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Sheep from groats

23 April 2013 By Ian Campbell

Independence battles aren’t what they were. In 1314, Robert the Bruce defeated a larger English army on the battlefield of Bannockburn. Scotland’s new bid to restore its independence boils down to the adoption, or not, of a new currency.

The Nationalists have faced money dilemmas before. Their first thought was to join the euro, but the onset of the euro crisis made that option undesirable. Now the Nationalists think it would be better to be part of a “sterling zone”.

The London-based UK government doesn’t want Scotland to secede. It is scarcely surprising, therefore, to see it publish a hostile response in its weighing of Scotland’s currency options on April 23. The less than cooperative stance is unhelpful, but denied control of Scotland’s fiscal policy and overall economic governance, why should the Bank of England backstop banks north of the border? And why should London want to turn the Bank of England into a UK version of the European Central Bank?

Scotland could turn English obstructionism into opportunity. Rather than favouring a “sterling zone” – a little like the euro zone but with only two members – it could launch its own currency.

To make the currency secure and keep inflation and debt costs down, Scotland’s new government – and its new central bank – would have to establish their credibility, emulating Nordic neighbours in Sweden, Norway and Denmark. As the Icelandic experience demonstrates, the size of Scotland’s financial institutions would have to be monitored closely. A small nation can ill afford oversized banks.

The merit of the new currency is that it could reflect the country’s economic fundamentals. The nation’s monetary policy could be directed towards Scotland’s needs, rather than those prevailing in London, or indeed Frankfurt. Currency weakness, meanwhile, might help Scotland build a more competitive and diversified economy.

The risks – not the least of which is capital flight, as Scots with money place it in other currencies – may well outgun the potential rewards. But if the costs outweigh the advantages for self-determination, macro policy, growth and employment, perhaps the Scots should think again about independence.

At present the polls suggest the unexciting status-quo will prevail. Though that is hardly in the spirit of Robert the Bruce, it is certainly the safer choice.


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