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16/10/13 09:46

The Currency Union

First Minister Alex Salmond
The Isle of Man
16 July 2013

In the second in a series of speeches the First Minister delivered over the summer, Mr Salmond set out how, following a vote for independence in next year's referendum, Scotland will continue to participate fully in a currency union with the rest of the United Kingdom.

Below is an abridged version of the First Minister’s speech, focussing on its main theme, or you can listen to the full speech here.

Thank you, Allan (Bell, Chief Minister)

It’s a pleasure to be here on the Isle of Man, and a special pleasure to speak in this magnificent Royal Hall in the Villa Marina’s centenary year.

Flying in today, I was reminded of the old saying that from the summit of Snaefell, you can see six kingdoms – the Isle of Man itself, Ireland, Wales, England, Scotland and the kingdom of heaven.

The Isle of Man is unique among the five earthly kingdoms mentioned in the saying. You’re the only one which has never been part of the United Kingdom.

Yet your history demonstrates how closely linked the people of these islands are. The Manx language shares many similarities with Scots Gaelic and Irish Gaelic. The old Kingdom of the Isles – or Kingdom of Mann and the Isles - included many of the islands off Scotland’s west coast, as well as the Isle of Man. In addition to periods of independence, the Kingdom had overlords from Scotland, England, Ireland and Norway.

During the 13th and 14th centuries, England and Scotland disputed control of the Isle of Man. Indeed, 700 years ago this summer, in 1313, you received a visit from Robert the Bruce, Scotland’s hero-king.

According to the Chronicles of the Kings of Mann and the Isles, after arriving, Bruce “went to the monastery at Douglas, where he stayed the night. On the Monday following he laid siege to Castle Rushen.” Bruce finally took the Castle, and the Isle of Man, in December.

You’ll be glad to know that I’m not planning to stay until December, and that I’m here for entirely friendly purposes. Allan’s invitation to me reflects the fact that relations between the different parts of these islands are now entirely peaceful.

You’ll see further evidence of that in a year and four days’ time, when Scotland will welcome more than 70 countries and territories from around the world to the Commonwealth Games.

In her Christmas address following the Delhi games in 2010, the Queen observed that the smallest nations always seem to get the largest cheers from the crowd. On that basis, the Isle of Man can look forward to a tumultuous welcome in Glasgow next July. Mark Cavendish has already won once in Glasgow this year - in front of 30,000 people at the National Road Race Championships in Glasgow last month – and I’m sure that he and the other Manx athletes will do you proud in 2014.

Allan’s invitation for me to speak here tonight isn’t linked to sport, however. Allan and I work closely together on the British Irish Council, which includes the crown dependencies of Jersey, Guernsey and the Isle of Man, the devolved governments of Wales, Northern Ireland and Scotland, and the Governments of Ireland and the UK.

At the most recent meeting, we discussed the economy, youth employment and the effects of high energy costs – areas where all governments benefit from learning from each other and working together.

The British Irish Council was established in 1998 – it is a good example of how we can evolve new ways of co-operating with each other in changing political and economic times.

That ties in with the main theme of my speech this evening. It’s about independence and interdependence- the links we seek to preserve and strengthen, and those we need to change.

The currency union is the one I want to speak about in most detail this evening.

That’s partly because the Isle of Man provides an interesting case study. Local banks have issued Manx banknotes for over 150 years. The Manx pound is equal in value to the pound Sterling. Your Government has held the right to issue notes since 1961, accruing income to your Treasury.

Your experience tells us two important truths: first, it shows that self-governing territories can have credit ratings, within a sterling zone, which compare favourably with the UK’s. Your smaller population is not a disadvantage, and the UK’s size is no guarantee against downgrades.

As many countries demonstrate on the international stage, creditworthiness is based on your economic prospects– your underlying strength, not your overwhelming size.

So when Moody’s downgraded the United Kingdom’s status earlier in the year, it kept the Isle of Man’s triple A status intact – just as it has kept the triple A status of Austria, Denmark, Finland, Luxembourg, New Zealand, Norway, Sweden and Switzerland.

That makes a mockery of one of the UK Government’s main arguments against independence… that the UK’s triple A status was crucial to Scotland’s economic prospects and a reason for rejecting Scottish independence.

The second point about the Isle of Man’s currency powers is that you have used them to meet your specific needs. You don’t have a formal sterling union. Instead, notes issued in the Isle of Man are backed by your own Currency Fund. This arrangement has brought exchange rate stability and has facilitated trade with the UK.

