Nicola Sturgeon grilled on her 'record' as First Minister
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Former First Minister Alex Salmond has insisted an independent Scotland should have its own currency. The Alba party leader believes the world has changed since the 2014 referendum, when he explored the possibility of maintaining an agreement with Westminster to keep using sterling. But he says a number of factors, including historically low interest rates mean it would be the correct time to establish a Scottish currency.
Mr Salmond told Times Radio that today’s economic conditions “would tend to make the case for moving to a Scottish currency just as quickly as you can because you don’t want to have debt denominated in another currency”.
This appears to be a recognition of inherent weakness in the SNP “sterlingisation” plan to unofficially use the pound without formal monetary union before transitioning to a new currency if a number of economic tests are met.
That arrangement would involve the new state issuing a lot of debt in foreign currency, and the plan has been heavily criticised by economists as it will likely lead to an economic crisis.
As the SNP prepare to do some major soul searching, in an exclusive interview with Express.co.uk, Economics Professor at Edinburgh Napier University Piotr Jaworski left the door open to an independent Scotland using the Norwegian krone as its currency.
He referred to an argument he made ahead of the 2014 Scottish independence referendum, claiming that while “it requires further analysis” because Scotland’s economy has changed in the time since, he is “definitely not excluding the possibility”.
He previously penned a comment piece titled “The best currency for an independent Scotland would be Norway’s krone”.
He explained: “There is a strong correlation between oil sector figures and each country’s economic and political choices. Norway stays out of both the EU and European monetary union. It has its own independent currency, whose rate of exchange is determined by the market.
“At the other end of the spectrum, Denmark is a member of the EU and is part of European Exchange Mechanism II (ERM II). The Danish krone’s exchange rate is tied to the euro, making it practically another form of euro. The UK is in the middle: a member of the EU but not in ERM II or the euro.
“If Scotland votes for independence, it will create a completely different economic context for the two new countries that emerge. This new macroeconomic framework will work against the currently declared goals of both countries’ governments.
“The economy of an independent Scotland would of course be much smaller than the economy of the new UK. This means that with the same absolute oil extraction, you can estimate that the sector would contribute more than one-third of Scotland’s GDP. In the new smaller UK, on the other hand, it would only contribute something like one percent (coming from the mainly gas fields off east England).”
Mr Jaworski concluded in his piece for The Conversation: “This suggests that it would suit the two countries to make completely different economic and political choices. If North Sea oil dominates the Scottish economy to an even greater degree than in the case of Norway, it would suggest that it would be even less inclined towards the EU and euro than the latter country.
“The logic behind this point is that oil changes the economic cycle of a country. The easiest way to think about this is to reflect on the effect of the oil price. If the oil price is high, a country that heavily relies on oil production does well and non-producers tend to do less well, because they are paying higher prices for their fuel. When oil prices are low, this reverses.”
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Dr Jaworski told Express.co.uk that while Scotland’s oil industry has declined since 2014, his claims might still apply to today’s macroeconomics.
In another interview with Express.co.uk, Ronald MacDonald, research professor of macroeconomics and international finance at Glasgow University’s Adam Smith Business School, cast a shadow over the SNP’s plan to retain use of sterling in the early years of independence, rather than introduce a new currency.
He said: “The underlying deficit has not changed too much since last year.
“It went up by half a percent, I think.
“That is not a sustainable deficit in itself.
“So they [the SNP] have argued in the Growth Commission report that they could handle that by having higher growth if they were independent.
“But they haven’t said how they are going to get it.
“Of course, on top of that you have the coronavirus crisis, which means the deficit going forward. It will probably be somewhere in the 20 percent region or even 30 percent.
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“That’s a huge deficit.”
Ms Sturgeon’s argument, the macroeconomist noted, seems to be that she can do what other governments are doing, which is to borrow heavily on financial markets at relatively low interest rates.
However, Mr MacDonald claimed there is a huge problem with that.
He continued: “Their strategy for an independent Scotland is to have a relatively long transition period where they continue to use sterling.
“Borrowing in a foreign currency is a very dangerous strategy, particularly if you are borrowing the kind of sums of money they are talking about.
“The reason for that is that if you adopt sterlingisation that is a form of a rigidly fixed exchange rate.
“The UK has a flexible exchange rate. It means that when you get a shock to the economy, you have some means to adjust the economy to that.
“By adopting the currency of another country you really are fixing your currency against that currency. And you have got no means of adjustment.
“That is not tenable for an independent country.
“I have argued separately it could lead to bankruptcy.
“They haven’t thought through the macroeconomic framework.”
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