Ben Wray – What Currency? A Question that Sharply Divides Backers of Scottish Independence

Scottish National Party members are due to vote shortly on whether – given success in a future referendum – an independent Scotland would “sterlingise” or create its own currency

Ben Wray is CommonSpace editor and co-author of “What is Scottish Independence For?”, to be published by Verso 2019-20

On the final weekend of April, Scottish National Party members will have crucial vote at their party conference in Edinburgh: should a future independent Scotland create its own currency?

This is part of a bigger debate: namely, is national sovereignty worth fighting for in an age of neoliberal globalisation? Should monetary and fiscal policy be democratic choices for a country’s citizens? Or should macroeconomic management be left entirely in the hands of technocrats and bankers?

Such questions have always been present within the Scottish independence movement, but have now become a clear dividing line over the question of a Scottish currency. This weekend’s poll crystallises that division around one vote, the decision of which will go a long way to dictating what the cause of Scottish independence actually represents: a route for centrist politics to rehabilitate itself on Brexit-Britain’s shores, or a pro-democracy, pro-sovereignty movement seeking an alternative to Britain’s hyper-financialised variety of capitalism.

Following the Brexit vote in 2016, SNP leader and First Minister Nicola Sturgeon commissioned Andrew Wilson, former SNP parliamentarian and current head of Scottish corporate lobbying firm Charlotte St Partners, to lead a Commission for a new economic prospectus for Scottish independence. The Growth Commission (GC) published its final report in May 2018, proposing that an independent Scotland should continue to use the pound sterling informally, a policy known as sterlingisation, but that the infrastructure should be built for a future independent Scottish Government to establish a Scottish currency. That report also proposed a grim diet of austerity for the first five years of independence, based on a set of fiscal rules that would make the Troika blush (even Brussels couldn’t imagine a public-debt-to-GDP limit of 50%). 

The report was fiercely debated within the independence movement as soon as it was published, with very few senior SNP figures defending it publicly, and even Sturgeon at one point distancing herself from its deficit-reduction proposals (the SNP leader has repeatedly denied that the report proposes austerity, despite there being little other conclusion to draw). The debate has continued on and off since then, but Wilson, in true lobbyist style, has steadfastly refused to defend the report on intellectual grounds, instead arguing that it is aimed at those who don’t yet support independence. He added the dubious claim that polling evidence backs up the political popularity of the GC’s currency recommendation. 

After a series of consultations with SNP members, party deputy leader Keith Brown and Scottish Finance Minister Derek Mackay have submitted a motion on the GC report which waters down some of the most heavily criticised parts of its findings, while maintaining the fundamentals of the currency position. Instead of it being a possibility in the distant future, there will be a vote before the end of the first term of the Scottish Parliament on whether to establish a Scottish currency. However that decision will be guided by the GC report’s six tests, which the embryonic Scottish Central Bank will report on annually. 

The six tests are a bit like Gordon Brown’s five tests to join the euro, and Labour’s six tests now to support Theresa May’s Brexit deal – they are designed to never be met, setting criteria that a Scottish currency has no possibility of meeting before it comes to fruition: such as decoupling from the UK’s economic cycle and establishing foreign currency reserves (£30-40 billion worth). So the motion simply adds confusion and uncertainty to a proposal which will already leave an independent Scotland financially vulnerable. Scotland would be joining Montenegro and Luxembourg (with the euro) and Panama and Ecuador (with the dollar) as one country using another country’s currency. In 2014 the independence white paper proposed a currency union with the UK with shared institutions. Sterlingisation proposes the currency-issuing state (the rest of UK) having no formal responsibility to the currency-using state (Scotland). 

But whereas the other four euroised/dollarised countries have a GDP of less than one per cent of their respective currency-zone, and in at least half of those cases (Panama and Luxembourg) have economies uniquely geared towards international trade/finance, Scotland’s GDP is roughly 10 per cent of the sterling zone, and has an economy largely based on domestic services. Its two big banks – RBS and HBOS – are highly leveraged and implicitly protected by the Bank of England, as too-big-to-fail. Wilson & Co have failed to answer the question of what a sterlingised Scotland would do in the event of a global financial crisis, with no lender of last resort. Scotland’s banks had assets worth a whopping 1,254 per cent of Scottish GDP in 2014, higher than Iceland’s at the time of the 2008 financial crash (at 880 per cent of GDP), the largest systemic banking collapse experienced by any country in history.

Sam Bowman at the proudly neoliberal Adam Smith Institute, favoured sterlingisation as the end of credible state protections for Scotland’s financial sector.  He wrote a paper in advance of the 2014 referendum, citing Panama as an “appealing lesson” to Scotland. Bowman’s vision for Scottish independence is as a test case for returning to the laissez-faire economics of 19th Century capitalism. The fact that this is impossible in today’s monopolised capitalist age, or that Panama is a country with high levels of financial corruption (remember the Panama papers?), enormous inequality and poverty and regularly has destructive booms and slumps, may be of little concern to the neoliberal Adam Smith fanatics, but those of us who would bear the brunt of the sterlingisation experiment should be wary, to say the least.

Indeed, even foregoing the threat of a financial crisis, a sterlingised Scotland would be solely reliant on the City of London for financing deficits and would have to closely follow the rest of UK’s macroeconomic strategy, for fear of becoming de-coupled to the point that interest-rate decisions at the Bank of England have a malign impact on the Scottish economy. Caught between the hammer of the City of London and the anvil of the Bank of England, an independent Scotland’s finance minister would be hamstrung: taking fiscal policy decisions with a firm eye on pleasing his or her London paymasters. 

