Carney says privately what currency union really means for Scotland

In the run up to the referendum, we republish Ralph Blake’s article from February on currency union

Mark Carney private words to the Scottish Financial Enterprise (SFE) members on his visit to Scotland outlines the Bank of England’s (BOE) conditions for currency union writes Ralph Blake. BOE governor simply said the BOE would need a fiscal compact with Scotland to have currency union. The outline of this pact would be that Scotland’s deficit cannot be above a set % of GDP, the structural deficit must be below a certain % and the ratio of debt to GDP to also below a certain %. If the latter two conditions are above these limits at currency union then there must be a plan of cuts to bring them inline. This will be monitored annually. Failure to meet targets will mean the end of the currency union. The SNP’s currency union is much more than simply using the pound.  That in itself would not require any fiscal pact. It is their other demands of: the BOE underwriting the Scottish banking and financial sector; the Treasury underwriting Scotland’s historic debt and issuing any new debt on Scotland’s behalf.

With Scotland’s deficit, including 90% of North Sea Oil tax revenues, ranging over the last four years between £14.5 billion and £7.5 billion and those oil tax revenues varying from £6 billion to £10 biillion, Scotland’s deficit has had a range from 11% to 5% of GDP (it was 8% in the last financial year). This would mean that if Scotland entered such an agreement they would likely be faced with making cuts in spending to keep the deficit within the fiscal compact as well as the further cuts to bring the debt to GDP ratio down from around 75% now to a lower agreed level. Alec Salmond is right about Scotland deciding its own tax rates and deciding on how it spends its money. What he fails to tell anyone is the amount Scotland can spend will be limited by this fiscal compact. The BOE requires these conditions because of the volatility of oil revenues and hence the volatility of the deficit and the lack of political control of the Scottish economy and financial sector by Westminster.
The other revelation to the SFE is that the fiscal pact is an academic question anyway. That is because all the Westminster parties apart from the SNP have rejected it. They will play this card repeatedly throughout the referendum campaign in 2014.
This leaves Alec Salmond with a number of options.
Firstly, continue to use the pound but issue your own debt while walking away (essentially a default) from its historic obligation (the latter Salmond has threatened to do in the Financial Times[i]). Borrowing costs would be very high because of the volatility of the deficit and a potential further default.
Secondly, issue your own currency but try and peg it to the pound but this would require reserves way beyond what Scotland could command even with its population share of the BOE’s reserves and still leave the problem of high borrowing costs.
Thirdly, use the pound but take the EURO on re-entry into the European Union (EU). It is likely that if Scotland has to negotiate to become a new EU member which is what several senior EU commission officials are stating Scotland as new nation will have to do as a condition of membership and eventually take up Euro. This is what happened with Iceland’s membership which has now stalled over the Euro take up. It would still leave the problem of issuing debt and underwriting the banking sector neither of which the EU or European Central Bank does for its member states.
Finally, the radical alternative that we have been putting forward which is take the Norwegian road and nationalise the oil, introduce progressive taxation and join the European Free Trade Alliance.
It is key that the left wing of the independence movement advocates the radical currency option otherwise they will become caught in the SNP’s currency trap which will only weaken the case for independence.

Ralph Blake is the pen name of an analyst in the Scottish financial sector who attended Carney’s briefing to SFE.

Ralph Blake


  1. I agree that it is incredibly important that left-wing organisations like the Scottish Socialist Party, which participates in Yes Scotland, continue to make the case for an independent Scottish currency as a crucial tool in the development of a socialist economy in Scotland—both before and after the referendum. If the SNP won’t campaign for true economic independence, the left must! Thanks for writing, Ralph.

  2. Ralph, I’m not an economist, but a default is a default. It’s not a moral default, a essential default or any other pseudo default.

    It either is or isn’t a default. Now considering the debt is the UK’s and they have publicly quelled the markets by guaranteeing it to the markets.

    If Scotland does not get a share of the assets (including the BoE) then it walks away and either pegs or issues it’s own currency or whatever, but it doesn’t default.

    Considering the only reason we run a deficit is down to what the UK attributes to us, we will find funding in the markets (if needed) easy to find. Especially when we can secure it against something physical like oil!

    I’m so sick of hearing this line of a pseudo default being pushed constantly. Especially when we didn’t run up the debt and it wasn’t even spent on us. We have the pleasure of paying our share of the interest. With the BoE owning about 30% of UK debt and earning interest on it, which it pays to the treasury as a nice wee bonus. Do we get our population share of the refunded interest, do we hell!

    Give me 5 minutes in a room with Osborne and he would be a little more sheepish when he came out, if he came out!

  3. What the SNP are threatening is to walk away from the debt if they do net get their “sterling zone” not If they do not get their full share of Scotland’s assets/liabilities. A Sterling zone would be much more dependent on the Bank of England and the HM Treasury than the Eurozone. This is one of the reasons as well as political that the Westminster parliament rejects such a proposal. There is no reason why Scotland cannot continue to use the pound without the Sterling Zone as I point out. This walking away would be seen as a default under Vienna convention succession debt
    Scotland pay 7.5% of the UK total income tax and has 9.3% of the total public survives for 8.4% of the population. Only about £120 billion of the public debt came from bailing out the banks (over half on Scottish banks). The rest of the £1.3 trillion debt has come from the gap between spending and income of which if you exclude the geographical share of North Sea Oil revenues Scotland has contributed disproportionately more.
    As point out elsewhere only nationalising the oil would stabilise Scotland’s deficit and reduce the debt to manageable levels. Without that Scotland would have to pay considerably higher rates of interest to fund a large volatile deficit and rapidly growing debt burden heading for 100% of GDP. That is why the SNP want a sterling zone.
    On the Bank of England (BOE)’s QE and posting bond interest to the HM Treasury they are essentially reducing the deficit by creating a hole on the BOE’s balance sheet. A whole Scotland would pick up a share of for having an overall smaller total debt level.

