Independence: The Economy
From page 25
“Important
though
transaction
costs would
undoubtedly
be, this
consideration
is dwarfed
by the far
greater
questions
regarding the
fundamental
stability of
the sterling
union.”
participation be in an informal
union? Moreover, from a Scot’s
perspective, just how different
would an informal sterling
zone be from a formal sterling
monetary union? Some argue
that Scotland would de facto
be equally subject to the UK’s
monetary policy under either
scenario.
Interestingly, while the UK selfinterest in a continuing sterling
monetary union that included
an independent Scotland has
been strongly asserted as a clear
reason for the UK agreeing to
such a formal union, the case
has been advanced primarily
on the basis of the increased
transaction costs that would
be imposed on UK businesses,
consumers and visitors, were
Scotland compelled to adopt a
non-sterling currency. Important
though transaction costs
would undoubtedly be, this
consideration is dwarfed by the
far greater questions regarding
the fundamental stability of the
sterling union, and the costs
that might be incurred were the
union to prove unsustainable
and unstable. It is here that the
UK pro-union advocates see the
greatest threat to the UK interest.
Events in the EU since 2009 have
only served to heighten these
fears.
Similarly, UK dependence on the
strength of Scottish trade and
exports (especially Scottish North
Sea assets) has often been cited
as an important factor in the UK
interest. This analysis begs the
question of who actually owns the
North Sea assets that are being
exploited and who benefits from
the profits: to where is the profit
directed? – to within Scotland,
the UK, the USA, or elsewhere?
And, moreover, would the North
Sea assets be actually traded in
sterling? It is also interesting to
consider that, while there may be
monetary policy arguments for a
strong currency, few economies
in practice are unhappy to see
their competitiveness enhanced
through modest depreciation.
Indeed, many have argued that
if the benefits of the North
Sea were to accrue primarily
to Scotland, the UK would
not be averse to seeing its
currency weaken to facilitate the
development of other tradable
sectors. The UK interest here is
therefore not clear-cut.
In any event, the heart of
the currency debate should
arguably be about the conditions
that would, or could, create
sustainability and mutual benefit
within a common currency
area, not about second-level
concerns and not drowned
under the noise of political
manoeuvring. It could be
argued that – with appropriately
designed institutions, risksharing, oversight, and the
pooling of sovereignty, amongst
other key elements – a mutually
beneficial currency union might
be constructed. The key point
is whether or not the terms of
such an arrangement would
be agreeable to all parties,
and whether or not it would
be preferable to having no
agreement.
Inherent in this second key
question is the heart of the
constitutional debate: to
what extent does political
independence facilitate
meaningful and substantive
economic independence? Or are
most currency options – and,
notably, that of a formal sterling
currency union – necessarily
constrained, in that monetary
and fiscal policy are heavily
limited by the conditions
imposed on a union by the
members of that union? The
intervention by the Governor of
the Bank of England in January,
though carefully crafted to
avoid overt political comment,
was nonetheless insightful in
demonstrating his view that the
effective and sustainable working
of a monetary union necessitates
a high degree of co-ordination
and collaboration. It requires a
relatively sophisticated
pre-determination of
the rules that would
shape behaviour
within the union
and, importantly,
a high degree of risk-sharing
and risk-pooling within the
union, with all that that implies
for the sovereignty of the two
states. In the present political
climate, it is difficult to see UK
Ministers rejecting the Governor’s
perspective.
It would seem inevitable that any
formal monetary union would
entail a complex negotiation
in which the nature of the
conditionality imposed on each
other by the membership was
determined. In this circumstance,
the relative power and influencing
capacity of the partners to the
monetary union are central to the
strategic and policy outcomes
that emerge. The key question in
the event of a pro-independence
vote, in which a formal sterling
monetary union is the preferred
option, is: are the perceiv Y