Today I had the pleasure of speaking in a Westminster Hall debate that I had called for on the subject of the currency in Scotland after 2014. In a heated debate, my clear point was that Scotland should continue to use the pound as part of a strong and successful United Kingdom. It is also becoming increasingly clear that the SNP’s plans, as stated in the White Paper, just don’t add up.
You can read much more about the currency issue in the latest briefing from the Better Together campaign here: http://bettertogether.net/blog/entry/without-the-pound-the-nationalists-are-left-without-a-viable-plan-for-indep
You can find the full debate here: http://www.publications.parliament.uk/pa/cm201314/cmhansrd/cm140212/halltext/140212h0001.htm#140212165000345
Speech in Westminster Hall on Scotland’s Currency after 2014 – 12/02/2014
The last couple of weeks have been a watershed in the referendum debate in Scotland. The Governor of the Bank of England’s non-partisan and technical intervention on the currency issue has been critical in debunking the false assertions that the SNP have been peddling about keeping and using the pound. I’ll come back to these revelations later.
You can sum up his intervention with reflection on a quote by renowned economist, Keynes when he said:
“He who controls the currency controls the country”.
And which eminent economist said
“A country without it’s own currency is a country not only without a steering wheel but also without brakes”?
Not Keynes, Adam Smith or Marx but, the lesser known SNP education secretary Mike Russell.
There is little doubt that the Governor was saying just that.
“It is no coincidence that effective currency unions tend to have centralised fiscal authorities whose spending is a sizeable share of GDP.”
“In short, a durable, successful currency union requires some ceding of national sovereignty.”
The central message of the Governor’s speech was that currency union requires fiscal, economic and political union to avoid financial crisis. It is precisely that fiscal, economic and political union that the SNP seek to dismantle with independence.
When the First Minister met with the Governor of the bank of England there was one person in that room that would control Scotland’s fiscal, monetary and spending policies in a currency union after independence and it wasn’t the First Minister.
A key test that Mark Carney set for any currency union is that a centralised fiscal authority would need to control about 25% of GDP – that is about 50% of spending in Scotland. The SNP immediately responded by saying that they would have 100% of control over taxes and spending in an independent Scotland so, by default, it’s the SNP that have ruled out a currency union by completely ignored the central warning of the Governor’s analysis.
And we don’t have to look too far back into history to see that the Governor was correct. The Euro created sovereign debt crises, financial fragmentation and large divergences in economic performance. This clearly illustrates the risks and challenges of creating and maintaining a formal currency union across different states with differing economies. The euro area is now seeking very significant steps to expand the sharing of risks and pooling of resources to create a more homogeneous currency union. Exactly what the UK currently provides for the pound.
John Cridland, CBI Director-General emphasised this last week:
“As the Governor highlighted, successful currency unions need strong fiscal agreements and a banking union, with common supervisory standards and resolution mechanisms. The negative effects of not having these structures in place have been starkly illustrated by the Eurozone crisis.”
There is a very positive case for staying with the UK as part of the currency debate.
Scotland benefits from being part of the UK economy; the third largest economy in Europe and the sixth largest in the world. Being part of the larger, more diverse UK economy brings strength, stability and security to Scotland’s finances.
Being part of the UK offers us protection from financial shocks. During the financial crisis, banks based in Scotland took advantage of the protection offered to UK banks. Since 2007, the UK has committed £1.162 trillion to bailing out the banks. At its peak, the Edinburgh-based Royal Bank of Scotland received £253.6 billion in support from the UK Government.
The rest of the UK is Scotland’s biggest trading partner. Scottish businesses buy and sell more products and services from the rest of the UK than every other country in the world combined. In 2010, 70% of Scotland’s exported goods and services went to England, Wales and Northern Ireland, accounting for 35% of Scottish GDP. Likewise, 70% of Scotland’s imports are estimated to come from the rest of the UK.
And this is not just a technical or political issue. It is also a significant issue for the Scottish public. The recent Scottish Social Attitudes Survey said that 79% want to keep the pound with only 11% wanting their own currency (no doubt the Greens and the Chair of the Yes campaign are included in that 11%) and 7% want the Euro (Alex Salmond’s previous favoured option).
The First Minister has gone from saying the pound is “A millstone around the neck of Scotland” to being the currency of choice for the SNP but not all of the Yes camp. Their own SNP Fiscal Commission was not even in favour of an informal monetary union or currency union.
In fact, if we refer to the HBOS banking museum on the Mound in Edinburgh it says that people think of money today as banknotes and coins, things like tea, shells and even feathers have been used in the past. We may need to go back to that again!
People need to know what the money will be in their pockets. We can’t run a modern economy on empty ginger bottles?
Incidentally, you can also press your own coins at the museum so perhaps I could point the Scottish Government in that direction as a Plan B given they don’t have one.
This is too important an issue for the SNP and Yes campaign not to be honest with the Scottish people and businesses about the way forward.
The overwhelming weight of opinion is now against a currency union.
And it is little wonder as any agreement would mean our interest rates would be set by a foreign bank and would include strict instructions on how much Scotland could tax and spend. Scotland would have no control at all over monetary policy. It would also mean the loss of our UK central bank, which acts as the lender of last resort.
