WSJ: How Scotland Can Keep the Pound


If UK chancellor George Osborne wants to come down hard on Scottish hopes of independence, he should at least get things right. The problem is he hasn’t.
This week Osborne, who holds a cabinet position roughly equivalent to Treasury Secretary, said “If Scotland walks away from the U.K., it walks away from the U.K. pound.”
If the Scots believe him, his pronouncement sounds like a scary proposition. Or it would be, if only he was correct.
“Osborne is just wrong,” says Steve Hanke, professor of economics at the Johns Hopkins University. “There is a viable option that is easy to implement.”
Hanke is referring to the idea of a currency board. In the simplest terms, Scotland would peg the new Scottish pound to Sterling one-for-one. It would be British pound, for all intents and purposes and there would be little that Osborne can do to stop it.
“Hong Kong is an example where they have managed fabulously well,” says Peter Rodriguez, professor of business at the Darden Graduate School of Business in Charlottesville, VA. Hong Kong started pegging its currency to the U.S. dollar in 1983 after a crisis.
The real challenge is to link the currency with one that has a closely related business cycle. That seems to have been where Argentina famously went wrong with its currency peg to the U.S. dollar. But with Scotland adopting the pound, that doesn’t seem to be a risk. Exports from Scotland to the rest of the United Kingdom represent 29% of Scottish GDP, according to a 2013 report to Britain’s parliament.
That said, there are some downsides:
First, Scotland would cede monetary policy to the Bank of England. But as Marc Chandler, a currency strategist at Brown Brothers Harriman in New York points out, that may not be that big a deal. “To what extent is the Bank of Canada able to act independently of the Fed?” he asks. Not much.
A bigger issue for some would be that there would be no lender of last resort for the commercial banks, explains Nouriel Roubini, founder of Roubini Global Economics. That’s a role typically taken by the central bank to rescue stressed out financial institutions.
But if it meant banks avoided risky bets expecting the government to save them, then that might not be such a bad thing. Of course, just because Scotland could effectively keep the pound, doesn’t mean it should. That’s a bigger question.
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