By Russell Bruce
On Sunday morning on the Andrew Marr show Chancellor George Osborne was pressed by Marr on currency arrangements in the event of a Yes vote.
Osborne was very, very clear.
“Scotland would not be sharing the pound, as an independent country, with the rest of the United Kingdom”
“Currency union is not going to happen”
“There will be no currency union”
Marr pressed the point again ‘No ‘ifs’ no ‘buts.’
Osborne, “No ifs no buts – we will not share the pound.”
Osborne is perfectly aware the markets started selling sterling last week following a You Gov poll showing the polls continuing to close. With Sunday’s poll in the Sunday Times indicating the Yes campaign had moved ahead the reaction of the markets within hours was predictable, even George Osborne could work that out.
It was always a dangerous strategy for Osborne to move from a position of arguing against a currency union to flat out refusal to leave it on the table. He has left himself no wiggle room.
Sterling has now dropped against all major currencies including the Euro and analysts are predicting the value of sterling could drop by up to 10%. Such predictions can become self-fulfilling as investors holding sterling and UK debt rush to reduce their holdings.
When the market sees nothing to reassure, investors and countries holding sterling reserves react and the slide is in danger of getting out of control.
So Osborne knew on Sunday that he was effectively devaluing the pound. He chose political rhetoric over a chancellor’s duty to stabilise the markets. He did NOT say “Look I think it is a very bad idea, but if Scotland votes for independence of course we will sit down and discuss resolution of all the major issues.”
We know that the currency of an independent Scotland will be the pound and the Scottish Government has a range of options, but favours a solution that makes continuing trade between Scotland and rUK free of transaction costs.
Such a solution is more beneficial to rUK than to Scotland because Scotland imports more from rUK than it exports. It is the one plus on rUK’s balance of trade. Scotland on the other hand has a healthy balance of trade surplus.
The drop in value of sterling is actually good for the Scottish economy. Because of that healthy trade surplus our exports become more competitive in international markets. Sterling falling against the dollar is good news for oil exports because oil is priced in dollars and we win on the conversion back to pounds.
There is a bit of a problem though for the City of London with the drop in the value of sterling because the city is dependent on a stable and high value pound. London’s investment bankers and foreign exchange traders will not be at the back of the queue in selling sterling.
The other ‘little’ disadvantage to the UK of a sterling sell off is it is pushing up the cost of servicing UKs even rising debt.