Growth Commission: Use Sterling without a central bank

There are reports that the Scottish Government’s Growth Commission, which will report next Friday, will recommend that an independent Scotland uses sterling without a central bank until they can set up their own currency.

This should ring alarm bells. Politically, the only advocates of the abolition of central banks are right wingers like the Institute of Economic Affairs, and Libertarians in the United States. Reports earlier this year suggested that the Growth Commission would push independence proposals in a right wing direction, and we are now seeing the fruits of that endeavour.

For the Scottish financial system, no central bank means no lender of last resort. This could cause chaos in the financial system, and a potential credit crunch as liquidity dries up.

This means whatever monetary decisions are taken by the Bank of England would have an equal impact here - even if they are unsuitable for the Scotland. This could wreak havoc on the Scottish economy; for example, by setting the price of exports too high. Currency unions without fiscal transfers (i.e. government spending) have proved disastrous in the Eurozone. Using another country's currency, or pegging your currency on a on-to-one basis, is even more foolish. 

This has even more serious effects, because it would also mean Scottish Government debts are denominated in another country’s currency - and that means that all the arguments about austerity have to go out the window. If your debts are denominated in another currency, the only way to pay them is through tax rises or spending cuts. The Scottish deficit is considerable at 8.3%, or £13.3 billion. Unlike Britain, whose debts are denominated in pounds sterling, default would be a real possibility for Scotland.

And the case of Argentina, which pegged its currency to the dollar in the 1990s, suggests that world markets won’t stop at demanding austerity - they’ll want privatisation and restructuring to create an ‘investor friendly’ economy.

Scotland could also take the Irish approach and cut taxes to record lows to entice transnational corporations and rich individuals. The leader of the SNP in the commons, Ian Blackford MP, has already made clear that he wants to abolish the capital gains tax levied on financial assets. Reports in the Herald indicate that the Growth Commission will also suggest that the government consider offering ‘golden visas’ to the world’s rich.

Responding to the reports, Scottish Labour leader Richard Leonard said:

“Scotland needs real and radical change – looking forwards not back.

“The economic and social transformation Scotland urgently needs will not come from another referendum on leaving the UK – on which the sovereign will of the Scottish people has been clearly expressed.

“It will come from radical Labour governments tackling poverty and inequality, extending public ownership and redistributing power; especially economic power from the few to the many.

“The idea that a separate Scotland would seek to use the pound without a central bank behind it is a recipe for instability and is the economics of dereliction. We would give up our say over interest rate policy, exchange rate policy and inflation.

“Scotland does not need, and the people of Scotland do not want, this tired argument again. The SNP should recognise that, and focus instead on jobs, schools and hospitals.”

Note: This article was amended to make clear the formal distinction between using sterling informally and pegging your currency on a one-to-one basis. 

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