Currency in Scotland after 2014

Sajid Javid Excerpts

Wednesday 12th February 2014 Westminster Hall

[The Financial Secretary to the Treasury (Sajid Javid)]

I welcome you to the Chair, Mrs Riordan. It is always a pleasure to serve under your chairmanship, and it is good to see my right hon. Friend the Under-Secretary of State for Scotland here today. I congratulate the hon. Member for Edinburgh South (Ian Murray) on securing this debate, on his excellent, thoughtful speech and on giving all hon. Members an opportunity to discuss this important issue. The debate has been lively and passionate. Indeed, it has been the liveliest and most passionate Westminster Hall debate that I have yet seen, which shows how important the issue is not just to the people of Scotland but to the people of the entire United Kingdom.

It is no exaggeration to say that the currency that we use affects everyone every day, whether they are individuals buying food or paying off loans, businesses paying their employees or trading across borders or banks protecting savings or providing mortgages. Currency is one of the most important issues in the Scottish referendum debate. Members may be aware that last April the UK Government issued a comprehensive paper exploring an independent Scotland’s possible currency options. Members will be aware—many hon. Members have referred to this today—that just last week the Governor of the Bank of England, Mark Carney, set out his views on currency unions in measured and, as he describes it, technocratic terms. Members may also have read that the Chancellor plans to give a speech on the matter later this week.

[Pete Wishart]

In the past few days, the Prime Minister and the Chancellor have been playing good toff, bad toff with Scotland. The Prime Minister is love-bombing us from London, and the Chancellor will be threatening us on currency in his speech in Scotland in the next two days. Which one does the Minister support—the good toff or the bad toff?

[Sajid Javid]

That goes to show that the SNP is not interested in a serious debate on one of the most important issues facing the Scottish and British people. That speaks for itself.

The Government have consistently stated throughout the debate that the current economic arrangement—one currency in one United Kingdom—is in the best interest of everyone. We have also consistently stated that it is highly unlikely that a currency union between an independent Scotland and a continuing UK could be made to work. I will use the remaining time to remind hon. Members of our analysis, which explains why that is the case.

First, the lessons of the eurozone crisis are there for us to see. Currency unions do not work without close political and fiscal integration. As a result of the crisis, those countries that use the euro are moving towards ever greater integration to address the challenges that they face. Scottish independence, though, is all about disintegration and would inevitably mean that the continuing UK and Scotland move further apart. The Scottish Government’s proposal for a currency union without fiscal or political integration lacks any credibility and makes one wonder whether the Scottish Government actually understand what the word “independence” means.

Secondly, we know that the economies of an independent Scotland and a continuing UK would be very different and would diverge over time as a result of different laws, different regulations and different industries. One industry that we know would be important for Scotland is North sea oil. A significant portion of an independent Scotland’s economy would depend on oil revenues. Were a change in oil price to affect the two countries differently, a one-size monetary policy with one currency for two separate nations would simply not be suitable.

Thirdly, despite the Scottish Government’s claim, we do not believe that a currency union would be in the interest of an independent Scotland. Such a union would inevitably constrain Scotland’s own economic policies because the remaining UK, to manage the risks of the union, would need to set interest rates and maintain oversight of an independent Scotland’s tax and spending plans. Indeed, a currency union would also be likely to undermine an independent Scotland’s economic resilience and credibility. If, for example, the financial markets sensed that the Bank of England’s monetary policy did not suit Scottish circumstances, they might doubt Scotland’s commitment to the currency union, which would, in turn, lead to financial market speculation. In such circumstances, if markets were not calmed, there would be a very real possibility that Scotland would be forced to adopt its own currency in a time of crisis. One is reminded of the recent situation in Cyprus when there was plenty of talk of the country potentially leaving the euro. Members will know that that was prevented only after a huge bail out from other eurozone members, which came at a significant cost to Cypriots, many of whom lost up to 40% of their deposits in domestic banks.

Fourthly, just as a currency union is not in Scotland’s interest, it is hard to see how it could be in the interest of the remaining United Kingdom. Such a union would involve the remaining United Kingdom giving up an element of its economic sovereignty, as we have heard from many hon. Members today. The public would feel very strongly about that. It would increase the risk of having to bail out Scottish banks, and the idea of putting the remaining United Kingdom’s economy at risk because of another country’s banks just as we are getting our own banks in order would make no sense.

Before I come to an end, I will address some of the questions that have been raised. I listened carefully to the speech of the hon. Member for Dundee East (Stewart Hosie) and what he has to say on this issue is very important. I agree with the shadow Minister that he is an intelligent person who makes valuable contributions in the House, but from what I have heard today, he does not seem to want facts to get in the way of a good argument.

The hon. Gentleman and other hon. Members mentioned the banking bail outs of 2008. I remind him that the cost of recapitalising the Royal Bank of Scotland was £45 billion, which is the largest banking bail out the world has ever seen, plus an additional £275 billion of state support through guarantee and funding commitments. That sum is more than 200% of an independent Scotland’s GDP.

[Stewart Hosie]

Presumably, the Minister does not disagree with the Banking Commission that the total cash cost of the entire financial bail out of all the systems was £133 billion. Of the other figures that he talks about, £220 billion was made up of the asset protection scheme, which was a paid-for insurance guarantee. The scheme made the taxpayer a profit and was never called upon; it has since been shut down. Will the Minister confirm that that is correct?

[Sajid Javid]

Again, that is a good demonstration of how the hon. Gentleman would like to twist the facts. Just because a guarantee is not called upon does not mean that it has not done its job. The guarantee provided confidence and ensured that the banking system did not collapse. Our analysis shows that Scottish banks, even when we focus only on their assets in Scotland, would have assets equal to 10 times the GDP of an independent Scotland. That shows that it would be difficult for an independent Scotland to give depositors confidence in its domestic banking system.

The hon. Gentleman also mentioned trade between the UK and Scotland. The UK accounts for 70% of Scotland’s total trade, whereas Scotland accounts for 10% of the UK’s trade. Scottish trade is important to the UK economy, but it is not clear that it is important enough to risk recreating in the British isles the problems that we have seen in the euro area.

In conclusion, a fiscal and currency union pursued by two diverging nations would put significant limits on an independent Scotland’s economic freedom, and it would put an independent Scotland at severe risk of losing economic resilience and credibility. Such a union would undermine a continuing UK’s sovereignty and would increase the risk of bank bail outs. That is why we have consistently said that it is highly unlikely that a currency union would be agreed and that it is highly unlikely that a currency union could be made to work.