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Scotland’s Place in the UK

Countries in the eurozone were required to abide by the stability and growth pact, and look where that took us. We need something much more robust than that to make a currency union work, and I am pretty confident that it would not be any more acceptable in Scotland than it will be in England.

Let me now say something about the effects of a currency union on the rest of the United Kingdom. It would, after all, have to be a two-way street. Is it realistic to expect the rest of the UK—much the bigger partner, both economically and in terms of population—to accept Scottish oversight of fiscal policy here? Is it realistic to expect the rest of the UK to risk the need for what most durable currency unions have eventually required, namely fiscal transfers? Is it realistic to expect the rest of the UK to sign up to a currency union that could carry the risk that all those rules, albeit tough rules, would fail, and that their failure would trigger the need for bail-outs? I do not think that such arrangements would be acceptable to the electorate. What is more, I doubt that a majority could be mustered for them in the House of Commons.

Of course, the leaders of both countries might try to get a currency union past their respective Parliaments without fully explaining the consequences, but I am on my feet now because I want to try to prevent that from happening. There would be shades of the eurozone in such an attempt, but it would be a fool’s errand.

A currency union created in such circumstances would, sooner or later, be tested by the markets. Either the rules would be tough enough to bite, or, if they were not tight enough, there might be a bail-out. Alternatively, we might experience both the pain and the bail-out, as happened in the eurozone: we might experience the pain of the bail-out south of the border, and the pain caused by the biting of the rules north of the border.

Not enough attention has been paid to the political consequences of botching these currency arrangements. Whatever the economics of trying to create a currency

union, I think that it is bad politics for these islands at this point. The eurozone has provided a reminder not just of the economic difficulties of creating durable currency unions, but of the political damage and fall-out that come with flawed arrangements. We need, above all, to put what Lord Lang, in the other place, described as “the politics of grievance” behind us as we make our efforts to renew the relationship between Scotland and the rest of the UK. But it seems to me that a currency union would risk the opposite. As its full implications became clear, it would create the conditions for lasting resentment on both sides of the border, and it is just such resentment that we must do everything possible to avoid in the search for a stable economic and political relationship between those on the two sides of the border.

I urge the Governments on both sides of the border to explain how all the difficulties that I have outlined could be addressed, well before the Scottish referendum. Not to do so would be to deceive our respective electorates into believing that there is some third way, some relatively painless option, enabling the Scots to imagine that they could be fully in control of their own affairs and that the rest of the UK could avoid large contingent obligations. If, as I have concluded, those difficulties cannot be adequately addressed in the current circumstances, the two Governments should rule out a currency union now.

12.46 pm