BLBG:U.K. Scorns Pound for Independent Scotland Citing Euro Woes
The British government closed the door to a formal agreement with Scotland for its continued use of the pound if it votes to become independent next year, citing the tumult in the 17-nation euro region during the debt crisis.
A study prepared by the Treasury in London said an official currency union between Scotland and the rest of the U.K. is unlikely to work well without political union. U.K. Chancellor of the Exchequer George Osborne and Chief Secretary to the Treasury Danny Alexander are scheduled to make their case to business leaders in Glasgow later today.
“The economic rationale for the U.K. to agree to enter a formal sterling union with a separate state is not clear,” the Treasury said in the report. “The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties.”
Osborne and Alexander’s case for Scotland to maintain the monetary status quo is backed by politics as both the coalition parties, Osborne’s Conservatives and Alexander’s Liberal Democrats, plus the main opposition Labour Party, are in favor of preserving the U.K. formed in 1707. The Scottish National Party, which forms the government in Edinburgh, is campaigning for independence in a referendum due in the fall of 2014.
The matter of sterling has raised emotions across the U.K. ever since then Prime Minister Harold Wilson told voters that the value of the pound in their pocket hadn’t changed following devaluation in 1967. Successive governments have taken steps to keep the U.K. out of the euro ever since the common currency was introduced in 1999.
‘Fundamental Asymmetry’
Entering into a sterling union would bring a “fundamental asymmetry in the degree of exposure to fiscal and financial risk” between both an independent Scotland and the remainder of the U.K., according to the report.
A shared currency union is the best option for Scotland and the rest of the U.K., the Scottish government said in an e- mailed statement. It was responding to a report by the Fiscal Commission it set up which recommended earlier this year that Scotland should keep the British currency.
“The sharing of the pound between an independent Scotland and the rest of the U.K. is the common-sense position supported by the Fiscal Commission,” Scottish Finance Secretary John Swinney said in the statement. “A sterling zone is also in the overwhelming economic interests of the rest of the U.K. every bit as much as it is in the interests of Scotland.”
The Bank (RBS) of England could remain as lender of last resort and his government could sign a fiscal stability pact to stop a future Scottish government getting too indebted, Scottish First Minister Alex Salmond said last year. Swinney said that he wants financial regulation in an independent Scotland to be controlled from London.
Four Choices
The Treasury outlines four currency choices for Scotland outside of the current U.K. Having dismissed a currency union, it said that Scotland could use sterling without any formal agreement, leaving authorities in Edinburgh without control over monetary policy.
An independent Scotland might also find that, as a member of the European Union, it would have to adopt the euro unless it is able to negotiate an opt-out, the Treasury said. The final option would be the creation of a new currency which, according to the report, may increase transaction costs, increase volatility of its exchange rate and increase flows out of Scotland toward bigger and more established currencies.
“I think it is unlikely the rest of the U.K. would agree to, or make work, a euro-style currency zone,” Osborne said on the BBC’s “Today” radio program. “The best arrangement for Scotland and for the rest of the U.K. is the current one.”
To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
