| Topic: | Re:Re:Re:Re:Re:Re:Re:Currency Union | |
| Posted by: | Andrew Cumming | |
| Date/Time: | 03/09/14 10:24:00 |
| Heres the expanded opinion piece from the FT A currency union would be best for all of Britain By Anton Muscatelli The rest of the UK would benefit more than an independent Scotland, writes Anton Muscatelli The Deputy First Minister has welcomed reports that a pro-union government minister believes there would be a currency union between an independent Scotland and the rest of the UK. The minister, who The Guardian reports is at the heart of the pro-union campaign, told the newspaper that while saying no to a currency union is a vital part of the no campaign, everything would change if there were a yes vote. Sturgeon said the reports gave a big boost to the Yes campaign. See PA story POLITICS Currency. Photo credit should read: Danny Lawson/PA Wire©PA If Scotland votes for independence what will be the scenario for its economy? The government in London, supported by the Labour opposition, has ruled out a sterling currency area for an independent Scotland and the rest of the UK. But is this really the most sensible economic option for both parts of Britain post-independence or just a negotiation stance driven by politics? Look at the facts and I would argue (as I did recently in evidence to the Scottish parliament) that a successful currency union would actually be in the interest of both sides – and especially the rest of the UK. Undoubtedly there are considerable costs to abandoning the sterling currency union. Additional transaction costs of conducting trade from sterling to a separate Scottish currency might amount to £500m-£2.5bn a year for companies south of the border. The figure depends on whether one takes an estimate of annual transaction costs of 0.1 per cent of gross domestic product or the 0.5 per cent cited by Mark Carney, governor of the Bank of England. These are substantial costs, and would shave a substantial proportion from economic growth for years. To this we have to add unquantifiable costs such as the deterrent effect which abandoning the sterling union will have on companies operating across borders; a business from the rest of the UK wishing to invest in Scotland could be deterred by the exchange rate risk. The same would also apply for Scottish companies contemplating an investment in England. This is because the currency risks from trade can be hedged using foreign exchange rate markets but those longer-term currency risks linked to investments are difficult to hedge. In addition, trade flows would decline with economic losses to the detriment of consumers in both countries. Although estimates vary, statistically robust models of trade flows suggest that currency unions can add 40 per cent to trade between partners. About 40 per cent of rest of UK trade to Scotland is worth about £24bn on an export basis, and £19bn on an import basis using 2012 experimental statistics from the Scottish government. These are not trivial numbers. In 2012 the UK as a whole exported £150bn of goods and services to and imported £205bn from the EU. Even if some of this trade is diverted to other countries rather than destroyed that adjustment process will take time and will be painful to businesses and consumers. James Mackintosh, investment editor, looks to the British history of debasement and devaluation and wonders if a Scottish groat or bawbee would be any worse. Critics of a currency union have drawn parallels with the eurozone, and its perceived failures. A sterling area would operate differently and could overcome the flaws present in the European Monetary Union. First, fiscal rules, based on a symmetric budget deficit rule and a debt sustainability rule, which were never implemented properly in the eurozone could be adopted. Within this an independent Scotland and the UK would have the freedom to pursue different taxation and spending policies. Second, the euro was introduced in Europe where “border effects” (trade across similar distances within borders is much greater than across borders) were still significant, and the integration of goods, capital and labour markets and regulatory frameworks was incomplete. The opposite applies between Scotland and the rest of the UK, where highly integrated value chains and “border effects” would not develop quickly if a currency union was maintained. Of course there are alternatives to a currency union. However, we should not pretend these are without costs. An informal monetary union whereby Scotland adopted sterling should be concerning to the UK. Scotland is not to the remainder of the UK as Panama (which informally uses the dollar) is to the US: would the UK really wish 10 per cent of its money supply used informally on its doorstep? A separate Scottish currency would be viable, but we know countries linked by flexible exchange rates are not insulated from each other’s macroeconomic risks, especially where there are close trade and capital flow links. But the most damaging prospect to the rest of the UK from rejecting a sterling currency union is what it will do to its own trade and business activity. Whatever the political tactics involved, it would be tantamount to economic vandalism. |