Does anyone here believe we can't use the pound?

[joozy]

While in many ways it's quite admirable that some of the yes supporters here are trying to stick to the "of course, there will be currency union....it's in everyone's interest" line, it's simply not the case.

For starters, with regards to the political dimension. All three major UK parties have explicitly stated that there will not be currency union. They have been very vocal on this matter, it would require a volte face of epic proportions - difficult to see with a forthcoming general election and a rUK electorate who probably may not be feeling all that much goodwill towards the country that has just left.

Economically, it isn't good for the rest of the UK either. The additional transaction costs incurred, while mildly irritating, will have markedly smaller proportionate effect on rUK than an independent Scotland. It would place rUK on the hook for any future fiscal difficulties Scotland may get into (whether through excess spending or weakening tax revenues) or problems with financial institutions. The economic framework that would have to be created to support currency union would raise the question of whether Scotland was truly independent anyway! If there is no allowance for fiscal transfers, then it would make it far more difficult for Scotland to absorb any shocks through either FX or interest rate adjustments. In a note this week, Societe Generale said "the Yes Camp is deluding itself if it believes it can both retain the pound but also become master of its own fiscal affairs.... the chances of an independent Scotland being able to retain the pound (in a currency union) are slim".

On the trade balance and balance of payments issue. Morgan Stanley estimates that the trade balance for the rest of the UK would worsen by around 11%....scary? Not really, in absolute terms it would be a worsening of around £3.5bn – or less than 1% of GDP. Brian Ashcroft (Economics Prof at Strathclyde) comes up with a similar figure for the balance of payments. The £40bn often cited by the yes campaign fails to account for remittances, the Scottish deficit with rUK on trade in goods and services etc. Any negative trade implications from independence would likely prove immaterial for the overall performance of the rUK economy. You would likely see some weakness in Sterling as a consequence of the uncertainty (but not the apocalyptic collapse predicted by some of the more hysterical on this thread) and this would probably be fairly well received by the UK government. Sterling's strength over the past year or so has not really been all that beneficial to UK industry.

[Homer Thompson]

This might be a stupid question, but is our share of the UK debt linked to sterling?

[joozy]

This might be a stupid question, but is our share of the UK debt linked to sterling?

Depends what you mean really. The yes campaign try and link the currency matter to Scotland's share of the UK debt. This is because they claim that sterling is an 'asset' which Scotland are entitled to a share off - with the obvious claim that if we don't get our asset then we don't take the debt. The problem with this is quite simple, Sterling isn't an asset.

If you're talking about how UK debt is denominated, then it is in Sterling. Which raises a whole new set of questions. Holders of UK government debt will want the debt to be serviced by the continuing UK. So it is likely that some sort of payment mechanism would need to be established between an independent Scottish state and the rest of the UK to enable the Scottish government to meet its obligations. This could get messy.

[git-intae-thum]

Its pretty amazing the wet dreams some of the dependent cretins are having over this currency issue.

Here is the thing. Darling has now played his ace. Currency was his last big stick. And he attempted to wallop Salmond.

He missed.

The post debate indicators, if anything showing small movement to yes.

People are not daft. They know there will be a currency union.

[Confidemus]

Its pretty amazing the wet dreams some of the dependent cretins are having over this currency issue.

Here is the thing. Darling has now played his ace. Currency was his last big stick. And he attempted to wallop Salmond.

He missed.

The post debate indicators, if anything showing small movement to yes.

People are not daft. They know there will be a currency union.

Very much this.

Anything else is just mewling and fluff.

[Joey Jo Jo Junior Shabadoo]

My understanding of economics is basic so I'm asking for a bit of a Wisdom Wednesday conversation, but is it correct that having a strong currency is in fact a bad thing?

If your currency is strong that basically means it is expensive. If your currency is expensive then your goods and services in turn are expensive to foreign markets, so supply and demand dictates that demand for your goods and services abroad drop. Conversely, a weak currency is bad as it makes all your imports very expensive.

Basically what is 'good' or 'bad' is dependent on the structure of your economy. Greece would have killed for a weak (cheap) currency in the last few years for example, but were instead burdened with a 'strong' Euro.

[Homer Thompson]

Depends what you mean really. The yes campaign try and link the currency matter to Scotland's share of the UK debt. This is because they claim that sterling is an 'asset' which Scotland are entitled to a share off - with the obvious claim that if we don't get our asset then we don't take the debt. The problem with this is quite simple, Sterling isn't an asset.

It was this I was thinking of.