None of this is likely to have escaped Wilson, a former RBS economist, who when asked by The National what his response was to those who said the GC report was written for bankers, responded: “Do we need to have independence in opposition to the people who run the country, or do we need to persuade those people who currently run the country that this can be done?”

There is clear evidence in the GC report that the authors are very conscious that foregoing monetary policy will also mean a surrender of policy control in many areas to financial elites, with a proposal to “mirror” the UK’s much maligned financial regulation as an obvious example.

The GC report is what Thomas Fazi and Bill Mitchell have described as “the politics of depoliticisation”: “A process of self-imposed reduction of sovereignty by national elites aimed at constraining the ability of popular-democratic powers to influence economic policy, thus enabling the imposition of neoliberal policies that would not have otherwise been politically feasible.”

The euro zone is an obvious case of the politics of depoliticisation, but sterlingisation is perhaps even more disempowering, since no formal unifying of institutions means an independent Scotland would not even have any democratic claim on the Bank of England in the way the members of the euro zone have on the European Central Bank. Monetary powers would be, in effect, privatised. The forlorn hope of some independence supporters that sterlingisation would be a short ‘transition” before an independent currency is killed by the six tests and their annual assessment by Scottish bankers – once a new Scottish state is locked in the vice-like grip of finance, hell will freeze over before they let go. 

All of this is proposed in the name of all things “open” and “frictionless”. The Brexit backlash in Scotland has seen a fetish for single markets with senior SNP figures wary of anything which could smell like trade barriers within the UK internal market – worth nearly four times as much as to the Scottish economy as trade with the EU as a whole, as unionists endlessly tell us – post-independence. The fact that the costs of instability from a financial crisis “are an order of magnitude larger than the gains from increased trade”, according to one study of the prospects for sterlingisation, does not seem to have entered the thinking of frictionless trade fanatics around the leadership of the SNP. 

Of course there is an obvious contradiction here: post-Brexit (if such a day ever comes), it will be impossible for an independent Scotland to be entirely frictionless with both the rest of UK and the EU; a trade-off will have to happen somewhere. The fact that Wilson (whose agency has lobbied the Scottish Government on behalf of the People’s Vote campaign, according to the Scottish Lobbying Register) has chosen the UK over the EU is not without irony. It’s difficult to see how a sterlingised Scotland could possibly secure EU membership, since applying countries must have their own central bank with currency-issuing powers. 

But Wilson tells us, his aim is not to be popular with the independence base, but “to win by persuading people that are currently not convinced by the case”. In the minds of unreconstructed centrists, politics is still won by proposing minimal disruption. Leaving aside the fact that centrism has suffered one defeat after another just about everywhere across the Western world in recent years, the basic problem with the centrist case for Scottish independence is that, for most people, it’s an oxymoron: independence is by its very nature defined by risk and change. 

Centrist independence supporters have been expecting an independence bounce ever since the Leave vote in 2016, and it has not come, because they believe in an urbane, sophisticated middle-class swing vote that doesn’t exist. That’s not because there aren’t many people in Scotland aghast by Brexit (Scotland has actually become more pro-EU since it voted 62% for Remain in 2016). Opposition to Brexit does not inherently drive people into the arms of Yes – in fact, if you are opposed to one form of constitutional rupture, there is a certain logic to opposing all forms. “Brexit shows breaking up is difficult,” has become a staple phrase of Europhile unionists in Scotland, such as the Liberal Democrats.

Instead of framing independence through the prism of Brexit (a political strategy fraught with problems), the SNP could re-focus on the fact that in the five years since the 2014 referendum, life has got much more difficult in much of Scotland, with poverty rising as wages stagnate, and the housing crisis and austerity deepening. The projections for Scotland in the UK over the next decade are grim for the bottom third: relative poverty is anticipated to rise from 23% in 2018/19 to 38% in 2030/31, while absolute poverty will rise from 20% to 32% over the same time period. 

Not only are those at the sharp end of neoliberal Britain the most amenable to the idea of taking a risk on independence, the electoral demographics also show that because this constituency is much bigger than middle-class Scotland, it takes a much smaller swing from 2014 to turn them from No to Yes. If those earning over £45k (15% of Scottish earners) were to move from 34% in 2014 to the referendum average (45% Yes), it would only reduce the vote gap by 120,000, not sufficient to reduce No’s lead by half. However, if only an extra 5% of those earning less than the median income (£22k) and those who didn’t vote last time (overwhelmingly poor Scots) were to shift, it would move 400,000 Scots from No to Yes, enough to win an independence referendum.

But of course why should low-income Scots take the risk, if the reward is more of the same? The GC report’s bankers’ paradise, washed down with a grim diet of austerity, hardly provides the sort of motivation for people to switch. The inevitable rupture in the independence movement which will come from backing sterlingisation will also dent the optimism of Yes in 2014, critical to the gains made towards Yes over the course of the referendum campaign. It just so happens that believing in something transformative can also build electoral momentum. 

A number of amendments have been proposed by SNP delegates which, if passed, would see the six tests got rid of and a clear timetable for the establishment of a Scottish currency in its place. There is a real danger that multiple amendments could lead to divide and rule, if Scottish currency advocates are not organised. But ultimately, delegates have the opportunity to vote down the motion if they so wish. Whatever way the vote goes, the pro-independence left will continue to argue for and build an alternative to the Growth Commission report – the independence movement has always been bigger than one party. But the vote is pivotal at least to the medium term future of Scottish independence. An unamended motion in support of the Growth Commission will be a clear signal that the neoliberal wing is in the ascendency, while a successful rebellion from grassroots members (very few SNP leading figures have been willing to speak out) would be a major victory for those who believe independence can and must be about breaking with British capitalism. The stakes are high.

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