Scottish Independence - Yes or No - That is the Question
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Scottish Independence – Yes or No – That is the Question
Eight questions on the future of Scotland’s financial and monetary arrangements
Edinburgh, 9 June 2014
Prof. Dr. Wilhelm Nölling
Former Member of the Governing Council, Deutsche Bundesbank
1. What are the overall lessons for Scotland of the European sovereign debt crisis?
I believe there are four overall lessons, in no particular order of priority.
a) Overall political stability is of crucial significance for Scotland’s future as a possibly independent state.
Scotland should have a set of well-integrated institutions, a more or less united people, and trustworthy,
reliable, experienced and capable politicians and administrators. As it is written in the Bible, ‘A house
divided cannot stand.’
b) The state must remain in control of its public budgets, planned not only for one year ahead, but also
for a medium-term period of four years.
c) The state must have effective infrastructure, as the basis of a modern, internationally competitive
economy.
d) A well-functioning system of banks is required to ensure smooth and reliable flows of credits and
payments. In addition, a lender of last resort, a central bank which conducts monetary policy, preferably
independently and without regard to geographical or political ‘wishes’, needs to be in place as the
cornerstone of the system. Such a system is the most important basic institution of a market-oriented
economy. I must remind you that, in the euro area, the European Central Bank has assumed policy
leadership to become not only the lender of last resort but also the saviour of the entire system.
2. What are the general implications for Scotland of the attempts over 200 years to form
monetary unions in Europe and establish new currencies across the continent?
Sterling has been the common currency of the UK since England and Scotland united in 1707, when it
had already been in existence for about 500 years. It seems to me that it served the monetary needs of
the nation quite well over that time. One would have to mention the more recent episode of avoiding
the trap of joining the euro. As a result, the sterling zone of the UK is one of the most politically,
economically and financially integrated areas of the world.
To my knowledge, in the pre-euro period, no nation on earth of any importance has ever attempted to
intermingle two or more currencies of still-sovereign nations in the way the euro was constructed. Given
the dreadful performance of the euro, that is not a course of action that anyone should recommend.
The battle cry must be ‘One nation – One currency’.
1
Official Monetary and Financial Institutions Forum, One Lyric Square, London W6 0NB
Tel: +44 (0)20 3008 5262 Fax: +44 (0)20 3008 8426 www.omfif.org
Registered in England and Wales 70325333. The UK government says an independent Scotland would have to give up the currency link
with sterling and establish an independent currency. Is this a bluff? Or would an independent
Scotland necessarily have to cut its monetary links as well?
Whether or not the interested parties are bluffing is difficult to say. But the reality is that, in the case of
Scotland seceding from the rest of the UK, the newly-created state would have only two currency
options. It would either have to start a currency of its own. Or it could keep the pound sterling (of
course with the consent of Westminster) until the pound could be abandoned in favour of the euro.
To proclaim ‘independence reached’ and yet to keep the pound is, to my understanding, a contradiction
in terms.
A common central bank serving Scotland and the rest of the UK could not be achieved without
Westminster constantly meddling in Scottish financial affairs – and eventually accepting the obligations
of a transfer union from the south of the former UK to the north.
Establishing a new currency would not necessarily preclude certain links with other states or currencies.
Across Europe we can learn from an assortment of state experiences. Norway and Switzerland have
their own currencies, separate from the EU. Denmark and Sweden are EU members but have been able
to stay out of the euro area, keeping their own money. I have never heard that any of these countries
have shown great regrets.
Additionally, we see nations that were previously part of the Soviet bloc like the Czech Republic and
particularly Poland, which shy away from any commitment to join the euro, whether they fulfil the
entrance conditions or not.
4. What challenges would Scotland face in attempting to join the euro?
Becoming a member of the euro is contingent on membership of the EU. It is, however, not entirely
clear whether or not an independent Scotland could or would remain a member of the EU. The issue
would undoubtedly become more complex if the referendum takes place on whether the whole of the
UK leaves the Union.
I am aware of the official position, as expressed by European Commission President José Manuel
Barroso, that an independent Scotland would have to secede from the EU as well.
I turned to our foremost German expert in constitutional law, Prof. Albrecht Schachtschneider, to ask for
his opinion on the matter.
He has just completed a paper on the subject, concluding: ‘International law is governed by the principle
of continuity. A people, having left a nation, does not lose its membership of the EU. A new state
remains a member like the state it has separated from.’
2
Official Monetary and Financial Institutions Forum, One Lyric Square, London W6 0NB
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Registered in England and Wales 7032533As always where legal opinions differ fundamentally, the different parties are very likely to do
everything imaginable to fight it out and secure victory. Given that all members of the Union need to say
Yes to a newcomer, it is not difficult to predict rather lengthy controversies, with an uncertain outcome.
At this point, the importance of time available for the acceptance of accession enters the picture.
Problems caused by the pressure of time are likely to overshadow the whole process. This could poison
the entire enterprise.
Even if the issue of EU membership were settled rather quickly, for Scotland to gain acceptance as a
member of the euro would again require time and the fulfilment of the well-known Maastricht criteria. I
should add that, as we now know, fulfilling these criteria at the outset is not sufficient for the monetary
union, or a newly-admitted member, to develop without trouble.
