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Fiscal Commision urged to provide currency plan

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Scottish Secretary writes to Fiscal Commission and makes it clear that a currency union is off the menu.

On the eve of the next meeting of the Scottish Government’s Fiscal Commission, Scottish Secretary Alistair Carmichael has written to the Chairman Crawford Beveridge making it clear that currency union ‘is not going to happen’ in the event of independence.

Mr Carmichael has urged the Commission to ‘set out your recommendation for which of these options – so-called sterlingisation, the euro or a separate currency – would be best for an independent Scotland’.

The Fiscal Commission established by Alex Salmond is meeting tomorrow (Thursday) following the intervention of three main UK political parties last month who all accepted the advice of HM Treasury that a currency union would be bad for both an independent Scotland and the continuing UK.

Mr Carmichael encouraged the Commission to examine the three remaining options – the Euro, sterlingisation or a new currency – and offer advice on which offers the most realistic currency plan in the event of independence.

In his letter the Scottish Secretary sets out the reasons given by the Treasury advising against a currency union. These include:

  • An independent Scotland would have severe limits on its sovereignty and the prospect of much more painful and costly adjustments in the event of an economic downturn.
  • The euro area’s difficulties during the financial crisis – and the reforms they are having to put in place – show the painful realities of these points.
  • The continuing UK would be exposed to unacceptable risks that far outweigh any transaction benefits.

Mr Carmichael said:

Scotland already has the best currency option. Remaining part of the UK and keeping the UK pound is our best currency option. Alex Salmond set up his Fiscal Commission to consider what might be the least bad currency alternative if Scotland decided to leave the UK.

We now know that there will not be a currency union in the event of a yes vote. The three main UK political parties have all made it absolutely clear that they support the advice of HM Treasury not to enter into a currency union if Scotland becomes independent.

I would urge the Commission not to waste a minute of their time considering a currency option that is dead. What Alex Salmond asked his Commission to do was never a particularly enviable task and they need to make sure it doesn’t become a completely a pointless task by recommending an option that is never going to happen.

The full text of the letter to Crawford Beveridge is:

The Scottish Government’s Fiscal Commission

I understand that the Scottish Government’s Fiscal Commission Working Group, which you chair for the First Minister, is meeting again tomorrow. I respect the fact that you are directed by the Scottish Government but I think it is helpful to point out some important facts since your last meeting and your previous reports that you will doubtless wish to consider in your discussions.

On 13 February 2014 the Chancellor of the Exchequer, the Shadow Chancellor and the Chief Secretary to the Treasury each ruled out a currency union between the continuing UK and Scotland in the event of independence.

This decision was based on thorough and rigorous analysis by civil servants in HM Treasury. The analysis was based on the same modelling and approach that led to the previous UK Government deciding not to join the euro.

This decision is no bluff, as has been claimed by the First Minister. This was the three principal economic spokesmen of each of the main UK political parties setting out a clear position: a currency union is not going to happen. Your Commission’s work needs to be based on this reality, not repeated recommendations for an option that is not going to happen.

A currency union would not be in the interests of the continuing UK or an independent Scotland. As HM Treasury’s analysis has shown, the UK would be exposed to unacceptable risks (that far outweigh any transaction benefits) and an independent Scotland would have severe limitations on its sovereignty and the prospect of much more costly adjustments in the event of an economic downturn. The euro area’s difficulties during the financial crisis – and the reforms they are having to put in place – show the challenges of making currency union work.

As both governments have made clear, there needs to be an informed debate, and the question of currency is fundamental to the decision people in Scotland are being asked to make. It is now incumbent on the Scottish Government to set out their plan B for what currency a new Scottish state should use.

The Fiscal Commission Working Group has a vital role to play in this regard. Previously, your analysis concluded that a new Scottish system of currency could “evolve in the light of new economic developments and future preferences.” And the Scottish Government has said it could “choose a different arrangement in the future”. So you readily acknowledge there are alternatives.

I would encourage you now to set out your recommendation for which of these options – so-called sterlingisation, the euro or a separate currency – would be best for an independent Scotland. If you feel these alternatives are less optimal than the UK Pound as part of a single UK, which can only be maintained through a No vote, I would suggest that you should also say so.

The reality is simple: what we have works. The UK and Scotland are better together.

I am copying this letter to the Chancellor, the Chief Secretary and the Shadow Chancellor, and to the First Minister and members of the Fiscal Commission Working Group.

ALISTAIR CARMICHAEL