The SNP’s desperate bid to save sterlingisation

‘I hope the sterlingisation zombie now has a stake through the heart,’ tweeted SNP delegate Tim Rideout after getting his resolution on ‘The Scottish Reserve Bank Establishment Bill’ passed at his party’s conference last weekend.

Rideout sits on the SNP’s policy committee and is part of a faction challenging the SNP leadership’s plan for Scotland to informally use the pound for a prolonged period after secession – a policy known as sterlingisation. This faction wants to see Scotland establish a new currency, controlled by a new Scottish central bank, as soon as possible after exit day.

In his conference speech, Rideout was blunt. ‘No advanced economy has ever sought to use the currency of another nation,’ he said, adding: ‘To try to do so would be to start probably the most dangerous experiment in global monetary history.’ To his credit, he made some good points.

The SNP member is right to recognise the dangers of Nicola Sturgeon’s sterlingisation policy. Severing the Scottish economy from the Bank of England at the stroke of midnight on secession day, leaving Scotland with the type of monetary system used by small emerging market economies, has warning signs written all over it. If it didn’t lead to an economic crisis in the build-up to Scotland’s exit from the UK – as people, companies and capital flee in anticipation of what is about to hit them – then it would certainly lead to one afterwards.

Did the SNP leadership listen? Have they ditched sterlingisation? It appears not. Rideout’s motion was sufficiently amended for sterlingisation to effectively remain the party’s policy, albeit with lots of muddying of the waters to make the new-currency faction feel like they’ve made progress.

The SNP leadership’s determination to hold onto sterlingisation even though a notable segment of the nationalist base (the Scottish Greens and Alex Salmond’s Alba Party are also against it) are calling it out as dangerous might at first seem odd. After all, in the build-up to the 2014 referendum, Sturgeon and Salmond’s Fiscal Commission of economic experts made it clear that such a system has big drawbacks.

In a 2013 assessment of monetary options, the Fiscal Commission correctly noted that sterlingisation would mean:

“‘the Scottish Government would have no input into governance of the monetary framework and only limited ability to provide liquidity to the financial sector – this would depend on the resources and reserves of the country. The amount of currency available would depend almost entirely on the strength of the Scottish Balance of Payments position.’

The SNP’s about-turn came in 2018 when the SNP’s Growth Commission, tasked with updating the economic case for breaking away, opted for prolonged sterlingisation instead of a new currency. Since then, polling has demonstrated that the vast majority of Scots oppose a separate currency, and that support for independence would fall if it means ditching the pound.

Sterlingisation is, therefore, favoured by the SNP purely on political grounds. The economics of it are pretty much irrelevant.

The reality of the currency question for the SNP is that it is an intractable problem. There is no currency solution that allows for part of an advanced economy to safely remove itself from an established, deep-rooted national monetary base. Successful monetary system transitions in modern economies can only take place when all involved parties are incentivised to make the switch work, and when a carefully structured plan is agreed and then enacted upon in unison — such as the phased introduction of the euro in the early 2000s following a decade of preparation.

Scotland exiting the UK would not be like this. As with Brexit, it would see a small part of a large union cutting itself off from existing systems that underpin the functioning of its economy, while the remaining part keeps those systems and has little incentive to work towards a trouble-free transition for the leaver. Unlike Brexit, however, the implications of cutting away from a monetary and fiscal union as well as a free trade area make Scexit a far more serious — and risky — proposition.

The SNP’s campaigning strategy therefore is to stick with sterlingisation no matter what. There is no right way, so the only way is to pick the option that gives them the most pain-free doorstep pitch, and to hell with the real-life consequences for people. The economic consequences of separation might have become objectively starker (Scotland’s fiscal deficit was 6.4 per cent of GDP in 2013/14 and is currently running at over 20 per cent of GDP) but that just means doubling down on the big lie that sterlingisation equates to continuity and a risk-free transition.

The new currency faction within the SNP, deluded as they are by their own currency dreams, at least perform an important public service in highlighting the dangers of their leadership’s plan. The Sturgeon administration will try to neutralise them while avoiding debate on the issue outside the party. They shouldn’t get away with it.