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A sterling zone makes no sense for Scotland

By Craig McGlashan
26 Nov 2013

The Scottish government’s plan to keep sterling as its currency if the country votes for independence shows a shocking naivety about how the potential new sovereign will be able to access the capital markets.

The Scottish government has called for a sterling zone consisting of it and its former union partners, with the Bank of England at the helm, should it achieve independence from the UK. The country’s ruling Scottish National Party has made plenty of noise about the idea since quietly dropping its former preferred option of joining the eurozone after the eruption of the currency bloc’s debt crisis. But with the sterling bloc proposal formalised and other options seemingly off the table, it does not stand up to scrutiny.

The cobbled together approach of the SNP to Scotland’s potential position as a sovereign borrower in the debt markets is clear from the very selective name dropping in the White Paper.

“Countries like France, Germany, and the Netherlands do not have their own currency but are independent, and control their own resources,” the paper says.

It forgets to add that countries like Greece, Ireland, Portugal — and even Spain and Italy, to a lesser extent — have all of the above but have hardly been in full control of their destiny since the crisis. The eurozone is moving towards greater fiscal union, not less. It seems odd of the SNP to want to break a fiscal union with the UK while maintaining a monetary one — something the eurozone crisis proved is fraught with difficulties.

The SNP’s cherry picking is evident elsewhere, too.

“Countries of a comparable size to Scotland, such as Norway, Finland and Sweden, currently enjoy very low levels of borrowing costs through careful management of the public finances. We expect Scotland to have the top credit rating,” it says.

But countries like Norway and Sweden have full control over their monetary policy, which Scotland would not under the proposed scheme. Finland is in the euro, but is on course to tip over the EU’s 60% debt to GDP limit next year, according to the European Commission.

The nationalists claim that the Bank of England will have to serve both Scotland and the remainder of the UK. But it is hard to imagine why the Bank would have any more duty to serve Scotland as an independent entity than as a constituent of the UK.

Consider this: should the UK and Scotland go their separate ways and the UK falls into deep recession but Scotland does not, how could the Bank of England not loosen interest rates to alleviate the problems of more than 90% of the population it represents?

Scottish sovereign debt would become much less attractive to investors, regardless of the country’s fundamentals, its oil wealth, its GDP growth or anything else. 

If the Scottish government believes it can be a top grade issuer like Norway or Sweden, it should introduce its own currency and take the short term volatility that would introduce on the chin. If it believes its future is safer as part of an ever more integrated eurozone, then the euro is the currency it should adopt.

Creating a sterling zone ignores the lessons of the eurozone crisis. It is a halfway house and raises too many questions over how it operates. It is a muddle that few investors will be willing to spend much time unravelling — leaving an independent Scotland far from the investor haven the SNP envisages.

By Craig McGlashan
26 Nov 2013