That approach is ideal for you – it’s your choice. For Scotland – a larger economy - we will retain the pound. We would use our sovereignty to negotiate a formal currency union with the rest of the United Kingdom. Notes used in Scotland would and could be the same notes as in the rest of the UK. Scottish bank notes would remain in the same way they do now. The Monetary Policy Committee of the Bank of England would consider economic conditions in Scotland when setting interest rates for the currency union area, and it would operate as a lender of last resort.

For the first time since it was founded by a Scot, Scotland as a country would have a formal stake in the governance of the Bank of England – protecting its independence, but taking our share of responsibility with the rest of the UK.

It is what Adam Smith would have termed enlightened self interest.

Scotland gains the freedom to play to its economic strengths.

And the rest of the UK still has Scotland’s oil, gas, and whisky exports contributing towards Sterling’s balance of payments. It keeps a common currency with its second largest trading partner, facilitating exports to Scotland which were worth almost £50 billion last year.

That’s more than the rest of the UK exported to South Africa, Russia, Brazil, India, China and Japan put together.

Can you seriously imagine any Chancellor telling businesses in England, Wales or Northern Ireland that they planned to put up such a ridiculous and unnecessary barrier?

Especially since the fundamental problem of the euro – managing a common monetary policy for divergent economies – simply doesn’t apply within a sterling zone. Productivity in Scotland is marginally higher than the UK average – in the Eurozone, productivity in the Ruhr is 70% higher than it is in the Peloponnese in Greece.

Now, the UK Government has sounded sceptical about a currency union so far.

Yet that contrived scepticism ignores a fundamental point.

The Bank of England, despite its name, is actually a shared asset- it was founded by a Scot, and its assets and liabilities belong to Scottish taxpayers just as much as people in the rest of these islands.

The UK can make the argument that Scotland has no title to a share of such assets.

But if it does so there is an important corollary.

David Scheffer, Professor at Northwestern University School of Law and a former senior adviser to Madeleine Albright, has pointed out that the UK Government’s current position “offers no basis for establishing an obligation to share financial liabilities.”

If Scotland has no share of its assets, then it has no share of liability for UK debts. As surely as night follows day.

What is most revealing is that the UK Government has repeatedly refused to rule out the prospect of a currency union.

Before the referendum on independence, it will focus more on raising doubts than facilitating co-operation.

But after a yes vote in September 2014, there will be a much more constructive approach from the UK Government – one focussed on working in the best interests of the UK, as well as respecting the will of the people of Scotland.

That points to a currency union. That’s the view that has been put forward by our Fiscal Commission Working Group, including the two Nobel Laureates Joseph Stiglitz and James Mirrlees. It’s also the view of former monetary policy committee member Professor Danny Blanchflower.

That currency union would require co-operation and agreement. But the things we would need to agree on are straightforward – for example in relation to limits on budget deficits.

Scotland has contributed more, per head of population, in tax revenues than the rest of the UK during every one of the last 31 years.

Every single year for more than three decades.

During the last five years, our budget surplus relative to the rest of the UK has been more than £12 billion. That doesn’t mean that we have been running an overall surplus – very few Western economies have managed that in recent years. But we have been relatively better off than the rest of the UK by over £12 billion – or £2,400 for every Scot.

What independence would add is a full range of powers. Not just fiscal powers, but powers over the welfare system, economic regulation, employment legislation and key aspects of energy markets.

We could protect capital spending more effectively in tough economic times.

Or to give another example, we could eliminate aviation passenger duty to encourage more direct links to Scotland - including restoring a direct service between Scotland and the Isle of Man.

Price Waterhouse Coopers has found that reducing or abolishing air passenger duty could more than pay for itself, provided we had control of all tax revenues. The reason is obvious - increased receipts from other taxes, such as VAT from tourism, would more than compensate for the reduction in APD.

It’s the holy grail for politicians or economists to be able to reduce a tax while increasing revenues. Yet at present, Scotland can’t take this simple and hugely beneficial step to increase our competitiveness.

The Isle of Man’s success in the space sector provides a good example how economic growth can be encouraged. It’s a surprising fact, for people who don’t know the Isle of Man, to find that four of the world’s largest satellite makers have a base here. Analysts at Flightglobal last year suggested odds of 20-1 for you being the next country to reach the moon, making you fourth favourite - after the USA, Russia, and China.

I’m not planning to launch a 21st century space race between Scotland and the Isle of Man, but Scotland does now have a space sector of its own. There is a major space conference taking place in Glasgow today. Earlier this year I visited a company called Clyde Space, who were about to send the first Scottish-made satellite to Kazakhstan, where it will be launched later this year.

