Currency unions between independent states are technically difficult to establish and run. They can require strict limits to fiscal autonomy, and they can need painful adjustments if the component economies move out of synch. But whether or not they are set up and last has less to do with economics than with political will.
Seen from an economic perspective the Eurozone is hugely problematic. Its economies are much more out of synch than Scotland’s is with that of the rest of the UK. Yet it endures because the political will is there for it to do so, both in the governments of the strongest members such as Germany and the weakest like Greece.
George Osborne’s speech in Edinburgh (and the contributions expected from Ed Balls for Labour and Danny Alexander for the Lib Dems) are statements that the current and possible future governing parties of the UK do not have the political will to enter into a currency union with Scotland. Though lots of Osborne’s justification is couched in the language of economics, his speech is all about hardball politics.
It is an attempt to blow a hole in the Scottish government’s vision for many aspects of independence – not just the economic ones – as a continuing partnership between two independent states using many of the same institutions, such as the Bank of England, which currently provide services for the UK as a single state. It feels without doubt like a game-changing moment in this long independence debate.
But the impact on the game is nuanced and unpredictable. The Scottish government and the Yes Scotland campaign have been performing a balancing act in recent months. Part of their offer has been the reassurance of continuity around the pound and many other matters; on those matters their assessment is, in effect, that Scotland is – to borrow a phrase – better together with the rest of the UK.
Yet in other areas the Yes camp has been sharpening a message of difference and distinctiveness: on welfare, on childcare and gender equality, on immigration. Here we see a dividing-line strategy which says we are not, on these matters, better together. There is a mixed message here, and perhaps Osborne’s statement will push the Yes camp further or more consistently into stressing the distinctiveness of values and policy that independence might bring.
What the UK government and the Better Together campaign will get from Osborne’s statement is not fully clear. As Brad Mackay suggests elsewhere Osborne may well feed and deepen the nervousness that Scottish businesses have about currency issues and the transaction costs involved in not being part of a sterling zone. But as John Curtice suggests, ruling out a sterling currency union may have surprisingly little traction on public opinion.
Many, it seems, have already discounted the prospect of currency union, expect other arrangements to follow a Yes vote anyway, and don’t see currency uncertainty as anything that much changes their broader assessments of whether or not independence would be a good thing for them economically.
Some of the other commentary now unleashed by Osborne’s Edinburgh speech points to possible unintended consequences of so clearly rejecting the Scottish Government’s vision of currency union. Iain MacWhirter and Magnus Linklater both hint at a backlash: the Scots don’t like to be lectured by those from “down south”, especially by Conservatives (expect the adjective “posh” to be added) and especially by the prime architect of the austerity and welfare policies the Scottish Government is trying to draw its dividing lines around. The quick recourse by Nicola Sturgeon to the language of Scotland being bullied by an unreasonable and much stronger rest of the UK suggests the Yes camp will be quick to nurture such a backlash.
What’s next?
On the one hand we can expect a new level of bitterness in the debate. The tit-for-tat of responding to the rejection of currency union with a refusal to share the cost of UK debt is one example.
Much of this may be posturing and pre-negotiation. But it could have a lasting impact and impede constructive engagement on working out Scotland’s relationship with the rest of the UK whatever the result of the referendum. It will likely not impress voters. And it will also not impress the financial markets and international institutions that could penalise not just Scotland but also the rest of the UK should that bitterness get out of hand.
On the other hand we can expect a rush of thinking about the elusive Plan B. If formal currency is indeed ruled out, what are Scotland’s options? The euro is not one of them in the short term as Scotland would not meet the conditions for joining the Eurozone by the anticipated “independence day” in March 2016.
So it is either a distinct Scottish currency with all the associated set up and transaction costs, or an informal currency union in which Scotland continues to use the pound, but where the Scottish government has no role in the governance arrangements for monetary policy and no access to the backstop arrangements the Bank of England provides as lender of last resort for the wider financial system. As Angus Armstrong has shown these are possibilities with advantages and disadvantages. Perhaps we will now see the attention given to them that they really should have had all along?
This article was first posted on ESRC blog The Future of the UK and Scotland