  4. Ralph,

    If rUK are the continuing state and Scotland is a new state, then the assets and liabilities remain with the UK. That’s international law!

    Scotland have put forward a perfectly reasonable proposition and WM are dictating they can’t have anything but the debt.

    The SNP have never threatened to walk away except when the prospect of not getting our fair share of assets! It has NEVER been the stated position to walk away.

    Whether you like it or not the BoE is an asset of the UK and we deserve our fair share of everything. Our 8.4% of everything. In the negotiations there may be some to-ing and fro-ing, but that is fine. Both states end up with a position where they are happy.

    If we end up with a position where we get a share of the assets, but the UK refuse a formal currency union, fine. We still have no debt, it still belongs to the UK, but we will service an agreed amount, but we walk away with assets and no debt.

    We continue to use the £. Whether informal union, or peg a Scottish £, whatever. They all have drawbacks and the one which, some recognised economists views, is the least problematic is the currency union.

    You might not like the SNP, you might not agree with them, but their proposal as far as I’m concerned has been very reasonable. Going as far as stating in the White Paper that they would support the rUK’s position of retaining its permanent seat on the security council.

    I’m not disputing the income tax figures, but it is a skewed position. How does the rUK stack up if you only look at income tax? What about corporation tax, VAT or any other duties levied in Scotland? They contribute to the treasury and SCotland’s wealth. Only a fool would discount Scotland’s geographic oil wealth when looking at our contribution to the UK’s wealth (or a WM unionist type)! It’s there, it’s not going away any time soon.

    While I wholeheartedly disagree with much of what you say and you logic, I would be absolutely delighted to have such a radical proposition as nationalising Scotland’s resources such as oil and setting up a peoples power company (or nationalise one of those too).

    We are not so different, in our aims, but I think the small steps, pragmatic approach proposed by YES is the most likely to succeed. However, it is the beginning of the process. I look forward to it with great anticipation.

  5. Vienna convention succession of States came into legal force in 1996.
    SNP have repeatedly said over the last 10 days in the media that they would walk away if they did not get sterling zone currency union.
    As I point out in the main article sterling zone goes way beyond the Eurozone guarantees which is a unified political & economic block of countries.
    Scotland collects less tax per head of population in every category including
    corporation tax if one takes a per capita share of oil revenues.
    Taking the fair share of the Bank of England’s assets as well as its liabilities does not equate to a sterling zone. It would allow Scotland to set up its own central bank.
    Only economists employed to give the SNP economic advice think the sterling zone is a good idea. No one else thinks it is good for Scotland or the rest of the UK.
    Ridicolous arguments like those of Robin Macalpine in today’s h
    Herald that the UK’s debt us down to bank bailouts and tax avoidance and Scotland should get a debt discount failt to see that the root if the debt crisis was caused by the economic system. He seeks to make the people in the rest if the UK pay for it rather Han the rich, wealthy and banks. How else could our deficit go from £30bn to £120 bn a year and debt debt treble in. 5 years? Similarly as I have shown Scotland has its I population share of national assets which are in any case not realisable into real cash. The arguments put forward are nationalist which will only serve to divide the working class accord the UK.
    Any walking away from the debt by Scotland will be viewed very negatively by financial markets. Scotland after independence will have even with private North Oil Revenues a deficit way in excess if that of Greece, Portigal, Spain etc. that dispels the myth that the debt is all down to bank bailouts and tax avoidance. It is down to the structural weakness of the Scottish and UK economies. A deficit Scotland will find hard to fund as they will be seen as high rusk.
    We agree on one thing – nationalise the resources. Tha us the only way to smith the deficit and reduce debt and rebuild our economy. It is a step the SNP are frightened to take. That is why they are hiding behind all the bluster of the sterling zone.

  6. Ralph,

    I feel we could be here again and again of you continue to insist in the galactically stupid premise of using geographic measure for all taxes but the flip to a population share of oil&gas. How absurd!

    Walking away from the debt is eminently do-able if the UK claim to be the continuing state. Only if both states continue, then we enter a negotiation.

    What is the source for some your figures? I recognise some, like the income tax figure, but some of your other seem quite obtuse.

    As for the markets, they have no soul, no morals and no compass that most people would understand. They deal in profit/risk/reward. Why would a debt free, resource rich country be seen as a pariah in the markets? I don’t believe the markets would see Scotland in a poor light.

    I don’t believe we would have a deficit either, if you look at GERS the only reason we have a deficit is due to our share of UK debt, the bill for the MOD and other attributed spend.

    The bank bailout thing is a myth. The US FED bailed out the BRITISH banks to the tune of $1Tn. The bailout, if a government decides to have one, is based on the contagion, not whether the bank has Scotland in its name!

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