iScotland would be forced to create its own currency, says top economist
A YES vote in tomorrow’s referendum would force a newly independent Scotland to create its own currency, one of the country’s leading economists has warned, after a damning report concluded Alex Salmond’s fallback plan to keep the pound would collapse within a year.
In a separate study yesterday a major European bank raised fears of a stock market slump and a scramble to withdraw savings from Scottish bank branches on Friday morning if there is a Yes vote.
Dr Angus Armstrong, of the National Institute for Social and Economic Research (NIESR), said “a Yes vote is a vote for Scotland’s own currency,” after the think-tank published a scathing assessment of the First Minister’s apparent “Plan B” in the event the UK rejected his preferred option of sharing the pound in a formal currency union.
Mr Salmond insists a currency union would be agreed but, if not, has suggested an independent Scotland would use the pound informally, a process known as “sterlingisation,” while refusing to pay its share of the UK’s £1.4 trillion national debt.
The NIESR has previously argued that sterlingisation would be unstable and damage the Scottish economy as financial institutions moved their headquarters south of the Border.
In a report yesterday, it argued that refusing to pay a share of the UK’s debt would cause serious additional problems.
Walking away from the debt, argued Dr Armstrong and the report’s co-author Monique Ebell, would be “seen as a default” by the money markets, leaving an independent Scotland struggling to borrow and facing “unprecedented austerity” in the form of spending cuts.
The move would also be likely to leave Scotland out the EU, as Germany sought to protect its interests and blocked the newly independent state’s membership, the report warned. It argued Europe’s biggest creditor would fear a default by Spain, whose finances would come under pressure if Catalonia also became independent without paying its debts.
Dr Armstrong said: “A Yes vote is a vote for Scotland’s own currency. It seems to be the only option that makes sense.
“If Scotland votes for independence I think it would end up with its own currency. There’s a question of how it gets there, but it gets there.”
He said the transition to a new currency could be managed stably within the 18-month negotiation period that would follow a Yes vote.
Meanwhile Swiss bank UBS, which predicts a No vote, warned yesterday of a three per cent slump in the FTSE 100 index and a three per cent drop in the pound against the dollar on Friday if Scots choose instead to leave the UK.
Paul Donovan, global economist at UBS, said bank accounts could be moved from Scottish branches, despite assurances savers would continue to be protected by the Bank of England as independence negotiations took place.
“I wouldn’t like to predict it, but we may get Friday off,” he said, suggesting a bank holiday may have to be called.
Dr Armstrong played down speculation that a Yes vote would trigger panic on Friday morning if Scots vote to leave the UK.
He said a clear statement from the Prime Minister, stressing Scotland’s continued place in the UK until 2016, would limit the pound’s losses on the currency markets and prevent a run on the banks.
The UK Government and Labour opposition have ruled out Mr Salmond’s proposal for a currency union, arguing it would be too risky for the UK and impose too many constraints on an independent Scotland’s economic policy-making.
Mr Salmond has claimed they are “bluffing”. He has said the prospect of Scotland walking away from its share of the debts, worth about £5 billion per year in repayments to the Treasury, and the loss of exports such as oil and whisky from the UK’s balance sheet, would force a currency union to be agreed.
