Thursday 30 January 2014

More nonsense on currencies

From the BBC:

The Bank of England governor has said an independent Scotland would need to give up some power to make a currency union with the rest of the UK work.

Mark Carney said such a move, proposed by the Scottish government, "requires some ceding of national sovereignty". He also said the risks of not having a strong agreement had been demonstrated by problems in the Eurozone.


Nope.

There are plenty of examples of countries using "somebody else's" currency, i.e. countries not actually in the official Euro-zone which use the Euro or whose currencies are pegged to the Euro.

For sure, notes and coins issued by those countries might not be accepted as legal tender in the Euro-zone itself, but so what? We always had that with Scottish bank notes in the UK, and this is a bit of a red herring as 99%* of transactions by value are entirely electronic nowadays.

Would Scotland have to pay a slightly higher interest rate on GBP-denominated borrowing that England and Wales, or a higher interest rate on EUR-denominated borrowing than Germany or The Netherlands?

Quite possibly, that depends entirely on Scotland's credit rating. We know that interest rates on government debt are different in different countries in the Euro-zone. That's no different to UK businesses all using GBP but paying different interest rates on their borrowings.

If Scotland reduced public sector waste, ran a sensible tax system, got their economy going and didn't run large deficits, then they'd end up being able to borrow more cheaply than England & Wales or the PIIGS, that's for them to sort out.

The size of the country or economy plays little role in this. The Netherlands has lower borrowing costs than Germany because they run a tight ship. See also: Switzerland.

But what we have learned is that currency unions benefit the wealthier, central and more productive regions and make things even worse for the poorer, peripheral and marginal regions, and much the same applies to using a common currency, even if there is no formal arrangement in place.

So basically an independent Scotland can use whatever currency it wants, GBP, EUR, SCP, USD, that is a relatively minor decision (see also: Vaclav Klaus' comment about sorting all this out in an afternoon when Czechosovakia was split up).

All that matters is whether Scotland is run properly. If they mess up, then whichever currency they use, it will end badly for them.

* Made-up figure, I couldn't be bothered looking it up.

18 comments:

H said...

Independent Ireland used GBP until 1979ish. Few complaints or even comments, as I recall.

Mark Wadsworth said...

H, good example, thanks.

Dinero said...

I' not sure they could use GBP by there own whim. The BOE could in principle not let banks based in Scotland take part in the clearing system.

Countries in the euro have ceded some soverenity. There are rules concirning deficits, spending and even now a new thing called macro balances rules.

Its not without consequences a large entity such as the Scotish government borrowing and spending in pounds could affect the currency and really mess things up for England.

As for the referendum.
The union in the title United Kingdom does not refer to a union between Scotland and England, as the BBC keeps refering to it, It refers to a union between Great Britain and Northern Ireland. So what is being coutenanced by the referendum is breaking up the Country called Great Britain. Great Britain belongs to the English just as much as it does to the Scotish, so to me it all seams very unilkely, almost inconceivable.

Why doesn't Salmond want a Scotish currency - its the first on the list of economic control. I suppose the practical dynamics and devaluation make it not possible to re-denominate peoples savings without causing a large amount of deposits to be moved from Scotish banks..

H said...

I guess, however, that some would point out that there were exchange controls in 'those days', which made some of the modern problems with currency unions less pressing.

Mark Wadsworth said...

Din, what you say does not follow.

UK banks have plenty of accounts in EUR, and they transfer money to and from banks in the Euro-zone without too much of a hitch.

You can withdraw EUR notes abroad using your UK debit card from your UK bank account.

They use their own privately developed clearing systems and cash machines for all this, very little to do with central banks.

And yes, Euro-zone countries have ceded some formal sovereignty.

But that was the whole point of the post, an independent country - let's say for example Ireland until 1979, or Channel Islands and Gibraltar nowadays - can still use GBP if they choose to do so without ceding any sovereignty whatsoever.

Your third contention is unfounded. Does Greek borrow'n'spend mess things up for sensible countries like The Netherlands? Not really. And if Greece had been just using EUR while outside the zone, it would not have affected The Netherlands at all.

Lola said...

Less Mark Carney. More Fred Karno.

Derek said...