5. What other monetary alternatives would an independent Scottish government have?
There exists a support system, well tried out until the advent of the euro and still in existence, namely
the European exchange rate mechanism, now named ERM-II.
This system combines two essential requirements of protective currency assistance schemes: ‘stability’
and ‘flexibility’ of the exchange rate.
Admission requirements would be rather easy to meet, should a newly-formed Scottish government
wish to apply. In addition, institutions such as the Bank of England, the International Monetary Fund, the
World Bank and the Bank for International Settlements would be available to help materially and with
advice and expertise. The Bundesbank would most certainly provide assistance too.
If Scotland decided (or was forced) to leave the sterling zone, then I would advise it to participate with
its own new money (perhaps the Scottish pound) in ERM-II right from the beginning. Those in favour of
Scottish independence should prepare for that now and get ready to subscribe to all the entry
conditions.
A consequence would be to have a currency rate between the Scottish and English pounds. But to
expect this to stay stable would be wishful thinking to a giant degree – as we saw with the experience of
the Czech and Slovak currencies during the 1990s, which started off at parity and then became divided.
Any development - either positive or negative - affecting the performance of the Scottish economy
would be immediately reflected in a fluctuating exchange rate between the English and Scottish pounds.
This could lead to large currency movements that would be detrimental to stability and growth.
3
Official Monetary and Financial Institutions Forum, One Lyric Square, London W6 0NB
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Registered in England and Wales 70325336. If Scotland (perhaps as a prelude to joining the euro) were to form a new currency with a new
name, or simply re-establish a Scottish pound, what currency links with the UK government
and the Bank of England would be feasible?
There are many bilateral arrangements possible under which the Bank of England or the Westminster
government could provide foreign currency reserves in case of speculative attacks against the Scottish
currency. No doubt the European Central Bank and the Federal Reserve could also provide support.
The trouble is that such arrangements need to be negotiated to become effective. This requires a great
deal of ‘give and take’ and a lot of goodwill on the part of the stronger partners.
7. What other confidence-building measures would be needed to back a new Scottish currency?
Any newly established currency needs to have an array of confidence building measures. The most
obvious ones are a new central bank, a banking supervisory system, deposit insurance, backstop
facilities for Scottish banks and so on. A government seeking acceptance of its new money needs all the
weaponry it can muster.
One lesson should be kept in mind: gaining confidence in a new monetary regime can rarely be
accomplished quickly. This is not a question simply of a few months or even years. It took the Germans
10 years to enjoy this status after the D-Mark was established in 1948.
8. What are the overall issues at stake?
Bold statements such as ‘We’ll be moving forward with confidence’ or ‘we can forge our own path’,
combined with references to ‘many opportunities’ lying ahead, hardly do justice to the scale of the
endeavour.
Very significant challenges of internal and external reorganisation would lie ahead after independence.
To believe that independence opens the door automatically to hitherto unattainable goals seems to me
to be somewhat flying in the face of reality.
I take a neutral line on this issue and do not want to intrude into Scottish internal affairs. But, as a
European who has studied and acted on these matters over 50 years, I can say that achieving stability
and prosperity for an independent Scotland under present circumstances would be a gargantuan task
fraught with dangers.
The outcome would depend of course on careful analysis of the necessary steps, their implementation
at the right time and a sufficient dose of good luck.
It is not possible to predict the eventual results of what I’d like to call – with typically German
understatement – at best, an adventure, at worst foolishness.
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Official Monetary and Financial Institutions Forum, One Lyric Square, London W6 0NB
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Registered in England and Wales 7032533A new Scottish nation would need a lot of patience, energy and belief in its glorious future to bear the
initial costs of what would most likely turn out to be a period of some turmoil and uncertainty.
In addition I would like to ask what would happen in the event of a narrow victory for the Yes camp, say
by just a few percentage points. With such a low margin, would it be possible to envisage a successful
changeover? In such a position, the house would still appear to be divided, and therefore the question
would be raised: Can it stand?
Separation would no doubt create opportunities but would also bring obstacles that did not previously
exist. Overcoming these difficulties would require a spirit of togetherness and a willingness to work
hard. These conditions will be the true determinants of whether Scotland can achieve good results in
growth, employment and inflation – and avoid what might otherwise could become a period of
deflation.
No reputable economist can predict whether a new monetary regime would be strong or weak.
In conclusion, and in the spirit of European openness to lessons over the centuries, let me draw – as my
friends know I am wont to do - on the wisdom of ‘Old Bill’ Shakespeare. The dramatic high point of ‘The
Merchant of Venice’ revolves around the measurement of a pound, in this case, a pound of flesh.
Shylock stands ready to cut his agreed reward out of the body of Antonio the merchant, ‘next to his
heart’. He doesn’t mind if Antonio dies in the process.
As we all know, Shylock loses his bet because he cannot guarantee that a pound of flesh needs to be
exactly a pound, and not an ounce more or less. And of course the exercise must not spill a ‘jot of
blood’.
Shakespeare teaches us that cutting into a highly complex, integrated and vulnerable body is a
dangerous undertaking. Let us hope that all concerned are aware of this.
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Tel: +44 (0)20 3008 5262 Fax: +44 (0)20 3008 8426 www.omfif.org
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