Was the Currency Union refusal by the UK a bluff?

As I said in my introduction the Currency Union proposal was nothing more than a political device rather than a serious proposal.

My own view was that when the UK made it clear that the CU was never going to fly then the Yes campaign would be holed below the water. To this day I still believe that this was the case and currency remains the soft underbelly of the nationalist movement.

The basis of the CU was set out in the Fiscal Commission Working Group’s report into currency for an independent Scotland. It makes the case that the best economic outcome for an independent Scotland would be a CU with the rest of the UK. I couldn’t agree more with those conclusions, that’s why I’m in favour of the Union as it is the safest way of guaranteeing that we keep the Pound.

However the concept of the CU was blown apart by Osborne's sermon on the pound and quickly followed up by Danny Alexander and Ed Balls repeating the same sentiment: the people of the remaining UK (rUK) would not tolerate a CU with an independent Scotland.

This should not have come as a surprise to anyone who has followed UK politics. The UK public and parties were overwhelmingly against the Euro Currency Union largely on economic and sovereignty grounds. Why then would they suddenly be interested in sharing their economic and political sovereignty with a country that had just left the Union?

More importantly why would the rUK want to give Scotland any say over UK borrowing levels (which would be required in a functioning CU and public spending)? Why would rUK want to take on the risk of an independent Scotland placing the Pound under threat by their independent actions? Witness the effect on the Euro by the actions in Greece.

To the rUK a CU would be risky with very little upside, it would be hugely unpopular with the rUK public (hence why all three parties distanced themselves from it), it would threaten their own financial stability and threaten their credit rating, pushing up interest rates (as Moody’s concluded).

The question then would be why would anyone in their right mind think rUK would want a CU with Scotland?

Such a startlingly obvious refusal by the UK required an emotional and aggressive response from the SNP else their cause was lost even before they started.

That’s what we got.

Salmond launched a scathing attack on the chancellor and his anger betrayed the difficult position he was in.

The argument started with the “George tax” a very weak line that the rUK would be all for a CU because it would add exchange costs to rUK business selling into Scotland.

As usual a bit of thought was only required to take this argument apart.

Firstly the transaction costs argument would go both ways and have a much greater impact on Scotland given the relative size of our economies and the level of Scottish exports to rUK. Secondly if transaction costs were a compelling argument for a currency union then the UK would have joined the Euro a long time ago, indeed it would argue that a Euro-USD single currency would be demanded by business across the EU and United States.

The fact is demonstrably transaction costs do not trump the very real structural costs and risks of a currency union. This argument held no water.

Finally the most likely Plan B would have been a pegged Scottish Currency, which would not create any transaction costs for rUK business. This was a very empty threat.

The next line to follow was a dog whistle attempt to argue that if there was no CU then an independent Scotland would not it’s fair share of debt. Now here, other than one angry slip by Salmond, the Yes camp were at pains never to actually say they wouldn't take debt, just simply that they wanted a fair share of financial assets alongside debt and hoped that their supporters would read financial assets as the currency.

After relentless questioning Salmond finally conceded on the point that the pound was not a financial asset late in the campaign but the dog whistle had done its job.

Whether Scotland could or could not have refused a fair share of debt is another matter and will be dealt with later. Suffice to say that there was no credible option not to take a share of debt on a legal separation and this was yet another bluff by the Yes side.

So finally we turn to the main argument from the Yes side for a CU. Without oil and Scottish exports of oil backing up Sterling then the Pound would be shredded on the financial markets therefore refusing a currency union would be “bonkers”?

Anyone who actually read Osborne’s sermon on the pound would see that this point was explicitly dealt with at the time.

“The Scottish government have asserted that the rest of the UK would want to make a currency union work, because Scottish exports – especially oil – make a substantial contribution to the UK’s balance of payments.

As it happens independent experts think the effect would be broadly neutral, but let’s put that aside for now.

According to the Scottish government’s logic, if the value of oil exports went up, contributing more to the UK balance of payments, then we would have an even greater interest in making a currency union work.

But the opposite is the case.

Because if Scottish oil did make such a substantial contribution to the UK’s balance of payments, then it would be artificially increasing the value of the pound – and that would be to the detriment of exporters in other parts of the UK.

That’s exactly what many members of the euro have discovered over recent years.

That’s an argument against currency union, not for it.”

So if oil was, as the Yes campaign were arguing, propping up the Pound then it was artificially choking off rUK exporters and therefore the alleged devaluation of the Pound following independence would be a positive benefit for rUK. That therefore gives the Yes campaign no real substantive economic argument in favour of a CU if their proposition was correct.

However events since the referendum have enabled a real work demonstration that the Yes camp’s “shredding” assertion was simply wrong.

Since the referendum the price of oil has collapsed.

If the “shredding” proposition was true this would give us a proxy for Scotland leaving the Sterling zone and taking all it’s oil out of the balance sheet and the balance of payments. Whilst this wouldn’t have shredded the Pound it would have taken a huge toll on the level of the Pound, if the Yes camp’s proposition was correct.

Unfortunately for the yes side the Pound reached a 7 year high over this period. So far from shredding the Pound the collapse in oil actually took place at a time when the Pound strengthened. 

Demonstrably the Yes side’s final claim on a currency union was just plainly untrue.

The Currency Union was a bluff, but it was a bluff on the part of the Yes campaign. It made no political and economic sense and in the end was just demonstrably untrue.

Currency was and remains the soft underbelly of the independence movement and only the UK joining the Euro will resolve that issue.