The National Institute of Economic and Social Research has issued a warning that Scotland’s currency ‘plan B’ to unilaterally use the pound will “fail” in its first year of independence.
Scotland’s first minister Alex Salmond believes sharing the pound in a formal currency union is the “best option” for both Scotland and the rest of the UK but has recently hinted that if Westminster will not agree to his plan then Scotland can use sterling on a unilateral basis, while walking away from its share of UK debt at the same time.
However leading think tank NIESR argues that this alternative plan for Scotland’s currency is not sustainable even as a short-term solution and will likely result in an “unprecedented degree of austerity.”
It says: “If Sterlingisation is combined repudiating Scotland’s fair share of UK debt we expect this regime would fail within a year. Leaving aside that taxpayers in the rest of the UK would each face an additional £5,900 in debt, we believe that this ‘opportunistic’ behaviour would be seen as a default.
“As a result Scotland would be outside of the EU and capital markets leading to unprecedented degree of austerity and the eventual a collapse in the currency regime. Scotland would be better off introducing its own currency without losing its foreign exchange reserves first.”
The failure of sterlingisation would also mean that an independent Scotland had to set up its own brand new currency, something which the Scottish Government has not prepared for ahead of the referendum to be held in two days time.
By contrast NIESR describes establishing a brand new currency before the referendum as “the sensible option” for an independent Scotland, that could save billions. It adds: “Introducing a new Scottish currency has always been the most sensible option. We would recommend this is carried out before losing 7 billion pounds of foreign exchange reserves rather than after.”
As NIESR highlights, Scotland’s refusal to pay its share of UK debt is a not technically a default because the UK government has already pledged to honour its debt. But it also points out that the “opportunistic” nature of the arguments for Scotland to walk away from its debt and the unfair burden this will put on UK taxpayers means that markets will likely perceive it as a default nevertheless.
“If Scotland refused to repay the UK for its fair share of debt how would this interpreted? Clearly the debt cannot be considered ‘odious’ or ‘illegitimate’. Neither can it be argued that Scotland would be doing this because it is impossible to repay the debt. It would simply be because the UK chooses not to enter into a formal monetary union,” it says.
“Moreover, a proportion of the UK debt is of course held by Scottish adults in their pension assets. If an independent Scotland refused to pay its share fair share this would simply add on average up to £5,300 to the debt of all taxpayers in the rest of the UK who have no say in the referendum. We are not convinced that fair minded Scots or citizens of the rest of the UK would accept this as reasonable. While this may technically not be a default, it strikes us as ‘opportunistic’ and therefore is likely to be interpreted as a default.”