An independent Scotland could use the pound without permission

| 13/02/2014 | 2 Comments

Wealthy Nation supports the continuation of the currency union after a Yes vote.  We also believe that it will be maintained.  But we recognise there are longer-term options open to Scotland as there are to all independent countries, and these will without doubt continue to be debated till September 18 and beyond.  Below we reproduce two of today’s contributions to the debate, the first from Sir James Mirrlees, economic adviser to the First Minister of Scotland and Nobel prize laureate in economics 1996, the second from Sam Bowman, research director of the Adam Smith Institute.

This is an excerpt from an article by Sir James Mirrlees in the Scotsman, February 13, 2014:

The need for partners in a monetary union to share some sovereignty in common institutions is no disadvantage if monetary policy is then well conceived. Even if Scotland were instead to follow Hong Kong’s example and have a Scottish pound which a Scottish currency board keeps at parity with sterling, the interest rate would essentially be imposed on Scotland by world markets. Hong Kong exercises considerable autonomy in its fiscal and macro-economic policies. Scotland could expect to be able to enjoy comparable or greater autonomy.

THERE also must be credible fiscal projections for net debt and borrowing to meet market requirements and agreement on an overall fiscal base for a Sterling area. This would still allow for flexibilities in the design of the underlying tax system and a range of specific policies tailored for each country. This would provide the autonomy and policy levers to target country specific differences.

 

Commenting on the Chancellor George Osborne’s announcement today that is likely to rule out an English currency union with an independent Scotland, the Adam Smith Institute’s Research Director Sam Bowman said:

An independent Scotland would not need England’s permission to continue using the pound sterling, and in fact would be better off using the pound without such permission.

There is very little that an English government would actually be able to do to stop Scottish people from continuing to use the pound sterling if they wanted to.mixednotes_scotland

As the American economist George Selgin has pointed out, what the Prime Minister really means is that the Bank of England would not act as a guarantor for Scottish banks or the Scottish government. Lucky Scotland: the implied promise of a bailout from the European Central Bank is exactly what allowed Eurozone banks and governments to borrow cheaply and get themselves into a debt crisis.

Scotland’s position would be closer to that of countries like Panama, Ecuador and El Salvador, which use the US Dollar without American “permission”, and according to research by the Federal Reserve of Atlanta, consequentially have far more prudent and stable financial systems than if they were part of a formal currency union.

An independent Scotland that used the pound as its base currency without the English government’s permission, with banks continuing to issue notes privately and private citizens free to choose any currency they wanted, would probably have a more stable financial system and economy than England itself.

It’s up to Scots to decide whether they want independence, but the Chancellor’s announcement today should be seen as a feature, not a bug.

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Category: Empowerment, Independence, Our Currency

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Comments (2)

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  1. Douglas says:

    Marvellous and clear. I thoroughly enjoyed your article and have forwarded the link, very much appreciated. Although I am left of centre, i find your contribution very helpful and thought provoking.

  2. Abulhaq says:

    There is merit in retaining sterling, in whatever construct, during the transition to full independence. Its retention in the longer term would depend on how “useful” it proved to be. The Westminster argument that sterling is the property of the residual state alone is highly debatable. The underlying assumption being that after dissolution of the UK an entity still styled UK would inherit all as the “continuator state”. The political relationship between Scotland and England is unique. International law, influenced heavily by English common law, has no precedents. Opinions by jurists on this matter, Westminster will of course have sought such, are just that opinions not judgments. United by treaty the United Kingdom would de facto cease to exist once one signatory had opted to dissolve the union. There would be no continuator state but two successor states, both inheritors, and part of that inheritance would be sterling. In the light of Osborne’s nay-saying intervention this is a matter that needs illumination and clarification.

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