Robert Pringle’s Viewpoint: A qualified case for Scottish independence

There has been much pessimistic commentary and ominous warnings to the Scots from the UK media and politicians in the run-up to this week's referendum. If the Scots reject independence by a narrow margin, there will be calls for more referendums and debilitating uncertainty. A ‘Yes' vote, it is said, would lead to years of financial turmoil and economic distress – and threaten an immediate bank run in Scotland. Without denying the huge risks this enterprise runs, there is a case for taking a brighter view.

Assuming for the moment the Scots go for independence, let us start with three propositions.

First, the graduation to full legal sovereignty must be seamless at the point of independence; given the enormous number of issues to be agreed between the governments, and with the EU, even given maximum goodwill on all sides it is unlikely that this can be achieved by March 2016, the date set by Alex Salmond, Scotland's first minister. A transition period of, say, three years seems much more probable.

Second, during this time the Westminster government and the Bank of England should and will do everything they can to prevent financial chaos north of the border. Existing laws apply as well as the mandate of the central bank (on which more below).

Thirdly, the United States will back international efforts to support Scotland through the difficult transition and first few years of independent statehood. America's own history and the support of Scottish-Americans will ensure it respects what Salmond calls "the sovereign will of the Scottish people", if necessary leaning on London to fall in line. This will be particularly critical if Scotland launches its own currency.

Bank of England and stability

The Bank of England's mission – to promote the good of the people(s) of the United Kingdom by maintaining financial as well as monetary stability – requires it to promote an efficient flow of funds throughout the economy and maintain confidence in financial institutions. This will not change as a result of the vote on September 18. The Bank will and must continue to use all the means at its disposal to promote these ends, including its financial operations, its lender of last resort role, the powers of the Financial Policy Committee, as well as its resolution authority – i.e. its toolkit for dealing with failing UK banks, building societies, investment firms and central counterparties. It will continue to oversee the payment, clearing and settlement infrastructure for the whole country. The Prudential Regulation Authority will continue to supervise 1,700 banks, building societies, credit unions, insurers and major investment firms throughout the UK. All this will remain unchanged during the transition period to statehood.

Equally, customers having deposits in Scotland will continue to be protected, as the Financial Services Compensation Scheme (FSCS) has stated: "The matter of Scottish independence is for the Scottish voters to decide. If the vote is in favour of Scottish independence, there is likely to be a transitional period. During any such period, we expect consumers will continue to be protected by the FSCS as at present, and compensation cover would continue unaffected."

Finally, given Scotland's desire to re-join the EU, and the accompanying requirement that it also pledges to joins the euro and sets up its own central bank, it is likely that Brussels and the European Central Bank (ECB) in Frankfurt will also do whatever they can to support the fledgling state.

In other words, whatever the sore feelings aroused among English voters should the Scots reject the union, if it plays its cards well Salmond's government can count on widespread international goodwill and support. Indeed, some in Brussels may be only too pleased to teach the English a lesson in European cooperation.

The currency question

Is the currency conundrum the bugbear it has been made out to be by unionist spokesmen? Not altogether.

As regards banking supervision and oversight, the decision of the Scottish banks to relocate the domicile of their headquarters and main operating entities to England in the event of a ‘Yes' vote has hugely simplified and clarified the situation. There seems no reason why the Bank of England should not continue to provide supervision services as it has done during the lengthy transition period. That will give time for successor arrangements to be worked and reserves to be built up should Scotland opt to launch its own currency eventually.

The path that an independent Scotland would follow in its currency policy has become clearer. This is usually posed as a question of a choice among the following options: a currency union with the UK (rejected by all three parties in the UK), ‘sterlingisation' and launching its own currency – let us call it the ‘thistle'. Rather than stark alternatives, these seem more likely to be stages that Scotland transits on the way to its destination. It would start as a member of the sterling zone, transit through ‘sterlingisation' (unilateral adoption of sterling), through having a period with its own currency and its own currency authority to eventual membership of the euro. If so, it would be advisable for the Scottish government to lay out such a path early in the negotiations with Westminster and Brussels.

Perilous launch of the 'thistle'

Every stage will be fraught with peril – especially launching the ‘thistle', which will require full cooperation from the Bank of England, Federal Reserve, ECB and IMF.

What has been overlooked in all the doom and gloom is that during this prolonged period of uncertainty Scotland will have a huge advantage. This is that it has long experience not only of adjusting to an exchange rate determined by the interests of a dominant partner country (England) but also in making a currency union work. Scotland has had 300 years of experience of living with a currency union run by institutions in which it has had little influence. Among the original euro area members only the Benelux countries and Austria had experience of following a dominant central bank before entry into the eurozone – in their case the Deutsche Bundesbank – and this was an informal arrangement rather than a true monetary union. It is interesting that support for the euro among these countries has remained high despite the financial crisis (as it has even in Ireland, another small country used to adjusting to larger neighbours).

Scots recognise the enormous benefits they received from the ability of the Bank of England and UK authorities to act as lender of last resort to Scottish financial institutions during the financial crisis. At the same time, the English need to understand the disgust that London-based policies can provoke outside the metropolis: monetary and financial policies are perceived to have led the country into widening inequality of incomes and wealth, an unsustainable London property boom, and a financial policy dominated by the interests of global plutocrats and the City of London. These are perceptions felt by many English people as well as Scots; the difference is that the Scots can do something about them. London's policies – at both ends of the city – have come to be seen, in many ways, as deeply immoral.

The Scots have benefited hugely from the currency union. They have shown the self-discipline needed to make a success of it. Prudent Scots understand that the only way to reach their social goals is to have a successful, flexible economy and financial stability; for that they will need a pro-business and pro-enterprise culture, as well as a strong supervisory and monetary policy framework.

True independence must be earned the hard way

If they vote ‘Yes', the hurdles they will have to jump on the way to prosperity are also high. The Scots will have to face up to the probability of periods of even harsher austerity than in recent years. Other things being equal, the dissolution of the currency union will worsen living standards. The Scots will have to bend their efforts to establishing the new state's credit rating in the markets, and gain a reputation for reliability, prudence, enterprise and solid achievement.

In this regard the ‘Yes' campaign has been at best misleading and at worse downright dishonest. Little has been said about the daunting challenges the country will face and the massive dislocation and disappointments that are bound to be in store. Scotland is likely to have to endure prolonged fiscal restraint while it builds up reserves to support its claims to independence. Its leaders may have to put some of the promises for greater welfare spending on hold pending the establishment of financial stability. Formal political independence has to be backed by real financial independence. But the Scots also have resources to make a success of it. Central banking and currency challenges should not be seen as insuperable barriers to the establishment of a viable economy.

Robert Pringle is the founder of Central Banking and author of The Money Trap.