Labour's "No" To A Currency Union

In the venerable pages of The Scotsman, Ed Balls writes:

The Scottish people have a hugely important decision to make this year - whether to leave the UK or stay in our union. I do not have a vote, but I strongly hope the Scottish people choose to stay. 

I believe Scotland – and the whole of the UK – will have a stronger and fairer future not just by staying together in the union, but also with a Labour government in Westminster.

A Labour government committed to earning our way to higher living standards for all and fairer deficit reduction – getting young people back to work, ending the bedroom tax and bringing back the 50p top rate for the very highest earners.

But before next year’s general election Scotland must first make a historic decision about its economic future.

It’s important to be open about the consequences of this decision. SNP leader Alex Salmond says Scotland can leave the UK but keep the pound and the Bank of England. That is a false promise that he cannot deliver. 

Why Labour cannot enter into monetary union 

I am clear that the next Labour government cannot enter into a new sterling monetary union to share the pound with an independent Scotland. Let me explain why.

Ten years ago the UK had a similarly huge decision to make - whether or not to join the European single currency, the Euro.

At the time there were some who argued that the UK should simply join for political reasons. But there is no more important economic decision a country can make than what currency to have.

It’s not simply about the coins and notes in your pocket, but about mortgages, jobs and businesses, the taxes we pay and how our banks and financial services are regulated.

The economics have got to come first. That’s why, when I was at the Treasury, we conducted a hard-headed economic assessment of what joining the euro would mean. 

Euro ‘would be bad for UK economy’ 

We set five economic tests and did the most comprehensive work the Treasury had ever seen on what this would mean for jobs, interest rates and economic stability in the UK.

This immensely detailed work showed very clearly that the Euro would be bad for the UK economy. And it was on that sound basis of dispassionate analysis that we decided not to join the Euro.

I believe time has shown that we got that decision right. Keeping the pound has proved the best policy for the UK. Being part of the Euro would have been catastrophic for Britain.

Ten years on we have to make the same hard-headed economic assessment about the question of a currency union if Scotland were to become independent.

Following the very significant speech by the Governor of the Bank of England last month - and drawing heavily on the ‘five tests’ from a decade ago - the Treasury has conducted a detailed economic assessment of a sterling currency union.

The conclusions of this new Treasury assessment are that the rest of the UK need not and should not share the pound with an independent Scotland and that such a monetary union would be damaging for the economies of both of the countries involved.

The Treasury analysis demonstrates why a stable single currency cannot cover countries with entirely separate economic policies. There has to be an effective banking union and a significant degree of fiscal sharing. These were the key lessons which Governor Carney drew from the difficulties the Eurozone is facing.

As we are seeing now the euro countries themselves, as they struggle to restore growth in Europe, are trying to solve the flaws in the Euro by deepening their political and economic ties, through a banking and fiscal union.

A Yes vote in this year’s referendum would take Scotland in the opposite direction. It would mean, by definition, the end of our current fiscal and banking union and weaken wider economic ties between Scotland and the rest of the UK. All of which would fatally undermine all the features which currently make our monetary union work. 

UK ‘can stand behind any bank in trouble’ 

Banking union is necessary to deal swiftly and effectively with problems that arise in any bank in the currency union. The UK can stand behind any bank which gets into trouble, as we saw when the Royal Bank of Scotland and the Bank of Scotland got into very serious difficulties and the UK government was able to step in swiftly.

Fiscal sharing is vital so that taxpayer resources can move on an equitable basis to support areas which face problems paying pensions, tackling unemployment or investing in public services.

The UK delivers all these things for us today. None of us wants to lose any of this, but independence would break the political union which makes it all possible. If we were two separate countries there could not be an unquestioning commitment from both to stand behind a bank that gets into trouble.

Similarly, separation would put an end to today’s guaranteed fiscal sharing - even as they argue for a currency union, the SNP go out of their way to emphasise they will not share tax and spending with the rest of the country.

So a Euro-style monetary union between an independent Scotland and the rest of the UK would mean Scotland would have to live with an economic policy not suited to Scotland, with a direct impact on Scottish jobs and growth. It would involve simply unacceptable fiscal and economic risks for the rest of the UK. And interest rates would be higher in the UK and Scotland as a result. 

Currency union ‘cannot work’ 

All this analysis tells us that a currency union between the UK and a separate Scotland cannot work, will be unstable and bad for both a separate Scotland and the rest of the UK. And having helped to keep the UK out of the Euro I cannot import in to the UK the sort of problems which the Eurozone has faced.

I want Scotland to stay in the UK. But if Scotland were to vote to break away, then I do not believe a currency union would be in the interests of either an independent Scotland or the rest of the UK.

And as Chancellor in a UK Labour government after the general election, I simply could not support or recommend to Parliament that we form a currency union with a separate Scotland.

Looking at the economics of this, it’s the only conclusion I can reach. A currency union between an independent Scotland and the rest of the UK is not going to happen.

So I hope the Scottish people vote to stay part of the UK. But if Scotland votes to break away they will be voting to leave both the fiscal and currency union that we now have - and which has worked to the benefit of all.

Alex Salmond must now come clean and explain to the Scottish people what currency an independent Scotland would have. It is the most fundamental economic question a country has to decide. The troubled experience of the euro over the last decade shows why it’s so vital to get this right.