The SNP have stated that they want to maintain a currency union with the rest of the UK (rUK) post independence. They also want the Bank of England to continue to operate as a lender of last resort. I believe that currency union without political union is inherently problematic. However, let’s, for the sake of argument, grant the SNP all it desires on this matter, even down to having a seat on the Monetary Policy Committee.
What does being a lender of last resort mean? It means that if Scottish banks, or the Scottish government went bust, the Bank of England would be there to bail them out. But as we have found out recently, when the UK central bank bails out banks, ultimately it is the UK taxpayer who is responsible for the debt. But what if an independent Scotland’s banks were too big to be bailed out by the Scottish government, or if the Scottish government itself was insolvent? Who then would be responsible for the debt? Well, initially the Scottish government and people would be responsible for the debt, but ultimately, if they could not pay back the debt, the burden would fall on the rUK taxpayer. In the same way it is looking ever more likely that if Spain or Italy have debts that they cannot pay back, the burden falls first on the European Central Bank, but in the end on those countries in the Eurozone which are still solvent, i.e. the taxpayers of Germany, Finland, Austria etc. But just as the Germans are not very happy about this, it is easy to see why the rUK taxpayers would not be very happy about bailing out an independent Scotland.
But let’s not be so pessimistic about an independent Scotland’s economic future. What if the SNP are right and Scotland would be rolling in oil wealth, its banks full of cash, its streets paved with gold. Well, what would happen if rUK having lost its Scottish cash cow found that it just couldn’t cope anymore economically and that it had to be bailed out. The Bank of England would act as the lender of last resort, but under this circumstance the reverse situation would obtain as that, which occurred previously. Just as solvent rUK taxpayers would be liable if a bust independent Scotland had to go to the Bank of England as a lender of last resort, so solvent Scottish taxpayers would be liable if a bust rUK had to go to the Bank of England as a lender of last resort. The Bank of England would be playing the role of the European Central Bank in the Sterlingzone. If rUK could not ultimately pay back its debt, the money would have to come from that part of the Sterlingzone, which was solvent, i.e. independent Scotland. The trouble with monetary union is that it looks as if each part ultimately remains responsible for each other’s debt and if a bankrupt partner in the end cannot pay its debt, it’s hard to see where else the money would come from other than from the richer partner. Scotland wants the rights which go along with having the Bank of England as a lender of last resort, but it can hardly wave the responsibilities which go alongside those rights.
Looking further at how monetary unions work, it is becoming clearer that one of the fundamental problems of the Eurozone is that imbalances of competitiveness and wealth exist between the rich north and the poor south. The EU already has a system of transfers from the richer countries to the poorer countries, but it is becoming clearer that this is not enough to maintain a stable monetary union. Many commentators are stating that ultimately the Eurozone will have to become a transfer union, with Germany and the rich northern countries permanently transferring large amounts of money to subsidise the poorer southern countries. Germany accepted this logic when it created monetary union with the former East Germany, transferring huge amounts from the rich west to the poor east.
In order for a monetary union to work in the long term, it is necessary that there do not exist excessively large imbalances between one region and another. What this entails at present, in a UK context, is that if one region is much poorer than its neighbour, then money is transferred so that something approaching an equilibrium is obtained.
What this means is that if Scotland were to become independent, while maintaining a monetary union with rUK, this monetary union would have to remain a transfer union, with money transferred from the richer parts of the Sterlingzone to the poorer parts. Many people in England might expect therefore, that post-independence it would be necessary for rUK to continue transferring money to Scotland. They already complain about England subsidising Scotland, about the Barnett formula giving more money per capita to Scots than to the English. But let’s take the SNP at their word and accept that an independent Scotland would be as rich as they claim and indeed even richer than rUK. What would be the result of this? The answer is simple. Scotland would have to transfer a proportion of that wealth to rUK, otherwise the imbalances in the monetary union of the Sterlingzone could lead to strains which might lead to it breaking up.
Are SNP supporters really aware that according to SNP policy an independent Scotland would be liable for England’s debts and might have to permanently subsidise their former southern countrymen?Share on Facebook