Tuesday, 19 August 2014

Procurement in an Independent Scotland (part 2)

By Scott Farrance

As mentioned in Part 1, Scotland must also consider its Currency options if it were to go Independent. There is a lot of uncertainty over which currency would be used in an Independent Scotland, and in which manner. How would Procurement be affected between Scotland and the rest of the UK if no-one knows which currency Scotland will use?

The Yes campaign have said they will enter in a Currency Union with the rest of the UK, but the 3 main political parties in Westminster have said this will not happen. Scotland could of course still use the pound without the agreement, but this has a whole serious of issues itself.

If Scotland continued to use the pound without agreement the of Westminster/BoE, it would be called “Sterlingisation”, which has never been done before, but “Dollarisation” is quite common in countries such as Panama and El Salvador, so there is a precedent of this concept happening. As said, any country can use any currency it wants, currencies are globally tradable today, Westminster could not stop Scotland using the Pound, even without a Currency Union.

However, a currency is a reflection of your economy. When your economy is booming, interest rates go up so people buy it because it pays more in interest, and that strengthens the currency, which means exports are more expensive, in turn shrinking your economy and the balance is restored. This is the basic function of currency, determining what your currency is worth in comparisons to others. If Scotland were to leave the UK and not have a Currency Union in place, they would have no control over interest rates and their own economy would not be taken into account when interest rates are set by the BoE for the Pound. What the BoE deems a positive decision for the rest of the UK could have the complete opposite effect on an Independent Scotland.

Being in a Currency Union (official or not) also means Scotland would lose the advantages of being a small country; i.e. if it launched its own currency it would probably start weak so exports would be cheap and would rise quickly, and whenever a recession occurred, the ‘Salmond’ (or whatever they called the new currency) would fall and they’d be able to sell more. Problems with this are a) the currency will be more volatile which makes planning difficult, b) it will not have the same trust as the £ which means borrowing costs will be higher and c) transaction/conversion costs mean it’ll cost more to trade with England, where as I said previously, 70% of our trade goes.

A Currency or Monetary Union (The Euro) would be the best bet for Scotland, which is why they want it, but this will not happen. Scotland’s economy and banking sector is too big for England to take on without increasing risk. Why would anyone underwrite another country’s economy that could crash again and cause massive financial headaches? The BoE can afford to have monetary unions with the Isle of Man and Channel Islands, as they are tiny and could be bailed out; Scotland is a different case (9% of GDP is in financial sector).

It should be noted that even with a Currency Union, you still have the problems discussed above. A prime example of this was shown in the Euro crisis – Spain was deep in recession and Germany was booming; previously the Peseta would have fallen and exports increased, balancing the economy out, but this never happened as they were forced to trade on the Euro, a currency too strong for Spain. And this is still the case; youth unemployment is over 50%. The result of this is that Spain has to ‘internally devalue’, basically massive cuts to spending. This incompatibility has been documented since the 1950s – it was ignored to form the Euro, and look what happened to Spain. Doing the same in the UK may have the same effect on Scotland.

Will independence be Scotland’s biggest own goal since Tom Boyd vs. Brazil at France 98, or will it be a sublime stroke of genius, the likes not seen since Archie Gemmill vs. Holland in 1978? Only time will tell!

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