If you're talking about how UK debt is denominated, then it is in Sterling. Which raises a whole new set of questions. Holders of UK government debt will want the debt to be serviced by the continuing UK. So it is likely that some sort of payment mechanism would need to be established between an independent Scottish state and the rest of the UK to enable the Scottish government to meet its obligations. This could get messy.

Again, this might be a stupid question, but on what grounds can the rUK make an iScotland take on a proportion of the UK debt?

[MarkoRaj]

While in many ways it's quite admirable that some of the yes supporters here are trying to stick to the "of course, there will be currency union....it's in everyone's interest" line, it's simply not the case.

For starters, with regards to the political dimension. All three major UK parties have explicitly stated that there will not be currency union. They have been very vocal on this matter, it would require a volte face of epic proportions - difficult to see with a forthcoming general election and a rUK electorate who probably may not be feeling all that much goodwill towards the country that has just left.

Economically, it isn't good for the rest of the UK either. The additional transaction costs incurred, while mildly irritating, will have markedly smaller proportionate effect on rUK than an independent Scotland. It would place rUK on the hook for any future fiscal difficulties Scotland may get into (whether through excess spending or weakening tax revenues) or problems with financial institutions. The economic framework that would have to be created to support currency union would raise the question of whether Scotland was truly independent anyway! If there is no allowance for fiscal transfers, then it would make it far more difficult for Scotland to absorb any shocks through either FX or interest rate adjustments. In a note this week, Societe Generale said "the Yes Camp is deluding itself if it believes it can both retain the pound but also become master of its own fiscal affairs.... the chances of an independent Scotland being able to retain the pound (in a currency union) are slim".

On the trade balance and balance of payments issue. Morgan Stanley estimates that the trade balance for the rest of the UK would worsen by around 11%....scary? Not really, in absolute terms it would be a worsening of around £3.5bn – or less than 1% of GDP. Brian Ashcroft (Economics Prof at Strathclyde) comes up with a similar figure for the balance of payments. The £40bn often cited by the yes campaign fails to account for remittances, the Scottish deficit with rUK on trade in goods and services etc. Any negative trade implications from independence would likely prove immaterial for the overall performance of the rUK economy. You would likely see some weakness in Sterling as a consequence of the uncertainty (but not the apocalyptic collapse predicted by some of the more hysterical on this thread) and this would probably be fairly well received by the UK government. Sterling's strength over the past year or so has not really been all that beneficial to UK industry.

A good analysis although apart from your own opinion that it would be 'mildly irritating' and not scary it still sounds to me that it would be a good idea for rUK.

As far as the 'not full independence' argument goes, it's still better than what we have. I admit that it would not be ideal to have no control over interest rates etc but we could look at alternatives if need be. My own preference would be a temporary currency union until we come up with our own currency however I don't think that would really be feasible to get ukg approval in that case.

[Ad Lib]

The most frustrating thing about the currency union debacle is that it was all the making of the SNP. For a party whose raison d'etre is independence they have been spectacularly poor at working through the mechanics and basic structure of what future relationships with the UK and the wider world would look like.

On the currency, we wouldn't have this critical public weakness in the Yes case were it not for the fact that they have stubbornly refused to articulate their second preference. All they had to say was one of two things:

1. We consider the transaction costs of an independent currency to be more than offset by the fiscal and monetary freedom it affords us, therefore recommend continuing to use the pound, a freely tradeable currency, unilaterally, until a better alternative can be established in the interests of Scotland.

Or alternatively:

2. In the absence of a currency union we think it undesirable for an independent Scotland to be constrained by the fiscal policy of a foreign government, and as such we think an independent currency, initially pegged to the pound at parity, offers us the best alternative flexibility, outweighing the transactional costs associated with our trade with the rest of the UK.

Instead they lied about it being "Scotland's pound", accused the Treasury of "bullying" and "trying to deny the sovereignty of the Scottish people" (when in fact forcing another country to share a currency with you is precisely that and refusing to let another country force you to is the complete opposite). In doing so, they backed themselves into a corner where it is pretty much too late to back down and they're left relying on an unnamed, misinformed English junior defence minister's off the record remarks to The Guardian who said a deal would be done that would involve Trident staying in Sccotland, as the basis for believing their currency union will happen. Not disclosing a plan B is now more harmful to a Yes vote than admitting that plan A might not happen.

It's the same story with the EU. Had the SNP not steadfastly insisted that Scotland would be independent by March 2016, there would have been no time pressures on EU accession. Scotland could have stayed within the UK until the negotiations were concluded and the agreement ready to be implemented. All its rights and duties would have been protected, and it would have the full flexibility to stare down any attempts to give it detrimental terms of membership, knowing time was not of the essence.

