“Introducing a new Scottish currency has always been the most sensible option….”

Okay, so let’s for argument’s sake assume the premise of my previous blog is roughly true. Why is Alex Salmond want to mash up the media playing field between now and Thursday. It’s the conclusion from a short paper by Angus Armstrong and Monique Ebell of the National Institute of Economic and Social Research (NIESR), called simply, Is This Plan B:

In 2016, Scotland is likely to face twin deficits in the year that it might become an independent nation. These deficits are substantial: a fiscal deficit of over 6% of GDP and an external deficit, although difficult very to judge, may be similar in magnitude. This includes a geographic share of North Sea oil and gas reserves.

An independent Scotland would inherit perhaps £7bn of foreign exchange reserves. Claims that there are other financial assets, specifically quantitative easing assets, to be shared miss the fact that these are fully funded by financial liabilities.

We estimate that an independent Scotland is likely to inherit between £140bn and £120bn of the existing UK debt. Even assuming 5% repayment per year, an independent Scotland would face a funding requirement of at least £17bn in the first year. ‘Sterlingisation’ is likely to be vulnerable to even a modest negative shock.

If the Scottish Government combines ‘Sterlingisation’ with reneging on its fair share of UK debt, which judging from the First Minister’s comments may be Plan B, this would increase rather than reduce the fragility of the currency arrangement. The ‘appeal’ of this option might be that it reduces the internal and external funding requirements.

However, this would be a false economy. International investors are likely to see walking away from debt as ‘opportunistic’ and either charge very high borrowing premiums or exclude Scotland from international markets. This would imply an immediate return to a fiscal surplus and therefore unprecedented austerity.

Entry into the EU would be out of the UK’s hands, even if it supported Scotland’s case. This would raise doubts about the outlook for
exports, particularly for financial services. Whether the citizens of Scotland would accept this policy simply to hold onto sterling would become a source of speculation with a low level of reserves as defence. We would expect the currency arrangement to fail and Scotland would be forced to introduce its own new currency within one year.

Introducing a new Scottish currency has always been the most sensible option. We would recommend this is carried out before losing £7bn of foreign exchange reserves rather than after.

I suspect, in fact, that there was no Plan B when the White Paper was written, since it could mean ditching the banks. At 1200% of GDP it’s not sustainable in the long term without someone else holding the credit note to pay their liabilities (the idea that you can do that and get away with it disappeared in Ireland in Circa 2008).

Chris Cooke also thinks an independent Scottish pound is the way to go, and in the long run a better deal for the banks too…

In an age of direct instant connections there is no longer any need for banks as middlemen to intermediate credit risk, although there is a need for risk management or banking as a service.

The irony is that far from resisting such a transition to service provision, it is entirely in the interests of current banks to make the transition, because as a service provider the only finance capital they need is that necessary to cover operating costs, and the human and intellectual capital necessary to provide the best possible service.

So Scotland’s monetary system of credit creation, exchange, clearing and investment does not require a currency at all – virtual or otherwise – from the Bank of England. £ denominated paper notes may continue to be issued by Scotland’s banks precisely as now, except that they could be backed by Scottish Treasury Giants and Titans which would simply be undated Treasury prepay credit notes again denominated in £.

My (totally amateurish) guess is that it’s been framed the way it has because: one, sticking with the BOE means least possible disruption (and therefore easier to get over the line with voters); or two they ran out of time to finish the work on a more radical option).

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