“Scotland will continue to use the pound, providing continuity and certainty for individuals and businesses in Scotland and the rest of the UK” said Scotland’s Future, the White paper on Scottish independence.
The White paper underlines the fact that the Bank of England will be the bank of last resort and of course the currency would remain the pound sterling.
Much of the debate has centred on the decision of the Scottish government to declare that it wants to continue with the pound. Its going to be its currency of choice should the referendum go the SNP’s way and Scotland cry’s “freedom.”
One of the reasons used to justify this is to facilitate the considerable trade between Scotland and the rest of Britain.
The Irish Pound lasted from 1927 as an independent currency until it was fixed to the euro in 1999. Why mention this fact now, well it’s the only country in these islands to break away from the Union hitherto. Scotland in a less bloody way is attempting the same.
So what of the Irish experience. What the Irish wanted from their currency was price stability. How was this done? A one for one link with the pound sterling.
This was important as the vast bulk of the trade of the fledgling country was with the rump of the Union that they’d left. Scottish trade is also overwhelmingly a cross border trade with the rest of Britain hence the Scottish Government decision to stick with the pound.
It took years for the Republic to divest itself from being a sole trader with the UK and consequently the sterling link was unquestioned by the Irish. But eventually change came, caused by the UK. In the 1970’s the UK economy was in a mess, price inflation was rampant and consequently it threatened Eire’s price stability. Alternatives had to be found to the system.
It was unsustainable for the Irish economy to have different set of objectives and still retain a one to one relationship with the English pound. They had to break free. The same circumstances undoubtedly will effect Scotland sooner or later. The pursuit of different independent economic objectives cannot be sustained using a central bank wedded to sorting the finances of a much larger economy. When it comes down to the crunch the Bank of England will conduct monetary policy for what remains of the UK.
The Irish looked to Europe for their salvation from the curse of being tied to Britain’s economic woes. The Irish pound joined the European Monetary System(EMS) in March 1979. Britain being Britain decided to stay out. Sterling appreciated sharply and the inevitable happened, within weeks the historic link between sterling and the Irish pound was cut.
After a ropey start the Irish eventually got price stability and the EMS paved the wave towards monetary union which the Irish embraced with enthusiasm and was one of the eleven founder members of the European Monetary Union in 1999. Leading to the Euro becoming legal tender in 2002. So goodbye pound and hello Euro. The rest as they say is history.
How long will it take for the Scottish penny to drop that they too will have to set up their own central bank if they are to run their own economy. Mr Salmond should think long and hard about adopting sterling as Scotland’s currency.
The founding fathers of the Republic recognised that they had to have their own pound, all be it at first tied one to one with the ‘English’ pound and backed by British securities, liquid sterling balances and gold. OK, at first it was independent in name only, but in time they moved away from the imperial pound.
If its independence they want, Scotland surely would be wise to look over the Irish sea for lessons on breaking away from the Union, not least on what to do about the currency.