Scotland, England and currency union – or two bald men and a comb

Craig Berry - Research Fellow, SPERI

Richard Berry - Researcher at Democratic Audit UK, the London School of Economic

Support for a Yes vote in the referendum went up in the first new poll after Osborne’s warning, and support for a No vote fell, although the No campaign retains its lead (47 per cent to 38 per cent). The more fine-grained analysis from John Curtice suggests reactions differed depending on voters’ existing perspectives: that supporters of the No campaign accepted Osborne’s argument that a currency union could not work and took seriously his threat to veto it, while Yes voters were unconvinced by the argument and more inclined to believe Osborne was bluffing.

The fact that the currency debate has served to confirm existing prejudices reveals much about its quality. In fact, the recent exchanges between the UK and Scottish governments amount to little more than a phoney war, in that both are making definitive statements that are difficult to support with evidence.

In fact, both of the main options for Scotland’s monetary future –maintaining the status quo or creating a new currency union – have potential benefits and serious risks, for both an independent Scotland and the continuing UK state.

It will strike some as odd that the SNP is so committed to sterling. After all, the Scandinavian or Nordic nations are often cited as an inspiration for independent Scotland, yet all except Finland have their own currency. However, Alex Salmond’s economic strategy is inspired more by English neoliberalism than by Scandinavian social democracy.

His desire to retain sterling tells us that Salmond’s vision for an independent Scotland’s economy is much the same as the current Scottish economy. There will be a large financial sector, and a dependence on tourism and exports of whisky and oil – all of these are best served by retaining the pound. The SNP know how important trade with the continuing UK state will be Scotland’s economy, and they know (because BP’s American chief executive Bob Dudley told them) that the last thing international firms will want to do is to begin using two currencies if they want to do business in both England and Scotland, when currently one (and a very trustworthy one) will suffice.

In Salmond’s response to George Osborne he failed to fully address what seems to be the biggest risk of currency union for Scotland: that it would severely curtail Scotland’s ability to respond progressively to economic downturns, because monetary policy would be decided primarily in England. This is precisely what has happened to the PIIGS countries in recent years, out-voted at the European Central Bank by their Euro bedfellows. Monetary policy is made for Europe’s majority, not its margins – and the lack of fiscal integration between Eurozone countries means that transfers of cash in return for monetary inflexibility have been wholly inadequate.

Of course, currency union would not necessarily leave Scotland worse off. It is a member of the UK fiscal union at the moment, but the coalition government’s austerity agenda means the fiscal flows from buoyant to struggling parts of the UK economy are much slower than they should be. It is also a member of the UK currency union, and there is no reason to believe that UK monetary policy is going to be any more or less neoliberal than it is at present if the SNP succeed in rearranging the deckchairs.

Essentially, Salmond accepts this trade-off: independence means Scotland keeps more of its own oil revenues but pays for it with slightly reduced monetary powers, and a less secure fiscal safety net. Politicians of many different flags have committed much worse sins than this, but nevertheless, this is hardly the daringly independent path presented to the Scottish people by the SNP in public.

The Westminster parties are equally guilty of subterfuge on this issue. They say they oppose currency union because it would be unfair on UK taxpayers to expect them to fund the cost of bailing out Scotland’s banks in the event of another financial crisis, when Scotland could not possibly do the same for England’s banks. This position is founded on the highly contested notion that the 2008 banking bailout was fair in the first place, and that it was necessary. In fact, the bailout served to preserve the neoliberal economic system, albeit with some modifications, at the precise moment when alternatives had finally become thinkable.

Salmond is right about one thing: there should be little doubt that the UK government will find a way to agree a currency union with an independent Scotland. Just as England will be a major trading partner for Scotland, the reverse is also true. Future UK governments will not want to erect any barriers to Scottish consumers spending their money in England, and they will want Scottish oil to be paid for in English pounds. Furthermore, the Westminster parties (and the Treasury) know that the idea that Scotland might face a financial crisis that the UK banks are insulated from is fanciful. The Scottish and English financial systems are highly integrated, and would remain so under a currency union. There would be absolutely no expectation of the UK government bailing out Scottish banks, because they will be busy bailing out their own.

There are viable alternatives to those presented by Yes and No campaigns. One would be the creation of an independent currency, deemed ‘the only viable economy option’ by currency regime expert Ronald MacDonald of Glasgow University, although he warns the transition would be very painful.  Another option is that Scotland stays in the union, and re-commits to forming a partnership with other marginalised parts of the UK – in Wales and the North of England – to challenge the neoliberal paradigm.

Neither seems to be on the table. The only choice in September is one between a neoliberal economic policy run from London and a slightly different form of neoliberalism run nominally from Edinburgh – with London still calling the shots.

The full version of this article originally appeared on openDemocracy.