A New Scottish Currency could be disastrous for the rest of the UK
It is estimated that it will cost the Scottish Government around £40 billion pounds to set up a new currency and it is likely that some or all of the money will have to be borrowed. This would mean that an independent Scotland would be starting out in debt, however, this isn’t quite so alarming as Westminster would have us believe. Most people will borrow money to buy their first home and there are many businesses who borrow money to start up, so there is nothing unusual or unique about a country borrowing money, and in comparison £40 billion would be a drop in the ocean compared to the 1.7 Trillion pounds worth of debt currently owed by the UK government.
So why does the Bank of England want an Independent Scotland to continue using the Pound Sterling?
A monetary union was discussed in 2014 and despite claims from the better together camp that an Independent Scotland would not be allowed to use the pound, the Bank of England stated that Scotland could continue to use the pound following independence. But to the dismay of many independence supporters, the announcement by the Bank of England’s Governor Mark Carney was quickly suppressed by the UK government in the media, as it was felt that news of this would only stimulate more support for Scottish Independence.
The reason why the Bank of England had such a change of heart was because it realised that it stood to lose billions of pounds of assets overnight, if an independent Scotland launched its own Scottish currency.Read more about “Backing Assets” here
Once Scotland starts printing and circulating its new currency the Bank of England will lose over £17 billion pounds worth of assets. These are the assets held by them on behalf of the Scottish clearing banks who currently print Scottish Sterling. It stands to reason that the current Scottish notes will become obsolete and be withdrawn from circulation, so the assets currently held by the Bank of England as guarantees will also diminish as the notes are bought back by the clearing banks. This will give the Scottish banks the added advantage of being able to clear funds that could be invested elsewhere
The advantages of a new Scottish currency would be to give an Independent Scotland the power to set its own interest rates and to allow its currency value to fluctuate.
With money becoming available to the Scottish clearing banks it would make sense for them to re-invest it, and I wouldn’t be surprised if some of those banks chose to offer customers an incentive to move their mortgages and secured loans from banks south of the border to them. This is nothing new as borrowers already have the option to switch mortgage providers or move their accounts to different banks or building societies, we even have the option to transfer our loans and credit card balances, and as there is very little negative equity in Scotland the risk to the banks would be minimal.
Will a new currency affect the Scottish financial services sector?
The Scottish financial services sector is worth over £1 trillion pounds and in an independent Scotland much of that will remain, yes there may be one or two companies who will transfer assets elsewhere as we have seen with brexit, but on the whole there is nothing to suggest that these companies will suddenly up roots and head south just to prop up a failing UK economy. We have already seen investment in Scotland rising over the past few months, this is partially due to forward thinking companies who see the advantages of being involved in an independent Scotland.
In 2017 Scotland set a new record for Foreign Direct Investment (FDI) projects for the third consecutive year, this was an increase of 7% compared to 2016.Read the full briefing here
There is a lot of potential for Scottish companies to work with countries like China, particularly with energy, technology, engineering, financial services, financial investment, food and drink, life sciences, tourism, textiles and education. However, under the devolution settlement, international trade is reserved to Westminster. So taking advantage of any new overseas marketplace is constantly being hampered by the UK governments control of overseas trade negotiations.
In 2017 Forty new investors chose to locate in Scotland, creating and safeguarding 8516 jobs, of which 3362 were high value, with salaries around 20 per cent higher than the Scottish average.Scotland benefits from foreign investment
Once Scotland becomes independent then all matters regarding not only international trade, but also borrowing and foreign investment will become a matter for the Scottish government, and once that happens the door will be open to allow companies from overseas to freely invest more of their money in Scotland.
Could the Bank of England work with an Independent Scotland for the mutual benefit of both nations?
The Bank of England was nationalised in 1946, so is wholly owned by the UK Government and it is the UK government that is objecting to a new Scottish currency. Why? because they know that it will favour Scotland and be detrimental to the UK’s current financial position. However, if the UK government were to stop being spiteful and decide to allow the Bank of England to work with Scotland then it could be advantageous to both countries.
A Memorandum of Understanding could be set up between the Bank of England and the new Scottish Bank in the same way that the Bank of England has already done with many overseas authorities. These MoU’s make it easier to conduct trade and share information between international organisations.
An agreed exchange rate of 1:1 could be set up for an interim period to allow for the introduction and smooth transition between Sterling and the Scottish pound, this would help to stabilise the English pound during the transition period as the people of Scotland would not be in such a rush to transfer their mortgages and loans to Scottish companies, it would also allow finance companies south of the border time to negotiate deals with their Scottish counterparts.
It really does make sense for the two banks to work together and allow a smooth seamless transition. Any failure to do so would result in the Bank of England leaving the door open for more foreign investment in Scotland, and if that happens then the only ones who will lose out will be the rest of the UK….