UK Nixes Plans For ‘Sterling Zone’ With Independent Scotland
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Scotland may not be allowed to use the Pound Sterling as its currency in the event that its voters opt for independence next year, said the U.K. Treasury on Tuesday, citing the recent tumult in the euro area as a warning to the challenge of sustaining a formal currency union.
Unveiling a report prepared by a group of non-partisan civil servants and independent economists, the Treasury warned that “even with constraints in place, the economic rationale for the U.K. to agree to enter a formal sterling union with a separate state is not clear.”
Scotland may not be allowed to use the Pound Sterling as its currency in the event that its voters opt for independence next year, said the U.K. Treasury on Tuesday, citing the recent tumult in the euro area as a warning to the challenge of sustaining a formal currency union.
Unveiling a report prepared by a group of non-partisan civil servants and independent economists, the Treasury warned that “even with constraints in place, the economic rationale for the U.K. to agree to enter a formal sterling union with a separate state is not clear.”
“The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties.”
[quote]Entering into a sterling union would also bring about “a fundamental asymmetry in the degree of exposure to fiscal and financial risk as a sterling union would comprise two members of very different sizes,” the report added.[/quote]The U.K. government has continually advised Scottish ministers against a split that would tear up “one of the most successful monetary, fiscal and political unions in history.” On September 2014 however, Scotland, with a population of around 5 million people, will hold a referendum to decide on independence.
In its report, the U.K. Treasury warned that even if a currency union could be formed, authorities in London would still have to exercise control over Scotland’s fiscal and financial policies, due to the disproportionate risks involved.
At about a-tenth of the size of the U.K. economy, “an independent Scottish state would need to agree a negotiated set of constraints on its economic and fiscal policies,” the paper said.
[quote]This would “require rigorous oversight of Scotland’s economic and fiscal plans by both the new Scottish and the continuing U.K. authorities. These constraints would need to reflect the difference in the degree of exposure to fiscal risk,” the Treasury said.[/quote]In response, Scottish Finance Secretary John Swinney argued that the U.K. should want to have a currency union as more than 45 billion pounds of goods and services are sold to Scottish customers each year. Additionally, Swinney’s analysis of Scotland’s balance of payments showed that the Scottish economy was consistently healthier and less indebted than the U.K.’s as a whole over the last 30 years, despite higher per head state spending.
“A sterling zone, with the pound as a shared currency will provide the full flexibility to set tax and spending decisions to target key opportunities and challenges in Scotland,” Swinney said, as cited by The Guardian.
[quote]”A sterling zone is also in the overwhelming economic interests of the rest of the U.K. every bit as much as it is in the interests of Scotland. An independent Scotland using the pound will mean sterling’s balance of payments will be massively supported by Scotland’s huge assets, including North Sea oil and gas – which alone swelled the U.K.’s balance of payments by 40 billion pounds in 2011-12,” he claimed.[/quote]According to Bloomberg, other options an independent Scotland may have include adopting the sterling without any formal union, leaving authorities in Edinburgh without control over monetary policy.
An independent Scotland might also find that, as a member of the European Union, it would be forced to adopt the euro unless it is able to negotiate an opt-out, the Treasury said.
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Former Chancellor Alistair Darling told The Scotsman that the release of the Treasury report was a statement of intent by the U.K. government that Scotland will have to leave the pound, if it leaves the U.K..
“To keep the U.K. pound after we have left the U.K., we would need to ask the country we had just walked away from to set up a messy, eurozone-style sterling zone. After the failings of the eurozone, and given that the rest of the U.K. would already have the pound and the security of the Bank of England, would they go out of their way to set up eurozone-type arrangements?”
[quote]“To be clear: this is not about England saying Scotland couldn’t stay in the pound. If we choose to leave the U.K, it would be us leaving the U.K. pound. There is no easy or certain way to get back in. After having been found-out on NATO and EU membership, the Scottish National Party should stop pretending Scotland will automatically inherit things,” he said.[/quote]