Must admit it puzzles me as to why the SNP wants Scotland to use the GBP after independence. There's no getting round the fact that after independence, the splitting of the UK National Debt would mean that Scotland would end up with a lot of GBP-denominated debt but even so it seems to me that there would be more room for manoeuvre with a Scots currency. Maybe I just don't know enough about it.

Mark Wadsworth said...

D, splitting the national debt is an entirely separate topic, that's down to straight forward haggling, where common sense says just split it pro rata to the population. We have that issue whatever currency they use.

L fairfax said...

But wouldn't there be a problem of the base rate being set for England and often being wrong for Scotland?
A bit like what has happened to Spain, Ireland etc since the Euro started.
Or is there something I am missing?

Mark Wadsworth said...

LF, a small peripheral country with a weak economy is always going to have trouble borrowing, whatever currency they use.

If Scotland has a thriving economy and runs budget surpluses, then it will be able to borrow at lower rates than England, whatever currency they use. If it's all shit, they will pay higher rates than us, whatever currency they use.

The PIIGS are not in trouble because they are in the Euro-zone (well, partly, but not mainly), they are in trouble because they overspend and have rubbish economies.

L fairfax said...

@"The PIIGS are not in trouble because they are in the Euro-zone (well, partly, but not mainly), they are in trouble because they overspend and have rubbish economies."
Well are you sure that is true for all of them? I thought the problem with Portugal was partly that its currency was too strong.

BTW I was talking about interest rates for consumers.

Mark Wadsworth said...

LF, no, Portugal's problem was overspending and weak economy. Same with the other IIGS. It is a marginal peripheral country in a currency union so gets the worst of the deal.

Had it run small or no deficits and had a thriving economy, it would have been fine in the Euro-zone (see Germany, Netherlands etc).

Being in a currency zone exacerbated things for the PIIGS but it didn't really cause their underlying problems.

So to repeat yet again: if Scotland has a thriving economy and small or no deficits, it will be fine whatever currency it uses. If it's all going to turn to shit economically, then whatever currency they choose they are f-ed.

Perhaps I didn't make that clear enough?

Base rates for consumers is nigh irrelevant in terms of impact on economy.

If Scotland wants a house price bubble, it will engineer one, and if doesn't want one I will tell them how to prevent it.

Derek said...

Mw said: D, splitting the national debt is an entirely separate topic, that's down to straight forward haggling, where common sense says just split it pro rata to the population. We have that issue whatever currency they use.

Oh, sure. No disagreement there. But my point was that when we split the debt, the bond repayments have to be made in GBP whether or not Scotland adopts a new currency because that's what the bond contract says. And that may be a good reason for Scotland to continue using the GBP.

Otherwise Scotland would have to ensure a large enough trade surplus to ensure that it had (or could buy)the necessary GBP to pay off existing GBP bonds. Doable but more complicated.

In any case as you said: if Scotland has a thriving economy and small or no deficits, it will be fine whatever currency it uses. If it's all going to turn to shit economically, then whatever currency they choose they are f-ed.

Can't argue with that.

Bayard said...

My vote is for the latter outcome.

Mark Wadsworth said...

D, yes, fair summary.

But in theory, let's assume Scotland knocks itself into shape (shifts to LVT), the oil revenues keep flowing and introduces the SCP, which gradually strengthens against GBP.

It's sitting there with its GBP debts, it could easily swap them into SCP debts. Sorted. It's only bits of paper.

It doesn't need an actual trade surplus to do this (although that would help), it just needs a government which is no worse a credit risk than than the English government (hardly difficult).

B, what was the question?

Bayard said...

Mark it was "if Scotland has a thriving economy and small or no deficits, it will be fine whatever currency it uses. If it's all going to turn to shit economically, then whatever currency they choose they are f-ed."

DBC Reed said...

It would be easier if the UK mainland was divided in two with the border just south of Northampton and the Bank of England resited to Berwick.Then the top half of the country would get the benefit of being free of the Homeownerist scum who run things from London.The bottom half could just float away: preferably across the Atlantic.

Kj said...

DBC: I saw some blogpost/article recently, somewhere on the net, have no idea where, if any of the scandinavian countries would want to take on Scotland instead of Devo Max or something. I´m inclined to say yes, but if everything north of Northampton is part of the deal, I´m inclined to decline.