On 17th October, Nicola Sturgeon launched the third of the Scottish government’s series of papers that together are intended to persuade the people of Scotland of the merits of independence. The first two of these—about “independence in the modern world” and “renewing democracy through independence”—attracted little attention. This third paper, on economic policy, would normally have attracted more interest. However, it was published at the same time as the new chancellor Jeremy Hunt was busy reversing the “mini-budget” policies of his predecessor, Kwasi Kwarteng. What was a calamitous week in Westminster denied the SNP’s paper almost any attention outside Scotland. That was a shame.
I should lay my own cards on the table. As a columnist for the National, which is Scotland’s only pro-independence daily newspaper, I am unsurprisingly in favour of independence. However, that does not mean I suspend my judgement when assessing proposals to achieve this goal, not least because I do not do party politics in any country of the Union. That allows me to say, without hesitation, that this latest paper from the SNP was a real disappointment.
As was expected, a great deal of the paper was about Scotland’s potential for growth. Now typical references to Scotland’s future as a generator of renewable energy were present, although suggested dependence on the continuing exploitation of oil challenged many. That said, the paper’s focus on wellbeing was welcome, even if there was little reference as to how it could be “delivered”. There was rather more on a liberal migration policy, which indicated a clear departure from UK policy. Many might agree that all of these points are a solid foundation for growth, but it was hard to interpret them as a comprehensive set of policies. Numbers to support almost all of them were notably absent.
What could not be glossed over however was a discussion on the currency that the SNP thinks Scotland should use after achieving independence. This is one of the biggest questions in the independence debate; Alistair Darling was able to floor Alex Salmond with it in 2014. In 2016, the Scottish government established the Sustainable Growth Commission to explore options that would help to answer it. Chaired by former SNP MSP Andrew Wilson, the commission published its report in May 2018. It was in that report that the commission suggested a policy called “sterlingisation”.
Sterlingisation describes using sterling as the currency of Scotland after independence without the permission of the rest of the remaining UK or the Bank of England, which is the ultimate sole creator of that currency. The 2018 plan suggested that sterling should be used until a series of “arbitrary tests”—milestones that are supposed to pacify financial markets—are met. Thereafter, it was agreed that the transition to a separate Scottish currency might feasibly take place. What was made clear was that the time lapse before that might happen was to be measured in years, and probably quite a number of them.
With almost no alteration, this policy of sterlingisation has survived in Sturgeon’s new plan. It has changed a little to reflect a motion approved by the SNP membership at their conference in 2019, which demanded a Scottish currency be instated “as soon as practicable”, which is the wording now also found in the report. However, Tim Rideout, the motion’s author, has always been clear that “as soon as practicable” meant weeks, not years. The report makes no indication that the transition would, or could, be as rapid as this.
Since that 2019 conference motion was passed, the Scottish currency debate has been furious. It has exposed a considerable divide between the SNP leadership and its members, and the seemingly deaf ear of the former with regards to the latter. A number of groups have promoted alternatives to sterlingisation, which the SNP membership appear deeply unkeen on. Some have suggested the euro as an alternative, but this would still require Scotland to first establish its own currency so it could meet the requirements as set out in the Maastricht treaty, which would be part of any future EU membership application. This is why the currency debate is so crucial. Without its own currency, Scotland cannot join the EU. Without EU membership, it cannot use the euro.
I have been personally involved in many of these discussions, expressing my concerns at the continuing SNP approach to the currency question. My concerns are threefold.
The first is that, without its own currency, Scotland could not be fully independent. It could not create its own monetary policy without its own currency, meaning it could not set its own interest rates. Nor could it instigate measures like quantitative easing (QE) if there was to be another crisis like the Covid-19 pandemic.
Second, Scotland would have to borrow in a foreign currency. If another event like Covid happened it would literally have to pay for the consequences, which a country with its own currency could avoided with QE, as the UK has done. This is why almost every state in the world has its own currency. (Even the eurozone broadly meets this criteria, as individual member states each have representation within the European Central Bank.)
Third, I think Sturgeon is wrong to suggest that Scotland can use the pound without London’s permission. The power to clear payments made in sterling—that is, the process of turning requests for payment into the actual movement of money—can only be granted by the Bank of England. At present, the Bank only permits UK-registered banks (including foreign-owned ones working in the UK) to use this facility. If the pound remained in Scotland post-independence, Scottish banks would still need the Bank’s permission to clear sterling payments. The Bank has little incentive to allow this, because it would run counter to its job of delivering monetary stability in the UK. Allowing foreign Scottish banks into its clearing system without effective control over their regulation is bound to increase the risks of instability, meaning it will be obliged to refuse any such requests. The SNP’s proposed creation of a Scottish Central Bank after independence would not change this: without its own currency to manage or regulate, a central bank based in Scotland would have very little to do.
Establishing a new Scottish currency at the onset of independence comes with its own challenges, but it is inherently a better strategy than what Sturgeon and the SNP have consistently proposed. There remains an unwillingness in the party leadership to accept the risk of basing their economic plans on the use of sterling without permission. Not only do I think that this is economically unwise, I also very much doubt that it is technically possible. It is also unlikely to convince voters who are on the fence about independence. If the SNP wants to win a second referendum in less than a year’s time, it urgently needs to come up with a Plan B.
