Monday night’s Scottish independence referendum debate between Alex Salmond and Alistair Darling raised the scariest question for voters leaning toward a Yes vote: Does Scotland have the courage to face down the Bank of England, walk away from its share of the U.K.’s national debt, and become an international banking pariah in order to get its independence?
Scottish National Party leader Salmond did not quite say he would do that, but admitted it was a negotiating tactic. Darling, leading the “Better Together” campaign, led him to the brink on the issue.
The central problem in the Sept. 18 independence vote is what Scotland’s currency will be if the country becomes independent of the U.K. Salmond has said that Scotland should continue to use the British pound, and then negotiate some form of shared currency union with the U.K. The U.K. government in Westminster, however, has made it quite clear that Scotland will be going it alone if it leaves the union — the new country will have no say over the pound.
One potential option for Scotland is to use the pound anyway, as Panama does the U.S. dollar. The difficulty with that is that Scotland would have no control over the Bank of England, and would be forced to pay its debts in a currency whose strength is determined by interest rate decisions in London.
In that situation, Scotland could simply default on its debt and force the British to pay it instead — but that would make Scotland so risky as a sovereign borrower that it would be unable to borrow money elsewhere unless it accepted ludicrously high interest rates. Yet Salmond hinted that he was willing to force the BofE into sharing the pound by threatening just such a default, according to the Financial Times:
Mr Darling confirmed that an independent Scotland would be able to use the pound unilaterally even if the rest of the UK refused a currency union, a statement leapt on by Mr Salmond as “the most important revelation” of the debate.
But the former chancellor said the “sterlingisation” option would be hopeless since Scotland would not have a central bank and would have to run a permanent surplus. “Of course we could use the pound — but we could use the rouble,” he said.
Mr Salmond also repeated his warning that Scotland would walk away from its share of Britain’s national debt if the UK refused to “share the assets” of the Bank of England in a currency union; Mr Darling said a default would make Scotland a pariah on international money markets
That is an extraordinary thing to hear in a political debate: The leader of a country openly threatening default as a negotiating tactic. But it’s a good one, and it appeals to the position that the nationalists are in: They are behind in the polls and need to show they have the grit to take Scotland to independence come what may.
That grit, however, would come with a cost. It could bring Scotland to its knees, economically, through the prospect of a major, modern European capitalist economy, currently running at a debt, being suddenly cut off from all reasonable access to international finance. Such a scenario suggests a massive collapse of the Scottish economy.
But Salmond is willing to risk it. Here’s the Huffington Post’s account:
He added: “We don’t need permission to use our own currency. The argument actually is that they will deny us the assets of the Bank of England. The reason that won’t happen is that if you deny us the financial assets, then the UK will get stuck with all of the liabilities.”
Salmond said no chancellor would let Scotland away with its share of the debt liabilities and therefore a currency union would be agreed.
Darling said: “If your first message in the world is here we are, here is Scotland, and by the way we’ve just defaulted on our debt, what do you think that would do to people who are lending us money in the future. Nobody would lend us any money in the future.”
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