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The SNP has no plan when it comes to currency

By Jim Gallagher


In the midst of the Scottish National Party’s current crisis, it was easy to overlook a statement by its President, former minister Mike Russell. In an outbreak of candour, he admitted that the party had so far failed to figure out how to disentangle one complex modern state from another. (How, knowing that, he thought it would have been responsible to hold a referendum only he can say.)


Nowhere is this more evident than in the SNP’s tergiversations on the question of currency. They have been through just about every possible option. Back in 2014, an independent Scotland would somehow have been entitled to remain in a currency union with the country it had just left, as if nothing had happened. Then they argued for just using the pound anyway, and not having a Scottish currency at all. Nowadays, they seem to want a separate Scottish currency, but only one day.


All this flapping about is because the problem is an almost insoluble one for them.


People must be able to trust money their country uses so that they can buy and sell things, save, or lend, and account for things in the books. That is what people mean when they talk about “sound money.” Otherwise, there is economic chaos.


To achieve this, a country can have a currency of its own, join with some other countries in currency union, or maybe tie itself to another country’s currency. Each of these options put limits on what the country can do, especially in a world where money, goods and services and people can move across borders.


There is much to be said for a country having a currency of its own. It gives some economic independence, and changes in the exchange rate with other currencies can help with economic adjustments. But small countries in a globalised world find that they have to pursue conservative economic policies, that is to say not have large amounts of government borrowing, in order to keep their economies and currencies reasonably stable.


There are also advantages to joining a currency union. It makes trade with the other members easier, but it only works if the currency union is a political union of some kind as well, as decisions have to be taken about the economy of the whole union to keep the currency sound, and that too puts constraints on independence.


A few countries just use another country’s currency, sometimes after some kind of economic collapse. It is probably the least satisfactory option for independence as the country has few economic powers of its own, and the country as a whole cannot run a deficit. Otherwise, it just runs out of money.


The SNP have run through all these options, choosing one or the other for various political reasons at different times. The population of Scotland seem to want to keep the pound, as it is familiar and trusted as a unit of exchange. In reality that is only possible in some sort of political union with the rest of the UK or having no real economic independence by just using the UK's currency anyway. So, the SNP now seem to be edging towards creating a new Scottish currency, maybe after a period of just using the pound anyway.


What they do not have is there a plan to get there, and it is not at all easy to see how to do that without huge economic disruption. All the indicators suggest that a new Scottish currency would swiftly devalue compared to the UK pound, because Scotland as a whole runs quite a large deficit. So, anybody in Scotland who thinks that their UK pounds might be converted by an independent country into new Scottish pounds has a very strong incentive to make sure that they remain in a UK bank - and of course the banks that operate in Scotland are nowadays ultimately UK based. So, we might well find that Scotland found itself with two currencies running at once, a government trying to work in new Scottish pounds, but businesses and many of the population transacting in what would be a foreign currency.


Of all the problems of disentangling Scotland from the rest of the UK, currency may be the knottiest. It is a step forward that Mike Russell acknowledges this. He also admits that independence now is a long way off. Just as well, really. He's got rather a lot of thinking to do.

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