European Movement UK: Observations on "Scotland analysis: Currency and monetary policy" – HMG, April 2013 (Graham Bishop article)

01 May 2013

"The only real game in town for an independent Scotland is the euro", writes Graham Bishop in EM's latest euroblog.

(These observations do not seek to make any comment about the merits of Scottish independence, but instead simply review the HMG analysis from a European perspective.)

The authors of the HMG paper[1] faced a fundamental difficulty from the outset: If they were wholly non-partisan, then any merits in the case for Scotland joining the euro could be turned round and applied correspondingly to the UK. Clearly, the Conservative Party would not welcome such an analysis. So they hit on the safe solution of recycling some of the tired old arguments from a decade ago about Gordon Brown’s infamous “Five Economic Tests” for joining the euro. Even with a dash of re-heating they are no more convincing than they were originally. Yet joining the euro is the only route for a Scotland that wishes to be genuinely independent.

The paper lays out the four obvious currency options for an independent Scottish state:

1. “continue to use sterling with a formal agreement with the continuing UK (a sterling currency union);
2. use sterling unilaterally, with no formal agreement with the continuing UK (“sterlingisation”);
3. join the euro; or
4. introduce a new Scottish currency.”

Taking the currency union option first, the authors have certainly absorbed the current progress of the euro area towards a genuine monetary union to deal with the economic crisis. So they argue that “In practice this [currency union] would be likely to require rigorous oversight of Scotland’s economic and fiscal plans by both the new Scottish and the continuing UK authorities”. As the remaining UK would be about 10 times the size of Scotland’s GDP, it is not clear what arrangements could be made that would prevent England simply dictating to Scotland. By contrast, in the euro area the European Commission acts as an independent arbiter and the final decisions must be accepted as fair by all the other 16 states. Scotland would be at number 10 – larger than Portugal or Ireland. In a Scotland versus UK situation, there would not be any such system of protection against unfairness.

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© Graham Bishop