'No Obvious Choice' On Currency

23 June 2014, 05:48

There is no simple and obvious preferred choice for a Scottish currency post-independence, according to a leading Scottish economist.

Professor Jeremy Peat, former chief economist for the Royal Bank of Scotland and an ex-Treasury and Scottish Office economist, said the Scottish Government's Plan A of a continuing currency union can not yet be ruled out, despite the rejection of all the main UK parties, but it would constrain Scotland's fiscal policy.

Using sterling without a currency union is seen as "wholly implausible, dangerous and highly unlikely to be optimal'', he said.

The euro "might appear desirable in the fullness of time'' as it was perceived to be before the eurozone crisis, but it will not be available at the point of independence and will come at a cost, he added.

There is nothing to stop Scotland establishing its own currency but "some time would be required if this were to be a smooth process with the minimum of disruption''.

Mr Peat, visiting professor at Strathclyde University's International Policy Institute, said: "The continuing currency union ticks many boxes, but may not be achievable and if implemented would involve no independence on monetary policy and significant constraints on fiscal policy. Would this be widely accepted as a long-term arrangement?

"Sterlingisation or a currency board would in principle deliver currency stability and no transaction costs, but the practical difficulties and risks look too many and too great to make this an attractive proposition.

"Adopting a new currency pegged to sterling again has many attractions in terms of continuity and stability, but would involve severe constraints from the markets on monetary and fiscal policy and the probable loss - as with sterlingisation - of large chunks of the Scottish financial sector.

"A new freely-floating currency would mean loss of that stable exchange rate and wider economic stability with the UK; and uncertainties for many in Scotland but could deliver policy flexibility - subject to meeting market requirements to ensure that volatility was not excessive.

"Adopting the euro may prove an attractive proposition in the medium or longer term but is not available as an instant option, and would certainly not be readily and rapidly achieved or cost free.''

Prof Peat's paper includes a forensic analysis of the UK Government's apparent rejection of a continuing currency union, balancing the Chancellor's outright rejection with reports from an unnamed cabinet minister that "of course'' there would be a currency union.

He also notes the "less robust'' statements from the Governor of the Bank of England, and the precise wording of Treasury permanent secretary Sir Nicholas Macpherson that he would strongly advise against a currency union ``as currently advocated''.

Mr Peat said "as currently advocated'' is "not quite never''.

He added: "It is presumably best not to rule this option out until the vote has taken place and some political dust has settled.''

Professor Peat will present his findings at a seminar, Scotland's Currency Options, on Wednesday at the Royal Society of Edinburgh.

Scottish Labour MP Ian Murray said: "The currency we use is about so much more than just the notes or coins in your pocket. It determines the cost of mortgages and credit cards and would have a big impact on jobs, savings, pensions and benefits. These are the everyday things that are more secure and affordable in Scotland as part of the UK.

"Being part of the UK and having the pound as our currency protects Scottish families when things go wrong. When Scotland's banks got into trouble, the whole of the UK came together to stop the economy going under. If we leave the UK then we lose that security. We can't leave the UK but keep the joint bank account.''

A Scottish Government spokesman said: "An independent Scotland will keep the pound. The pound is as much Scotland's as it is the rest of the UK's, and a formal currency union is in the overwhelming economic interests of the rest of the UK.

"The Fiscal Commission Working Group has provided a workable model for a formal monetary union, which also ensures both governments have full flexibility over their fiscal and economic policies, within an overall sustainable framework.''