By Ben Wray, Common Weal Head of Policy

THE SNP’s Growth Commission is expected to publish its findings in the coming weeks. This group had the task of solving the sticky economic problems of independence and the stickiest of all is which currency Scotland would use after leaving the UK. Certainly, 2018 is not 2014 and, after Brexit, it is increasingly Unionists who face doubts about the economics of constitutional upheaval. But Brexit also poses new problems for the independence project: the SNP’s model of a “currency union” with the UK, questionable in 2014, looks unthinkable in 2018, particularly if Scotland rejoins the EU.

This leaves the SNP balancing between two options. Former First Minister Alex Salmond has argued for a Scottish currency. However, rumours suggest the commission plans to propose “sterlingisation”, at least for a transition period until “tests” prove the case for a Scottish currency. Under sterlingisation, one nation state unilaterally adopts the currency of another without any formal agreement for unifying their institutions. Panama and El Salvador are the only countries of any size to adopt this voluntarily; others, like Zimbabwe, resorted to it when their currencies collapsed.

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Worryingly, its effect on economies like Scotland’s are unknown. It is promoted by those ideologically committed to free markets. Many economists dismissed the idea in 2014 as there’s reason to believe it would lead to austerity, reinforce external control of the economy and weaken its resilience to another crash. Sterlingisation superficially resembles earlier currency union proposals but with added risks. Crucially, there is no lender of last resort facility and monetary policy would be set by the Bank of England without input from Scotland. A central bank isn’t just an afterthought. Its ability to set base interest rates and create money act as a safety valve, giving financial markets trust in the value of the national currency and, therefore, the national economy.

Without it, a sterlingised Scotland would have to take extra measures to reassure financial markets. This would probably lead to a tightening of fiscal policy by reducing public spending or raising taxes. For supporters, this “discipline” is a good thing. But it would be incompatible with the Scottish Government’s commitment to end austerity and reduce inequality.

Without the security of a central bank, Scotland would require commercial banks with healthy balance sheets to be confident it could ride out another crash. But Scotland’s financial sector remains over-leveraged and dependant on the state for solvency. The strongest argument for sterlingisation, frictionless cross-border trade, is increasingly questionable. Scotland’s trade is geared to UK conditions but Britain is following a radical new geopolitical course with serious implications for its trading future. The costs of cross-border friction are infinitesimal next to the risk of new financial crises.

Sterlingisation, rather like the eurozone, would be a radical experiment built on a wishful interpretation of free market economics. An independent currency, on the Nordic model, carries start-up costs and risks but also opportunities. It provides extra powers to soften the blow of crises, tackle inequality and boost investment. We hope the commission has given serious consideration to the risks of sterlingisation. Currency is not a technical matter. Sterlingisation carries implicit ideas about how economies should function and, on present assumptions, none will enhance social justice or Scottish sovereignty