But no. The SNP were determined that they should be in Government when Scotland becomes independent so that they get all the credit and they're in charge of all the Scottish side of the negotiations. The consequence of this is that the preservation of EU law's territorial effect or alternatively the conditions in which Scotland enjoys the benefit of being a part of the EU, are flung open to time-sensitive negotiations where several parties have a veto power and can threaten to use it unless certain concessions are made by us.

[sergie's no1 fan]

http://www.newsnetscotland.com/index.php/scottish-politics/6549-alastair-darling-backs-currency-union-between-scotland-and-ruk

[git-intae-thum]

It was this I was thinking of.

Again, this might be a stupid question, but on what grounds can the rUK make an iScotland take on a proportion of the UK debt?

That is a good point.

If its presumptious of the Scottish govt to tell the rUK that there will be a currency union. It is surely similar for the rUK to expect Scotland to take any of the UK's debt.

[Ad Lib]

Again, this might be a stupid question, but on what grounds can the rUK make an iScotland take on a proportion of the UK debt?

Because debt is subject to the negotiations where assets are also subdivided. If Scotland refuses to take any of the debt, the UK could quite legitimately turn around and refuse to let them have any of, say, the Bank of England's assets. If you look at Ireland's secession, it came with an arrangement to make fixed payments for a number of years to the UK Treasury. Their subsequent refusal to pay came with trade sanctions.

In the modern context, there is also a realpolitik behind it all. If Scotland refuses to take a fair share of the debt it jointly racked up with the rest of the UK, the UK has the power to veto its membership of, among other things, the European Union. This is the modern day equivalent of trade sanctions, as such belligerence by an independent Scotland would be frowned upon by its nearest and biggest trading block. If it was not permitted to join the EU, and the UK vetoed it, they would also be unable to secure a free trade agreement with the EU. This would mean tariffs to its main export and import market and an epic fail.

[Ad Lib]

That is a good point.

If its presumptious of the Scottish govt to tell the rUK that there will be a currency union. It is surely similar for the rUK to expect Scotland to take any of the UK's debt.

No, this is nonsense.

Assets and liabilities, in international law, fall to be apportioned equitably in accordance with specific principles, subject to any agreement beyond that agreeing to deviate from them.

Monetary arrangements are not governed by principles of international law. No government can force another government to share a currency.

[ayrmad]

It is dependant on agreement from the other side though, and Salmond has no plan B. However like a CU is, to have no contingency plan is fucking mental.

They've got contingency plans, always have had them, if YES win they'll have proven that their choice of sticking with plan A was correct, if NO win Salmond & Co will be to blame for the defeat, I'm quite happy to wait and see if they were right or wrong.

[joozy]

A good analysis although apart from your own opinion that it would be 'mildly irritating' and not scary it still sounds to me that it would be a good idea for rUK.

As far as the 'not full independence' argument goes, it's still better than what we have. I admit that it would not be ideal to have no control over interest rates etc but we could look at alternatives if need be. My own preference would be a temporary currency union until we come up with our own currency however I don't think that would really be feasible to get ukg approval in that case.

The reason why I don't think it would be a good idea for the rUK is simple, when you conduct scenario analysis you need to look at the possible outcomes based on a range of different scenarios. In a 'no currency union' environment, then you may have some relatively minor additional costs/headwinds for the rest of the UK. In the 'currency union' environment, while you may avoid these minor costs, you risk a far greater disruption in an adverse scenario (which could be caused by external or internal factors).

This is why if I lived in the rUK, I would definitely not want to enter currency union with an independent Scotland.

[Tonsilitis]

While in many ways it's quite admirable that some of the yes supporters here are trying to stick to the "of course, there will be currency union....it's in everyone's interest" line, it's simply not the case.

For starters, with regards to the political dimension. All three major UK parties have explicitly stated that there will not be currency union. They have been very vocal on this matter, it would require a volte face of epic proportions - difficult to see with a forthcoming general election and a rUK electorate who probably may not be feeling all that much goodwill towards the country that has just left.

To some degree, I agree. It will take a massive about turn but the economic consequences are dire and understated by you below

Economically, it isn't good for the rest of the UK either. The additional transaction costs incurred, while mildly irritating, will have markedly smaller proportionate effect on rUK than an independent Scotland.

Possibly but as you say, transaction costs are more an irritation than any principal reason for or against CU

It would place rUK on the hook for any future fiscal difficulties Scotland may get into (whether through excess spending or weakening tax revenues) or problems with financial institutions.

