John Ferry

Has Salmond just shattered Sturgeon’s currency delusion?

Has Salmond just shattered Sturgeon's currency delusion?
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The war of the Salmondites versus the Sturgeonites is just getting started. Who knows how nasty it will get or what the longer term ramifications will be? Already apparent though is how Salmond's pantomime villain shimmy back into the political arena is forcing Nicola Sturgeon onto ground she would rather avoid during an election campaign.

The usual SNP tactic around elections is to downplay separation talk and reach out to risk averse moderate voters, safe in the knowledge the party's most zealous supporters will stay in line. But with Salmond on the scene demanding to know how exactly Sturgeon will achieve independence, that is not an option. Sturgeon will have to make another referendum and her commitment to leaving the UK a central part of her campaign.

The coming weeks then are likely to see Alba and the SNP compete on the strategy and tactics to achieve independence.

Salmond favours extreme measures. Speaking to Times Radio, he talked of a post-pandemic move by a nationalist-controlled Scottish parliament to 'start negotiating about Scotland's independence'. He also talked of street protests, of organising a plebiscite without UK government permission, and of 'mobilising international opinion and international legal opinion on Scotland's right of self determination'.

This is far removed from Sturgeon's more conservative approach of getting the UK government to agree another referendum. Will Salmond bounce her into taking a harder line? Possibly.

As with the big question on secession, so too with other policy areas Sturgeon would rather shy away from. One is the post-independence currency question. At Alba's launch event, Salmond hinted his party's position will diverge from the SNP's lingering 'keep the pound' policy. He said that today's economic conditions 'would tend to make the case for moving to a Scottish currency just as quickly as you can because you don't want to have debt denominated in another currency'.

This appears to be a recognition of inherent weakness in the SNP 'sterlingisation' plan to unofficially use the pound without formal monetary union before transitioning to a new currency if a number of economic tests are met. That arrangement would involve the new state issuing a lot of debt in foreign currency.

The SNP plan has been heavily criticised by economists as likely to lead to an economic crisis. Salmond is right to reject it. But that does not make his plan any better. Having a new Scottish currency in play for day one or near day one of independence creates a raft of other risks and uncertainties.

Take just one issue: mortgages. The latest official survey of Scottish households estimates 720,000 households in Scotland have mortgages. Those mortgage contracts require repayment in sterling, which means households would suddenly have foreign exchange risk to manage as the value of incomes fluctuate relative to mortgage liabilities. A free floating new currency would almost certainly devalue relative to the pound in reflection of Scotland's stand-alone economic fundamentals and start-up risks. This could leave households unable to afford their monthly mortgage payments.

Ah, you might think, but surely the banks will offer to switch those mortgages to new contracts referencing the new currency, with houses revalued in that new currency? Maybe. Or maybe not. We don't know. There are no case studies on this. No advanced economy with mass consumer debt and mass mortgage markets has broken away from its national currency base before. Scots, and their debts, would be guinea pigs in an extraordinary economic experiment.

Dig deeper and many more problems are revealed. Around 60 per cent of Scottish exports go to the rest of the UK. Scottish exporters and importers to the remaining UK would have foreign exchange risk and currency transaction fees to deal with. And at the macro level the new state would have to establish trust and credibility in its new currency if it is to sell bonds in it. Extreme fiscal prudence would be required. With Scotland running a pre-coronavirus implicit budget deficit of 8.6 per cent of GDP (Scotland's current deficit is estimated at over 25 per cent of GDP), that would mean a ruthless austerity programme.

The return of Salmond could force these issues out into the open. The Salmondites have the advantage that they can argue the case for a new currency is at least more honest than the Sturgeonite fantasy that sterlingisation is merely a continuation of what we have now, which it absolutely is not.

Sturgeon then might finally be nudged into killing off sterlingisation. That just leaves defending the idea of a new currency being introduced within the period of the next parliament. Good luck making that case.