.

It is not yet clear how Scottish voters will react to such an intervention by the London political class. But it is hard to resist the conclusion that Mr Salmond’s bluff has been called. His case for independence is based on the claim that London would accommodate it without fuss. But Westminster’s politicians have now made clear to the Scottish people that they would not accept the central financial proposition of the independence project. This may prove to be a critical moment in the battle to save the UK.

[Thomas Jefferson]

There can be no "national independence" when the entire planet is controlled by international banks and international corporations.

 

What is the point of gaining political autonomy, when your economy remains under the control of transnational banks and corporations? Political independence for Scotland would constitute nothing but musical chairs in a talking chamber. It will be business as usual for the real power-brokers; and a small devolved Scottish government will be more easily swayed and controlled by them than a strong British government.

 

I reject their argument for independence.

[Thomas Jefferson]

 

a small devolved Scottish government would be more easily swayed and controlled by them than a strong British government.

You need a hell of a memory to name that one.

 

I'm not sure I understand your reply.

 

What I said has already been demonstrated in the United States. It takes a very large corporation to pressure the federal government; however, even medium-sized businesses can exert pressure on individual states and play them off against each other in order to secure better subsidies and tax incentives for themselves. We already see this being played out between sovereign nations all over the world. Devolution is a transfer of power and influence away from democratic political institutions and toward undemocratic transnational private tyrannies.

 

The political disintegration of the United Kingdom would be a dark day for British democracy.

[Thomas Jefferson]

To name a strong British government - none in my lifetime unless you include the crude bullying of the Thatcher cow.

 

I wasn't talking about the coming and going "governments". I was talking about the permanent institutions of power.