This week I published, through Common Weal, a discussion paper on the potential currency options for an independent Scotland in light of the material changes in circumstances caused by the Brexit vote.
This paper examines some of the options open to an independent Scotland and concludes that, on balance, the best option for Scotland would be a Scottish currency, initially pegged to Sterling but with the infrastructure and mechanisms in place to move, replace or remove that peg if and when it proves advantageous.
(As the UK did itself in the 1980’s when the pound was pegged first to the US dollar and then to the Deutschmark.)
One of the requirements of an independent currency is that Scotland would need its own foreign reserve fund which would act as a buffer against trade imbalances and would be used to counter movements in exchange rate (particularly if we were pegged our exchange rate to Sterling).
It was on this particular point that yesterday’s Scottish edition of the Daily Express chose to focus, in its characteristically measured, balanced and thoughtful manner.
Their piece describes it as a “huge body-blow to Nicola Sturgeon”, suggesting that it would be simply impossible for Scotland to find this “huge sum”, and Conservative MSP Murdo Fraser describes the setting up of such a fund as “totally unrealistic” and that it would somehow prove “disastrous” to the economy.
(It’s odd that £10 billion for a foreign reserve fund is a disaster but £20+ billion to pay our share of Trident renewal is not only essential but somehow a good thing.)
I mention in my paper a few ways that this sum could, in fact, be found for Scotland (the Express does grudgingly mention some of them in a single paragraph right at the bottom of the article where most readers never actually reach), but I thought I’d take the opportunity here to lay them out in just a little more detail.
The foreign reserve fund of most western countries lies around 5% of GDP. Scotland’s GDP, according to GERS 2014-15, is £153.3 billion. 5% of this figure is actually just £7.7 billion, but I rounded it up to £10bn both for simplicity and to give a little bit of flexibility should anyone tell us that Scotland was just such a volatile and mismanaged economy that we’d need a bit more.
Off the top of my head I can think of four ways that Scotland could begin life as an independent country and start life with the reserves we need.
1. Shared Assets
The most politically co-operative solution would be for Scotland to negotiate a share of the UK’s movable assets when we leave. This would include a share of the UK debt, which would also be a significant financial burden (albeit one we’re already paying now).
The UK’s own foreign reserves total around £164bn, suggesting Scotland’s share would be around £14bn – more than enough to support our new currency.
2. Mortgaged Assets
Negotiating a full share of all of the UK’s assets in return for a full proportion of all of the UK’s debts may not be the most beneficial strategy for Scotland.
As an independent country we don’t need a 9% share of two aircraft-less aircraft carriers, we probably don’t need a 9% share of the London Underground (though I’d be tempted to claim the stop nearest Westminster and maybe hike the ticket prices a bit) and trying to claim our 9% share of Trident (14 warheads) may not be considered particularly diplomatic.
Instead we could start from a position of having no assets and no debt but then “mortgaging” the value of the assets we DO want against an equivalent share of UK debt. If we want a £10 billion foreign reserve fund, we take it from the UK’s reserve and claim £10 billion of the UK’s debt at the same time.
It turns out that apart from that and maybe a few military assets we likely don’t actually need all that much from Westminster. This could represent a very large saving on our current “bill” for the UK’s debt of over £3 billion per year.
3. Borrow it
So maybe Westminster just wants to take the ball (and the credit card they bought it with) home in a huff and refuses to part with a penny of foreign reserve assets. Fine. Scotland starts with a clean slate and no debt. We’re now in a particularly advantageous position of being able to borrow on our own terms and raise the money that way.
True, we don’t know what our initial borrowing rates will be but consider the situation that the UK is in right now. As of writing, the cost of borrowing for the UK is at a historic low of 0.72% but, due to still paying off older, more expensive bonds from prior to the 2007 recession the total average interest paid by the UK each year is closer to 2%.
If Scotland’s initial borrowing costs are a little higher than the UK’s rate on the day of independence but lower than the average rate then we’d be better off simply borrowing the money on our own terms. Another advantage of this option would be that we’d owe Westminster no debt at all therefore they’d have no diplomatic leverage over us should they ever wish to use it.
4. Buy it
Our final option in the event that Westminster throws an almighty hissy fit, refuses to part with a penny and sends the financial world into so much of a mess that maybe we want to avoid borrowing money if we can avoid it.
In this case, Scotland would look to the effective monetary surplus that we’d gain on independence. I’ve already mentioned the £3 billion per year we’d save on debt interest. Our contributions to the UK’s military adventures, compared to what Scotland would actually need to defend herself, probably totals a billion or two, and there’s likely more to come once we see the actual account books rather than the guesstimates we have right now.
All in, if we play our finances smart and accept that we’re going to have to invest in some high-priority items like fiscal security, we could probably raise the £10 billion within a couple of years of independence.
It’s not perhaps an perfect solution to not have that buffer on day one, but the likelihood of a speculative financial attack on a country is negatively correlated with the likelihood of prudent and sensible governance in that country. Scotland, especially post-Brexit, has a particular reputation in this regard and this scenario would only come about due to disastrously incompetent governance down south.
(I don’t think we’d be the first target of such an attack, although in this case I’d probably counter my own report by suggesting that we may want to reconsider that peg to Sterling. It might have a bit further to fall than we’ve seen recently.)
It’s natural that the Express would want to try to portray anything said about independence as a “setback”. It’s rather more difficult, however, to actually defend such a position under the most cursory of examination. Rather than a “setback” for independence, I believe that my work has shown just what a great opportunity we have ahead of us should we choose to embrace it.
As some curiously strident pet-food salesmen might be keen to point out, I might not be in the traditionally, formally-trained sense an “economist”. But if even a mere laser physicist can see this opportunity, I’m sure that others – perhaps even some of the brighter Conservative MSPs – can spot it too.