19 February 2014

A Scottish Pound?

An Assessment of the UK Treasury's Assessment of a Sterling Currency Union.

Every negative that could be accentuated about an independent Scotland has been accentuated. This is an unremittingly negative document.

That is not to say that there are not risks involved in Scotland going independent. But the chances that EVERY risk associated with independence actually occurs is, I would suggest, very unlikely. Let's take some examples from this 78 page document.

First off, lets start with one point I can agree with. I can accept that legally the pound sterling is not an asset that the "continuing" UK has to share.

As the document states "there is no rule or principle in international law that would require the continuing UK to share sterling".

Equally "there is no rule or principle in international law" that says Scotland can't negotiate a lower share of liabilities as a result.

In physical terms I can agree that a sterling zone is not an asset in the sense of the £1.2 trillion of physical and cash assets the UK possesses. The UK will also have £1.6 trillion of national debt by 2016. Scotland's share of this debt (on a population or repayment share calculation) is between £100bn and £130bn which can be offset against UK assets held outside Scotland. This will leave an independent Scotland with a much lower debt/gdp ratio (55%-75%) than the continuing UK (85%) (more on this later).

Legally it has already been established, by the UK treasury itself, that the national debt is the responsibility of the "continuing" UK. An independent Scotland has no "legal" responsibility to take on a share of this debt. So Scotland cannot "default" on this debt, since it is not legally theirs.

However the Scottish government has said they want to take on a fair share of liabilities (which includes debt), as long as they get a fair share of assets. Legally a sterling zone is not an asset. But in practical terms it would be of "benefit" and anything of benefit is usually deemed an asset.

But, says the report, a sterling zone would not be of worth to the continuing UK because an independent Scotland would be too "risky" to be a part of it. Therefore, despite the lower transaction/barrier costs etc for both countries of continuing a currency union, this is not in the "continuing" UK interest.

This is based on three broad claims.

1) As a "new" country money markets wouldn't trust Scotland.

2) As a "small" country it would be more reliant on trade and have less economies of scale.

3) An independent Scotland is too dependent on oil, gas and financial services, which would make revenues vulnerable and volatile.

All of this it claims would bring an interest rate premium that would push up Scottish deficit repayments.

This conveniently ignores the fact that whatever way it is negotiated, Scotland will start with a much lower debt/gdp ratio than the continuing UK (see above point). This usually brings a reduction in interest rates.

In the EU single market and as an English speaking nation, point 2 is pretty negligible, even irrelevant. And it is surreal to think rump UK would dare veto EU membership for their third biggest trading partner or Spain would cause chaos to European business just to get one over on the Catalonians. Even if they did, Scotland would no doubt end up still in the single market like Norway or Switzerland are. Some would argue that is an even better position to be in.

Finally, even without oil & gas, Scotland has output per head 99% of the UK average. With oil & gas it is 120%.

A lot is made of the volatility of oil & gas prices in the document with a constant focus on prices falling. But how likely is that? At over $100 a barrel, the profit margin is huge. Prices do fluctuate but big drops are usually temporary and followed by huge increases. In an energy hungry world the general trend is clear, prices are going up and likely to continue going up.

Nor is oil & gas the only large energy resource that Scotland has. Renewables will grow in value and Scotland has some of the largest potential in Europe.

Scotland is future proofed, exactly the type of country investors want to lend to. If anything, the rest of the UK can only benefit from sharing a currency with such a nation.

Which leaves one final claim why a currency union is not in the continuing UK's interest:-

"Scotland could leave a currency union for its own benefit at any moment and leave the rest of the UK counting the cost".

But the alternative is to chuck Scotland out on day one. So if the only difference is timing, what is the benefit in not allowing a union to continue longer? Surely better to delay costs, if any?

The Scottish government have stated they have no plans to leave sterling, say, for the Euro. And if they ever did decide to join there would be a lengthy transition process spreading out transition costs. Why would the rump UK decide to take these costs immediately in one hit? It makes no sense and I imagine the UK would decide this too when the time actually arrives. And of course all the main UK parties have in principle an aim for the UK to join the Euro itself, so there is no permanent guarantee for either side of the continuance of the pound.

Overall, I can only assume the conclusion of this treasury document was decided before they even started to research and write it. It is not a credible document in my opinion.

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