Blighty | The future of Britain

George Osborne’s pound of flesh

The chancellor of the exchequer says an independent Scotland could not retain the pound

By Bagehot

SCOTTISH separatists can have their cake, or they can eat it, but they cannot do both. That was George Osborne’s message in a speech on the future Scottish currency on February 13th, in which the chancellor of the exchequer set out to demolish claims by the separatists that, in the event that Scots vote to leave Britain next September, they could retain its currency. No chance, said Mr Osborne: “If Scotland walks away from the UK it walks away from the pound.”

It was a good speech, with Mr Osborne exuding his usual sense of barely-supressed triumphalism. In response to claims by Alex Salmond, leader of the secessionist Scottish National Party (SNP), that the pound is Scotland’s to keep if it so wishes, he said: “The pound isn’t an asset to be divided up between the two countries after break-up as if it were a CD collection.” Rather, its value lies “in the entire monetary system underpinning it.”

This is the nub of it. An independent Scotland could of course carry on using pound notes for its currency; Britain could no more prevent that than America can stop South Americans exchanging dollars. The question is whether it could persuade the rest of Britain to enter into a currency union that would give Scotland, for example, the cover of the Bank of England and a say in monetary policy. That now looks unlikely.

In an unusual, and belated, show of cross-party support, the Tory chancellor’s attack was backed up by the economic spokesmen of both the other big political parties. The Labour shadow chancellor Ed Balls—who was, significantly, an important voice in keeping Britain out of the euro a decade ago—said: “Scotland will not keep the pound if Scotland chooses independence.” Danny Alexander, the Liberal Democrat chief secretary to the Treasury, agreed: “I couldn't recommend a currency union to the people of Scotland and my party couldn’t agree to such a proposition for the rest of the UK.”

This was awkward for Mr Salmond, representing a knockback from the current British government and, with a general election due next year, also the next one. Rather lamely, his deputy, Nicola Sturgeon accused the unionists of “ganging up to bully Scotland”. Much more painful to the nationalists, however, was the analysis provided to Mr Osborne by Treasury’s top mandarin, Sir Nicholas Macpherson, which the chancellor took the unusual step of publishing. This was dispassionate and devastating.

“I would advise strongly against a currency union as currently advocated, if Scotland were to vote for independence,” wrote Sir Nicholas. “Why?”

He gave four reasons. The nationalists have trailed the idea that the currency union would be only a transitional arrangement; if it suited them, they might later choose to launch a currency of their own. Yet if financial markets did not believe the union to be permanent, Scotland would face a constant risk of capital flight. “Successful currency unions are based on the near universal belief that they are irreversible,” wrote Sir Nicholas. “Imagine what would have happened to Greece two years ago if they had said they were contemplating reverting to the Drachma.”

Reasons two and three are related. The Scottish financial sector is large relative to national income, ensuring that the rump of Britain would have to bear the risk of bailing it out. In the event of a financial crisis, British taxpayers could therefore be on the hook for Scottish debts—an eventuality that would not be reciprocated, given that the Scottish economy is around a tenth the size of the rest of Britain’s. The only fair way to manage this risk would be for the Scottish government to cede far more powers, over monetary policy, tax and spending, than it would be likely to do. For that would make a nonsense of its secession.

Finally Sir Nicholas warned of a likelihood that the new Scottish administration, overburdened by high expectations, would overspend, putting further pressure on the union. “Of course,” he said archly, “if the Scottish Government had demonstrated a strong commitment to a rigorous fiscal policy in recent months, it might be possible to discount this. But recent spending and tax commitments by the Scottish Government point in the opposite direction, as do their persistently optimistic projections of North Sea [oil] revenues.”

Nationalists will read that and wince. Yet Sir Nicholas was not quite finished. Mr Salmond has repeatedly threatened that, if Westminster politicians refused to enter into a currency union with Scotland, Scotland would refuse to pay its share of the national debt. Yet this would hurt Scotland most of all, by dashing the new country’s economic credibility at birth.

It will be interesting to see how Mr Salmond responds.

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