Separatist Scots beware: A new Scottish currency would be catastrophic
Some 12 out of the last 15 opinion polls on Scottish secession have shown majority support for splitting up the United Kingdom.
During a period of unprecedented crisis, Scots have chosen to rally round the flag — only this time the flag is that of Scotland, not the UK.
However, while polling numbers may be unnerving Unionists, the chances of the nationalists triumphing are inauspicious. Should a further referendum happen, the separatists will be promising the loss of the fiscal transfer presently worth at least £10bn, the severing of Scotland from a UK single market worth almost 30 per cent of its GDP, and above all, the financial chaos set to be unleashed by the SNP’s currency plan.
Even among separatists support for retaining sterling is high. A recent poll found that, post-secession, 54 per cent of respondents support using the UK’s currency permanently, with only five per cent in favour of establishing a brand new Scottish currency.
Unfortunately for the nationalists, the Scottish electorate’s most unpopular currency option is also the most likely.
A permanent currency union with the UK will never be accepted by voters in England. “Sterlingisation” would enjoy zero confidence from the financial markets, precipitate a balance of payments crisis, and even breach EU membership criteria.
Using the euro, meanwhile, is only possible as a full member of the European Union — a process that by the SNP’s own estimation will take at least 10 years. The money does not exist to finance a currency peg, so the only option available to a separate Scotland is the creation of a free floating currency.
What is the problem with this? Only the challenge presented to every mortgage holder by the SNP’s intention to institute a new currency as legal tender while keeping all existing debts denominated in sterling.
As explained in their Growth Commission report, the SNP’s secessionist economic roadmap:
“It cannot be emphasised too strongly that the existing financial assets and liabilities of Scottish residents…are assets and liabilities of these individuals, businesses and institutions, not assets or liabilities of the Scottish Government, before or after independence. There is thus no benefit, and a considerable downside, for a future Scottish Government to seek to legislate to change the terms of these private contracts. If Scotland were to adopt a distinctive Scottish currency in future, that currency would be incorporated in future contracts — not in past or uncompleted ones.”
This harbours tremendous risk for anyone who holds debts in sterling but would receive income in the new Scottish currency, which would be practically every Scottish citizen and institution with repayable debts of any value. A devaluation of the domestic currency would result in disproportionate increases in debt values held in a foreign currency. For instance, a 50 per cent decrease in the Scottish currency would cause sterling debt as valued in the Scottish currency to increase by 100 per cent.
There are over 700,000 mortgage holders in Scotland, collectively housing just under two million people. Local authorities hold debts of £18bn. Scottish housing associations owe £4bn. The Scottish government’s share of the UK national debt will be denominated in sterling. All would be materially affected by a decline in the Scottish currency. A 25–30 per cent decrease against sterling is entirely possible and holds the capacity to cause severe financial stress.
The case for a rapid devaluation of the fledgling Scottish currency is not difficult to make. Post-secession, the Scottish government’s share of the UK’s national debt would be well over 100 per cent of GDP, the loss of the Barnett Formula would result in massive public expenditure cuts, the new currency would find itself under assault by the financial markets, and mass capital flight would likely ensue. Meanwhile, sterling would remain a global reserve currency, home to the world’s biggest financial centre and still one of the largest economies on the planet.
It is also unlikely that Scotland’s one million pensioners will be happy to see their sterling state pension replaced with a new currency of diminished value. Similar unfunded pension schemes would also be at risk, including those of nurses, doctors, teachers and civil servants.
Pro-UK strategists should not struggle to craft a successful anti-separatist campaign from such fertile material. The risk that the new Scottish currency poses to people’s mortgages, pensions and incomes allows for targeted messaging that can demonstrate to individual voters exactly how much they stand to lose from Scottish secession in a way that remote debates about trade can struggle to.
It will likely take the heightened focus of a full referendum campaign for the implications of the new Scottish currency to permeate Scotland’s public consciousness. We can expect queues outside banks as homeowners scramble to protect their mortgages, a credit crunch as lenders don’t wish to be paid back in a devalued new currency, and chaos within Scotland’s public services as employees fight to keep their sterling pension. Scotland’s cautious middle classes would be reminded they have an awful lot to lose from seceding from the UK.
Election strategist Isaac Levido famously said: “When someone walks into a polling booth they’re answering a question. As long as they’re answering the question to which you’re providing the answer, you will win.”
Should we have to endure another Scottish referendum, Unionists could do a lot worse than basing their campaign around ensuring voters head into the polling booth asking themselves: “What currency will I be repaying my mortgage in — the pound or the groat?”
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