Scottish independence: The pound of Salmond

If Scotland were to vote for independence, it would face a whole host of problems. Would it have an army? An intelligence service? Both would have to be established. A tax collection agency? A financial regulator? Numerous new civil service departments would have to be established, including a Debt Management Office, to run its borrowing operations, a foreign service, complete with embassies in all major international capital cities and so on and so on. All of these would have to be conjured, in a tedious and expensive logistical phase that would come immediately after independence.

But though substantial, problems such as these are not big enough to knock out the whole pro-independence argument. Setting up structural governmental apparatus would be a draining exercise, and after the euphoria of winning independence, the tedium of the task would come as a sharp back-to-earth-with-a-bump corrective to the jubilant Holyrood mood. The language of hope and aspiration would very quickly turn to that of hard slog, of tasks that lie ahead and of jobs only half done.

But if these circumstances were ever to arise, then the resilience and intelligence of the Scottish people would be more than enough to deal with the consequences. The SNP might go into a period of political frailty, but it would do so knowing that its principle objective had been achieved and that the constitutional alteration to Scotland would be irreversible. Almost all of the problems Scotland would face would be solvable in the short to medium term.

Almost, but not all. It’s hard to overstate the problem faced by the SNP over the pound. It knows that it cannot go into the referendum offering to take Scotland into the euro. That would be a catastrophe and Salmond knows it.

Likewise, claiming that an independent Scotland would establish its own currency would blow a hole in all of his party’s economic planning. The question that kills the idea of issuing a New Scottish Pound is simply—what would it be worth? The answer is that nobody can know for certain, but that on the balance of probability it would suffer a substantial devaluation relative to the UK pound and would be prone to bouts of dangerous volatility.

Which brings the argument back to sharing the UK pound, which this week the Chancellor, Shadow Chancellor and Chief Secretary to the Treasury made clear in a rare show of party unity, would not happen. Added to which in an unhelpful speech—for Salmond at least—in January, Mark Carney the Governor of the Bank of England warned against ill-thought out currency unions. He told an Edinburgh audience that the risks of such unions “have been demonstrated clearly in the euro area over recent years,” a comparison that would have made Alex Salmond’s tea curdle.

This is a problem that Salmond cannot shrug off. Without a viable currency, his plans are fatally holed. A further option would be to propose a New Scottish Pound pegged to the UK pound, whereby the Scottish Treasury would make clear to markets that its currency would act as part of the UK’s. The peg system has worked before, with great success in Hong Kong, whose dollar has been pegged to that of the US for 30 years.

For Salmond, a peg would neutralise the negative political effects of appearing to be shut out of the UK pound. He would be able to say that he was keeping the pound, but doing it his way. But it would bring with it substantial economic problems, the most glaring of which would be that Scotland would have no sway over its interest rates. This is a big problem. An independent Scotland would be an oil-based resource economy; the remainder of the UK would be a services economy and the two would have very different interest rate requirements. The Bank of England would inevitably put the interests of the UK above all else.

Before the announcements this week in Westminster, Salmond would have had a case to make for putting a Scottish government representative on the Monetary Policy Committee of the Bank of England, but that argument now seems concluded.

On all else, Salmond is looking strong. But in a cruel twist, the pound, which he so covets, may now bring about the failure of his so far hugely successful political project.