Tuesday, November 26, 2013

Scotland, sterling and the debt

Does your separatist movement have an infographic?

Scotland will hold a referendum on independence from the United Kingdom in September 2014, and the Scottish Government has just released a 670 page white paper on Scottish independence (conveniently available in both Kindle and ePub formats for nice bedtime reading). The white paper presents the government’s case that Scotland can and should be in a currency union with the rest of the UK.

There are probably some sound arguments for that: it could take years to join the euro, and much of Scotland’s trade is with rest-of-UK, and vice versa.

On the other hand, events of recent years have kind of cooled the enthusiasm for currency unions in Europe. It’s not at all clear that it would be a good idea for Scotland to adopt sterling. The UK Government’s position is, sensibly enough, that a currency union would be unworkable without a fiscal and political union, which is kind of absurd when the goal is Scottish independence.

But let’s read between the lines. The argument of the Scottish National Party-led government is that the British pound and the Bank of England (name notwithstanding) are “assets” of the United Kingdom. Assets and liabilities of the United Kingdom should be split up among the constituent countries, and if rest-of-UK refuses to divide the sterling “asset”, then Scotland would refuse to assume its share of the liabilities—the UK national debt.

(By the way, did you notice the reference to “the most optimistic scenario … by the Institute for Fiscal Studies, would be to cut public spending by £3bn more than the UK government plans by 2021”? Emphasis added, of course.)

This is a brilliant strategy and a win-win for the pro-independence campaign, given Scots’ apparent sentimental attachment to a currency issued by a bank that is named for their erstwhile enemy. They either get to keep sterling, or they get a huge chunk of debt relief. Given the quality of economic decision-making in London, it’s seems likely that rest-of-UK will go for the latter.

I think this is the endgame, assuming the referendum passes (which doesn’t seem so likely right now): an independent Scotland with its own currency, a geographic share of hydrocarbon reserves and no debt. Great way to start a country.


  1. This is the same kind of "divorce but keep a joint bank account" that Quebec nationalists proposed when they touted "sovereignty association" with Canada. There was never any possibility that the rest of Canada would have agreed to the fantasy terms that the Quebec Nationalists were peddling to their supporters.

    On the other hand, Scotland would not need the permission of England to continue to use sterling any more than Panama and Ecuador need American permission to use the dollar. Of course, Panama and Ecuador have no say in setting the policies of the Fed.

    1. Absalon, I quoted you in my post that just went up :)

    2. Carola - I saw that. Scotland's position reminds me of the positions taken by Quebec nationalists 20 years ago. The Scottish nationalists are trying to lull voters by pretending that nothing much would change: the currency would be the same and the Queen would still be the head of state.

  2. Anonymous9:36 PM

    Coming originally from Northern Ireland, I can tell you if the Scots are daft enough to vote for independence (which they won't be) the idea that they get to skip out on their debt obligations is utter fantasy. Why would anybody in the rest of the UK agree to that? Oh, they want to keep the pound? Sure, but they won't have a say in the control of monetary policy, they can like it or lump it.

    And they may also have to think about getting their EU application papers in order because the Spanish are going to make sure that Catalonia doesn't get any funny ideas.

  3. Anonymous9:37 PM

    The question is, how can Scotland simply refuse to take on the liabilities, when the rest of the UK is in a so much more favourable a negotiating position? Wouldn't what they actually end up doing be to start off in default?

    1. The UK is not in a very favorable position. What will they do, go to war or refuse independence? The negotiation is over the assets and liabilities of the United Kingdom, and rest-of-UK will be the successor state. The main leverage rest-of-UK has is that by default, they control both the assets and the liabilities.

      Scotland is setting things up so that they have a natural “right” to share in the “asset” of the pound sterling. We don’t naturally think of it that way, but Salmond is trying to change that. Rest-of-UK will refuse to share the asset, so Scotland will refuse to share the liability.

    2. Why can't they? Who would intervene in Scotland's behalf? The UK is not a signatory to any treaties that determine the secession of states. And Scotland is not like South Ossetia or South Sudan or whatever, with a large and powerful protector.

      The UK can refuse independence if Salmond demands too unreasonable terms. Nothing in present UK law gives Salmond cart blanche to determine what the terms of the situations would be in the event of an independence win. There's no pressure on the UK to be 'fair' to Scotland, only that the two sides come to an agreement. If the two sides do *not* come to an agreement, independence can be delayed indefinitely. And until independence takes place, Salmond only has whatever powers Whitehall determines to give him.

      And Cameron does not have to worry about any votes from Scotland, he gets none from them in either event. In what way does the rest of the UK not hold all of the cards?

    3. @Fangz: Independance is not "granted", it is claimed. If the scots vote for independance, they will just proclam it. UK may or may not recognize the new state, sending or not embassadors to Glasgow, but it will not be able to send soldiers to scotland without getting shot at, and it will not received tax money and so on.
      What could UK do then? Usually, a country that refused the independance from one of its parts (like France with algeria "part of the republic and no colony") you have to go to war.
      And UK will not. So Scots have to decide by voting...

    4. They can just close down the A1 and poof, Scotland implodes.

    5. Shot at by whom? It works both ways

  4. A small point, but Scottish currency is not "issued by a bank that is named for their erstwhile enemy." There are Scottish banknotes.


    Yes, the Bank of Scotland has all the monetary independence of the Kansas City Fed, but at least they have pretty notes.