So Scotland might leave the moon to the Isle of Man and others, but we do hope to play a leading role in the increasingly important area of nano-satellite technology.

However the main point is that the Isle of Man’s success with space is a good example of how quality jobs can be attracted to a location - in your case by a competitive tax environment, a reputation for manufacturing excellence based on decades of aviation expertise, and the ability of your government to promote investment.

Scotland has a worldwide reputation – out of all proportion to our size – in other economic sectors, such as life sciences and energy.

Energy is a relevant example. Scotland has almost two thirds of the European Union’s oil production, 10% of its wave power potential and a quarter of its offshore wind and tidal power potential. Glasgow is Europe’s leading centre for offshore wind research; the European Marine Energy Centre in Orkney is its leading centre for wave and tidal power research.

The Isle of Man has already been involved in discussions on the ISLES project between Ireland, Northern Ireland and Scotland. That project will look at developing a grid infrastructure which allows the renewable electricity we generate offshore, to be transmitted to the major towns and cities across these islands.

It’s a good example of Governments co-operating on an all-islands basis to maximise the benefits of renewable energy.

Another example is the British Irish Council workstream on marine energy, which the Isle of Man participates in, and which the Scottish Government leads.

The Isle of Man is taking steps to realise its offshore energy resources – for example through next year’s offshore renewables tender. Marine Scotland has already provided advice to the Isle of Man on updating your procedures for granting consents to offshore developments. I hope that collaboration of this kind will continue.

As you start to harness your renewable resources, you will have one advantage that Scotland lacks. You have control of your own waters.

Scotland currently doesn’t have control of the Crown Estate Commissioners who manage Scotland’s seabed out to 12 nautical miles, and almost half of its foreshore. This prevents Scotland taking an integrated approach to how it manages its marine resources.

The licenses – and revenues - of much of our offshore energy are therefore in the hands of unelected commissioners, with revenues going to the UK Treasury. In the Isle of Man, they will be under the control of your elected Parliament.

It’s a good example of why we need the powers of independence. Transferring control of Scotland’s seabed to Scotland is a key ingredient in delivering the full benefits of the offshore renewable energy revolution for Scotland, and ensuring that the benefits are shared widely across our communities.

When offshore oil and gas was discovered in the 1960s, the Isle of Man Government was able to negotiate a 0.1% share of licence fees and royalties from the UK Government. For decades up to 1995, while Scotland got no access to its own oil revenues, the Isle of Man got a share of our revenues – as indeed did Northern Ireland.

Some time ago, when I discovered this incredible fact, I asked the UK Treasury how much money was involved. They had no idea. The Manx Treasury could tell me immediately - to the nearest million. Which makes an interesting point about which Treasury looks after its finances better!

Scotland has almost two thirds of the European Union’s oil production. But with no Government of our own, and no control over territorial waters, we had no leverage.

As a result, Scotland has watched as the UK Government has squandered four decades of oil and gas revenues. With independence, we can use the next four decades of revenues more wisely. We can also start to harness Scotland’s second, renewable, energy windfall. We can use our natural resources responsibly and sustainably, to enable our human resources to flourish.


Background:
During the summer of 2013, the First Minister made 6 major speeches on an independent Scotland’s place in an interdependent world. He put forward the view that Scotland is currently a member of six unions:

  • The political and economic union
  • The social union
  • The currency union
  • The union of the crowns
  • The defence union through NATO
  • The European Union

The Scottish Government wants to become independent from one of these unions – the political and economic union.

The social union will remain, regardless of Government policy, since it rests on ties of history, culture, family and friendship which are not dependent on Governments.

The current Scottish Government will choose, as a matter of policy, to remain in the currency union, the union of the crowns, the defence union and the European Union; and it will use the powers of independence to recast these unions and make them work more effectively for Scotland and Scotland’s neighbours.

The six speeches were made on the following dates -

12 July, 2013 – Nigg Fabrication Yard – introduction to the sequence of speeches
16 July, 2013 - Chief Minister’s Lecture, Isle of Man – Currency Union
25 July, 2013 - Shetland summer cabinet - Defence Union through NATO
21 August, 2013 - Hawick summer cabinet – European Union
28 August, 2013 - Campbeltown summer cabinet – Social Union and Union of the Crowns
2 September, 2013 - Fraserburgh summer cabinet – Independence from the Political and Economic Union

The idea of the six unions was explained in each speech, meaning that there are some overlaps in content between the six speeches. In addition, each of the summer Cabinet speeches began with very specific local references relating to the programme of events around the cabinets themselves. We have therefore published abridged versions of the speeches, focussing on the major theme of each speech.