The currency question has once again reared its ugly head during the past week. An assortment of Unionists have asserted that the rest of the UK would not, most definitely would not, agree to a currency union with an independent Scotland. There are arguments for and against such a currency union as proposed by the SNP. I have posted before on this matter, here, while Iain Macwhirter has a typically robust article on this issue here. This post will focus on a slightly different aspect of the currency debate – the link between currencies and independence.
The question posed above is really for those, mainly Unionists, who claim a Scotland that continued to use the pound sterling would not be fully independent. Particularly if Scotland were to form a currency union with the rest of the UK. The argument is that to secure the agreement of the rUK, Scotland would have to agree to very onerous conditions regarding borrowing, taxation and spending. These conditions would be so restrictive as to make independence worthless.
This whole claim of course is based on a very narrow, indeed restrictive view of what independence means. At one end of the spectrum independence can mean the complete freedom to do whatever you want, without any restraint whatsoever on the part of others. Now it is hard to find an example of any country in the world which has this degree of independence. Even the mighty USA has discovered limits to its freedom of action.
This is even more so in Europe, where just about all countries are either members of the EU, the EEA, or are planning to become members. Thus one could claim that no country in Europe is really independent, not even the UK. So to move the question from a theoretical level to a more practical one, I have posed the question at the top of this post. I would imagine that most people regard both Austria and Denmark as independent countries. Most people will realize that this independence is qualified but that qualified independence is what all countries have. So Austria and Denmark are neither more nor less independent than any other country in the EU/EEA.
I have chosen these two countries as both are medium sized countries and thus in many ways comparable to Scotland. The other reason is that one, Austria, is part of the Eurozone, while Denmark is not, and continues to have its own currency – the krone. Thus Austria provides some lessons on what can happen when part of a currency union, while Denmark provides some lesson on what we might expect if Scotland were to establish its own currency.
Now without getting into a detailed analysis of both countries, it is pretty clear that both are economically and financially strong and successful countries. As a member of the Eurozone, Austria is formally bound by all the conditions and restrictions that come with that membership. Interest rates are set in Frankfurt by the ECB, the exchange rate is fixed and of course there are the famous Maastricht conditions which limit the national debt and the budget deficit. Despite these restrictions, or perhaps because of them, the Austrian economy continues to do well. The latest OECD report, 2013, on Austria has this to say: “Austria has strong material well-being and quality of life. Steady growth in GDP per capita has been combined with low income inequality, high environmental standards and rising life expectancy. Supportive conditions for a dynamic business sector, generous cash benefits allowing families to provide extensive “in-house” services, a wide supply of public services and a well functioning social partnership system have helped achieve this performance. The Austrian population has therefore combined preferences for stability and work-life balance (“wealth in time”) with a thriving economy pursuing an active globalisation strategy.” So the apparently severe restrictions of a currency union do not seem to have had an adverse affect on Austria.
When it comes to Denmark, we find that its economy too continues to do very well. The latest OECD report I could find for Denmark dates back to January 2012 and stated the following: “The economy displays a number of strengths. The fiscal position is relatively sound. The flexicurity system helps adjust to shocks while limiting the social cost of unemployment and the risk that it becomes entrenched. The welfare system ensures low poverty and inequality. However, competitiveness has deteriorated in the past decade and productivity growth has been weak, eroding potential growth.” So broadly similar to Austria, despite the supposed advantages of having the extra freedom that comes from having its own currency. The reality though is that Denmark has for decades voluntarily restricted its freedom for independent action on the economic and financial front. The main tool for this has been to tie the krone to the euro. The krone is part of the ERM-II mechanism, so its exchange rate is tied to within 2.25% of the euro. Prior to this the krone was tied to the Deutschmark. So in effect, Denmark is almost as bound by the eurozone conditions as Austria. Again without any obvious detrimental effect on its economic performance.
In fact I would contend most of the Unionist assertions on the currency are just a lot of hot air, with no basis in reality. In or out of a currency union all countries have to manage their economy and finances in a way which secures their long term stability. If both the national debt and the budget deficit get out of hand then it will be the global financial markets which will exert pressure on the governments of such countries. It might have been a good idea for the previous Labour government in Westminster to have followed some simple guidelines and to have stuck to them. An independent Scotland will want to pursue prudent financial policies whether it is in a currency union or not. Just like Austria and Denmark. Otherwise we face the prospect of another UK financial crisis.