A notable feature of Scotland’s First Minister Alex Salmond’s campaign for next year’s independence referendum has been an increasing determination to reassure middle ground voters that much will stay the same if they opt for going it alone. Embracing Nato and the monarchy, he has managed significantly to antagonise traditional Scot Nats safe in the knowledge that they will continue to vote the right way.
Now the battleground has moved to the currency after independence, and Salmond is playing a similar game. He says he sees no reason to forsake the pound, and is proposing a monetary union between Scotland and the rest of the UK akin to the euro and in which the Bank of England, with a distinct Scottish input, would manage the pound for both states.
Salmond is rightly concerned to reassure business that independence would not mean creating a monetary border involving costly currency exchange and possible monetary uncertainty. But in doing so he is also exposing a contradiction at the heart of the independence case – there is no such thing as a free lunch, and any attempt to use the bank to shore up a Scottish pound will come at a significant price; severely curtailed independence.
As the EU has discovered a monetary union can not be built without a fiscal pillar. And Scotland is in danger of finding itself shaking off the dead hand of Westminster only to assume the yoke of Threadneedle Street. The bank will certainly require a strong input into an independent Scotland’s fiscal policy if it is to stand behind its banks as a lender of last resort.
One alternative would be to create its own currency and peg it the pound – an informal monetary union, but leaving the levers of monetary policy in London. Another, simply to keep using the pound, with or without London’s consent, but again leaving Edinburgh with no monetary tools to manage its economy. No control of money supply. No control of interest rates.
Salmond’s “independence” begins to look bit threadbare.