The trouble with Scotland's plan to launch its own currency
A Scottish currency makes sense for the nationalists dreaming of independence. But will it work, asks Matthew Lynn.
A Scottish currency makes sense for the nationalists dreaming of independence. But will it work?
At its conference last week, the Scottish National Party accelerated plans for Scotland to launch its own currency. Last time around, it planned to keep the pound if it won the independence vote. There was, however, a slight problem with that proposal. The British government in Westminster quite rightly said it didn't want to share a currency with an independent Scotland. The result? The currency policy was a complete mess, with the Scottish nationalists insisting they could hang on to sterling, and the British saying they couldn't. How many votes that swung behind staying with the union it is impossible to say. But it must have swung some, and perhaps enough to make a difference.
The SNP has now drawn a line under that, and decided that Scotland should have its own currency instead. Not right away, admittedly, but once a series of six economic tests set by the government in Edinburgh have been met, which might take a decade or more. The party members then accelerated that, and mandated the government to introduce Scottish money as soon as possible. Of course, we don't know if Scotland will ever vote for full independence from the UK, or even when a second referendum would be held. But we do at least know that the currency debate will be very different, and the Scots will be committed to their own money.
A fog of uncertainty
One big problem will be the credibility of the new unit. Scotland is currently running a budget deficit of 7.9% of GDP, compared with 1.9% for the UK as a whole. And that is after a decade of relative macroeconomic stability. To put that in perspective, it is almost double the deficits in South Africa and Costa Rica, the two highest elsewhere in the OECD club of nations. With an ageing population, few world-beating industries apart from whisky, and a government addicted to constantly increasing welfare spending, it is hard to see why the markets should be very interested in funding that kind of deficit for very long. To avoid massive devaluation, a Scottish government would have to cut spending sharply. But even before it gets there, there is an even bigger problem: uncertainty.
Right now, no one can have any clear idea what currency Scotland might be using a decade from now. It might, of course, be the pound, if a referendum is never actually called, or if the Scottish nationalists lose again. It might be the new Scottish currency if a referendum is won. Or it might be the euro, given that the SNP is committed to joining the European Union, and given that all new EU members are required to sign up to adopting the single currency (of course Scotland would have to meet the stringent deficit criteria first, but it would have to slash spending anyway to have any chance of making the new currency work). You can argue the costs and benefits of any of those options. The problem for businesses is that they have no idea which one it will be.
A risky bet for investors
Who is going to want to invest in Scotland in those circumstances? After all, it makes a huge difference. If you build a new factory, distribution centre, or a hotel or restaurant chain, what kind of money will you make a return in? It might be the pound, which is at least familiar, even if it is still subject to all Brexit-related wobbles. It might be the euro, but that would probably mean a long and harsh Greek- or Italian-style recession while the public finances were put back in shape. Or it might be the new Scottish currency, but that would be sharply devalued as it struggled to establish its credibility in the market and might only end up being worth half or less than you thought it would be. Either way, the outlook is not good.
That matters. Scotland has a perfectly viable economy, and parts of it are just as wealthy and productive as the rest of the UK. And yet, over the last few years it has started to fall behind the rest of the country, and it shows little sign of developing any new industries. The uncertainty over its currency will only make that worse and that in turn will mean lower growth for the whole of the UK.