Scotland with its natural resources will probably warrant an AAA rating. Further, we have proven ourselves far more able to balance our (albeit restricted) budget than any UK chancellor. rUK is much more likely to have difficulties than us. As for the financial institutions, whilst nominally Scottish, they are primarily based in and operate from London. RBS and HBoS essentially belong to the UK taxpayer so they would require to be supported UK wide anyway. Outfits like Standard Life provide pensions all over the UK and for that reason would not be allowed to fail on a British basis CU or no. Why do you think the British taxpayer helped bail out the Irish Banks?

The economic framework that would have to be created to support currency union would raise the question of whether Scotland was truly independent anyway! If there is no allowance for fiscal transfers, then it would make it far more difficult for Scotland to absorb any shocks through either FX or interest rate adjustments. In a note this week, Societe Generale said "the Yes Camp is deluding itself if it believes it can both retain the pound but also become master of its own fiscal affairs.... the chances of an independent Scotland being able to retain the pound (in a currency union) are slim".

Scotland would be as independent as the Societe Generale's home country. Are you saying Germany, France and Italy are not independent because they share a currency? Is there provision for fiscal transfers in the way you imply between these countries?

On the trade balance and balance of payments issue. Morgan Stanley estimates that the trade balance for the rest of the UK would worsen by around 11%....scary? Not really, in absolute terms it would be a worsening of around £3.5bn – or less than 1% of GDP. Brian Ashcroft (Economics Prof at Strathclyde) comes up with a similar figure for the balance of payments. The £40bn often cited by the yes campaign fails to account for remittances, the Scottish deficit with rUK on trade in goods and services etc. Any negative trade implications from independence would likely prove immaterial for the overall performance of the rUK economy. You would likely see some weakness in Sterling as a consequence of the uncertainty (but not the apocalyptic collapse predicted by some of the more hysterical on this thread) and this would probably be fairly well received by the UK government. Sterling's strength over the past year or so has not really been all that beneficial to UK industry.

The UK is ranked very poorly - something like 188th out of 192 sovereign countries - in terms of its current account deficit. It relies hugely on the financial sector to boost that and the financial sector needs a reasonably stable £. Anything that forces the value down is disproportionately detrimental. Further your value of the impact in absolute terms of Scottish exports is at varience with other figures, the Oil and Gas sector, for example had exports worth circa £27bn in 2013. Further the deficit with he rest of the UK you cite is skewed because of the way the UK accounts. The UK Continental Shelf is treated as an autonomous area so that oil flowing into Grangemouth is classified as an import from the rest of the UK. The Scottish Government commissioned a report which shows that adjusting the figures to include a geographical share of oil, Scotland moves into trade surplus. So sorry, but I do not accept the slight impact on the rUK balance of trade you suggest and £40bn is probably nearer the mark. Further, factoring in oil shows Scotland has a current account surplus. See this paper:

http://www.scottish.parliament.uk/ResearchBriefingsAndFactsheets/S4/SB_14-07.pdf

Finally, there is the question of ownership. Scotland already owns circa 9% of the Bank of England. Its another asset to consider the destination of in the divi up and if we can't use it, that will have an impact on the level of debt we accept from rUK. I think there will be horse trading and currency union will be part of that as will Trident. It will not be called CU to save political face but anything else is economic suicide for rUK.

[Baxter Parp]

It's not for Scotland to tell what will be a foreign country what is best for them. That is supreme arrogance.

The transaction costs for UK business issue is a total red herring as they will be passed on to the consumer - the Scottish consumer.

And what about the transaction costs for Scottish businesses?

[welshbairn]

...you risk a far greater disruption in an adverse scenario (which could be caused by external or internal factors).

Like what?

[Homer Thompson]

Because debt is subject to the negotiations where assets are also subdivided. If Scotland refuses to take any of the debt, the UK could quite legitimately turn around and refuse to let them have any of, say, the Bank of England's assets. If you look at Ireland's secession, it came with an arrangement to make fixed payments for a number of years to the UK Treasury. Their subsequent refusal to pay came with trade sanctions.

In the modern context, there is also a realpolitik behind it all. If Scotland refuses to take a fair share of the debt it jointly racked up with the rest of the UK, the UK has the power to veto its membership of, among other things, the European Union. This is the modern day equivalent of trade sanctions, as such belligerence by an independent Scotland would be frowned upon by its nearest and biggest trading block. If it was not permitted to join the EU, and the UK vetoed it, they would also be unable to secure a free trade agreement with the EU. This would mean tariffs to its main export and import market and an epic fail.

Fair enough.

What are the assets, then, that are up for negotiation?

[Baxter Parp]

Like what?

He doesn't know.