‘Retaining the pound makes good sense for an independent Wales’
Earlier this week First Minister Mark Drakeford called on those seeking an independent Wales to answer one question – ‘Explain to me what currency would an independent Wales use?’ Here, economics expert – and independence supporter – Dr John Ball gives hi
IFULLY accept the First Minister’s right to question those of us who favour independence, sadly in his attempt to disparage our case he reveals an astonishing ignorance of economics. He asks what currency we would use – the answer, of course, is the pound.
While there are those in the independence movement who hanker after a new, Welsh currency, the economic reality means that the best option is the continued use of the pound. There is no reason why, in an independent state, the pound could not continue to be used.
There are several different systems which are not necessarily mutually exclusive. The first and obvious is a currency union and probably the best option. During the Scottish referendum, the then-governor of the Bank of England suggested that a currency union would be required, in fact such a currency union based on the pound already exists. There is a nine-member sterling currency union and although its members are not sovereign states, they are to a greater or lesser extent self-governing so far as economic and fiscal policy is concerned. Each has its own banknotes designated in pounds and Welsh banknotes would reflect our individuality.
Such unions may be formal or informal. An informal currency union exists where separate states unilaterally adopt the currency of one of its members; this informal arrangement neither implies nor requires any further economic or monetary union and would be appropriate for Wales. The advantages of such an arrangement are clear; international competitiveness is maintained using a recognised hard currency, there is no exchange rate risk and no transactions costs within the British Isles and other members of the currency union. The principal disadvantage is that there is no influence over monetary policy, but with interest rates currently at an all-time low and likely to stay that way into the foreseeable future, this is not an issue.
In a currency union the Bank of
England would be the ultimate issuer of bank notes and remain lender of last resort. During the 2014 Scottish referendum the “better together” campaign insisted that an independent Scotland could not continue to use the pound. There is an important and fundamental issue here – the Bank of England is independent of government and while it might consult, or be consulted by the UK Government, it is not an arm of government.
During the referendum campaign the then-governor emphasised this independence and told the BBC: “The Bank has operational independence in the conduct of monetary policy – others, that is elected officials, make decisions about our remit, our mandate.”
In the absence of a currency union sterlingisation would be an alternative, this is seen by any economists as the way forward. The pound remains the currency but used without the consent of the Bank of England. The weakness is that the Bank would not act as lender of last resort, although the likelihood of an event requiring such protection is extremely remote and, in any event, such a duty would rest with the Wales Central Bank. In addition, there would be limited control over interest rates, although with rates likely to remain at or close to zero probably for the remainder of the decade or further, this is not an issue. This arrangement would work over the longer term, as is the case with some Latin American countries that use the US dollar without the direct consent of the Federal Reserve. In terms of economic stability (in the absence of a currency union) this might be the best option. Support for sterlingisation (in Scotland but applies equally to Wales) has recently come from two important sources. Lord Mervyn King, former Governor of the Bank of England, has pointed out that there is no reason why Scotland could not continue to use the pound within such a scheme. The respected think-tank Adam Smith Institute has suggested an “adaptive sterlingisation” which not only allows continued use of the pound, but outlines an approach that would stimulate the economy.
The use of non-domestic currency is in fact quite common, many countries have such an arrangement. Nine countries or dependencies outside the Eurozone use the euro, 11 countries the US dollar, seven share the East Caribbean dollar, nine the West African franc and five the Central African franc. There are in addition (other than sterling) nine currency unions, the majority of which are informal. The 19 countries currently using the euro do not have a domestic currency. In a lesson for Wales, the five fastest-growing economies in Europe (the three Baltic States, Slovenia and Slovakia) use the euro, which is clearly not their domestic currency.
How would using the pound as a non-domestic currency work? The mechanics of its use do not present a problem, it would very much be business as usual. Firstly, there is perversely a substantial advantage in having the major international clearing banks in Wales – and for anyone screaming that they are English, they are not. They would want the straightforwardness of the pound to continue and would make that clear to any potential intransigence from the UK Government or the Bank of England. Secondly, more and more financial transactions are made electronically, and although varying by demography and sector, some 70% of all purchases are through international card payments, as are in addition almost 100% of wages, salaries and busines transactions; thus little “money” changes hands.
Clearly, the macroeconomy, tax and spending priorities, social welfare, economic development and indeed all undertakings by the new Welsh Government would quite clearly not be affected by the continued use of the pound. It is worth repeating – the small nations of Europe have not been hampered by being part of a non-domestic currency, indeed they have benefited from it.
There are two related financial matters that should be mentioned: Wales’ share of UK international currency reserves and contribution to the UK’s National Debt.
It is not unreasonable to assume that Wales’ allocation of each reflects its population share of the UK; currently 5%. Taking figures published by HM Treasury (which interestingly are published in US dollars) Wales’ 5% share of international currency reserves would amount to £7bn. A greater amount than several of Europe’s smaller nations including Ireland, Iceland, the Baltic states and about two-thirds of Finland.
Arguably the main financial debt facing a new Welsh Government is the contribution toward the UK’s national debt, currently over £2trn. Opponents of independence have leapt upon this, suggesting that even a relatively small amount of 5% would wreck the country’s finance. In practice – whatever the rights and wrongs – and in keeping with almost all indebted countries, the UK pays interest only on the debt, currently £48bn, there has been no contribution to the overall amount since the 1960s. Wales’ 5% share would amount to £2.4bn, almost exactly the amount currently being paid by the Welsh taxpayer in interest charges.
So, First Minister, please do not worry. We in the independence movement know what we are doing – your pension is quite safe.