It was this lender of last resort issue that the Business Secretary raised last week in relation to the large Scottish financial institutions being forced to move to have a strong central bank that can support them in a crisis.
Essentially, Scotland’s relationship with the rest of the UK will be the same as the relationship of Greece to Germany.
But it is not just an issue for Scotland. The rest of the UK would also have to agree and it would appear that from speculation in the press today that there is not going to be agreement on currency union as it is undeliverable.
If an agreement was not possible or ruled out by the Treasury – what is the SNPs Plan B?
Even The Scottish Government’s own Fiscal Report says that an informal monetary union was “not likely” and “not to be a long term solution.” – So, what is the long term option? What is the Plan B? What should they be setting out for the Scottish people before we go to the polls?
- Well, it is clear that leaving the UK means losing the security of the UK pound.
- If the yes camp cannot even tell us what money we would have in our pockets – how can they ask us to vote to leave the UK?
- The pound is one of the most trusted and secure currencies in the world. The Eurozone crisis has shown us how important it is to have a strong and stable currency.
- And this isn’t just about what money is in your pocket, it is about what it will buy you. Losing the pound means more expensive mortgages, more expensive credit card bills, more expensive car loans.
What about business – we sell twice as much to the rest of the UK as we do to the rest of the world combined. Losing the pound means every time a Scottish company sold to somewhere down south there would be the cost of changing money – that means fewer jobs. Every time we bought something from down-south we would have to pay too – that means a higher prices for all of us – the supermarket bosses have already warned us on this.
We should listen to business. In a strong criticism of the SNP White Paper, Scotland’s accountants, ICAS, have warned that there is a “high degree of uncertainty as to what the currency of an independent Scotland will be” and “there are no alternatives set-out if negotiations were unsuccessful.” The choice of currency will have a very significant impact across the pensions sector, the economy and the country generally, and this will inevitably remain as a major uncertainty for the time being.”
The Pension Insurance Corporation, which manages almost £10bn on behalf of nearly 100,000 pension scheme members, has turned down a number of potential investments in Scotland because of uncertainty over what currency any long term debt would be repaid in.
Losing the pound means the SNP must tell us what currency Scotland would use – is it setting up an unproven currency or rushing to join the Euro (if they are in the EU?) or will they join the only other 2 countries that tie their currency to another informally – Panama and El Savador who use the dollar.
And then we have the unedifying assertion by the First and Deputy First Minsters in Scotland saying that they will default on their debt if no currency union is forthcoming. This ill-though-through, toys-out-the-pram threat is a recipe for economic crisis and political conflict. It is reckless and irresponsible to say the least.
Experts like Professor MacDonald and Professor Armstrong are clear – defaulting on debt would be a reckless move that would have negative consequences for the people of Scotland for years to come
This threat shows that the SNP accept that Scotland cannot keep the pound if we leave the UK. Defaulting on our debts as a nation has the same impact as if you defaulted on your debts as an individual. What happens if you do not pay your bills?
Your credit rating would be terrible and we would have to pay more for everything.
That would be a disaster for ordinary individuals and families up and down Scotland. Anyone who borrows money, who has a mortgage, who has credit card bills, who has catalogue payments will have to pay more. This is not scaremongering but the facts of very basic economics.
Also the SNP have said in their fantasy white paper they would have to rely on the rest of the UK to collect our taxes, pay our pensions and pay our benefits for years after independence. They can’t threaten to dump the debt one minute and then ask to share everything else the next. This is recipe for crisis. How would these UK institutional systems work with a separate currency? Could the Minister tell us if DWP can work in a currency other than the pound?
Give the White Paper is underpinned and predicated on the pound, perhaps it will turn into an actual white paper, when they have to so heavily Tippex it that it contains just Tippex.
Scots have an international reputation for being prudent and thrifty. To default on debts would irreparably damage Scotland. In fact, even just to threaten to default has significant consequences for interest rates, borrowing and international reputation. In fact, the National Institute of Economic and Social Research put this at a minimum of 1.5% higher.
To summarise – What losing the pound would mean
Higher cost of living with higher mortgage repayments, higher credit card and store card bills and more costly car loans because Scotland would start out as a separate state with no credit rating or a hugely damaged credit rating due to threats of default.
Fewer jobs due to the cost of changing money every time Scottish firms buy or sell from our biggest customer – the rest of the United Kingdom.
Deeper cuts or higher taxes as the Scottish Government pays more to borrow money meaning more debt and lower public spending.
Risks to benefits and pensions as payments are converted into a different currency.
Risks to our economy. Without the back-up of the rest of the UK Scottish banks would have gone under and families and businesses would have lost everything. Tens of thousands of those employees in my constituency.
And an unproven and weak currency with a poor credit rating and high borrowing costs.
You can sum up the SNPs current proposition as this –you go from a proven and respected single currency backed by a strong lender of last resort as part of the UK – to a promise from Alex Salmond that he simply is not in a position to deliver. That is not good enough for the Scottish people and not good enough for Scottish business.
I can say this afternoon Chair – without contradiction, without doubt, without argument, without assertion – that the currency of Scotland post-2014 will be the pound, but only if we stay in the UK.
It is clear now that the most positive case for the union is the pound in our pockets and we must do all we can for today and future generations to save it.
Currency in Scotland after 2014