The last few days has witnessed speculation on the value of the pound sterling, alongside some instability on the stock exchange.
This behaviour is driven by what analysts are describing as ‘uncertainty’ – but uncertainty over what?
Westminster’s failure to present a sensible currency and financial framework ahead of a vote for Scottish independence is a substantial factor.
This decision generated criticism from economists and commentators. Now the UK Government is risking its own economic future on a refusal to discuss arrangements with an independent Scotland.
Trade deficit and debt burden
It’s not Scotland that is in jeopardy, it’s Westminster’s balance of trade and financial accounts that are weak without Scotland’s contribution. The rest of the UK’s trade deficit and debt burden would both increase without Scotland.
This was explained last week by James Meadway of the New Economics Foundation. He quotes The Financial Times: “Currency investors” would apparently be “particularly concerned by the UK’s persistent current account deficit if this were no longer offset by North Sea oil revenues.”
Never before has an economic explanation been so quickly vindicated. Last week the UK’s trade deficit shot to almost an all time high: £10.2 billion for July, even when including Scotland’s offshore contribution.
Osborne’s claims to have ‘rebalanced’ the economy through increased exports have been shot to pieces. In fact current London-focused growth is dependent on a bubble economy of house prices, record high debt levels and consumption. If the UK balance was to lose Scotland’s contribution it would risk disaster.
Market pressure will force currency union
Also last week Professor Danny Dorling explained this great market pressure looming on George Osborne.
He said that the UK is one of the most indebted countries in the developed world. Scotland, he explained, is asset rich and would have offshore income to ensure a transition into global markets.
The rest of the UK would appear vulnerable – like a boat in stormy seas without an anchor. This would potentially lead to capital flight from the City of London and investors ditching the pound sterling.
According to Dorling, a full scale review of Westminster’s financial position would call into question their ability to finance current debt. Scotland’s above average Gross Domestic Product holds down the UK debt/GDP ratio. This would increase by 11% after Scottish independence. (See Table 2)
So with the threat to London’s currency and financial institutions, where will Osborne turn?
The obvious answer is a currency union. The need for economic stability, offshore revenue to support the pound sterling and financial services security will all be best served by an agreement to support a single currency.
Anything less would be an “act of economic vandalism” as forewarned by Professor Anton Muscatelli.
Current instability has been minimal – a blip within long-term currency and market trends. But after a Yes vote, scrutiny will fall on Westminster. At that point political blundering and point scoring will finally be replaced with economic common sense. An independent Scottish currency could be made to work for Scotland, indeed that would have many benefits however it could not be made to work so well for our friends and partners in the rest of the UK.