Photograph: Jane Barlow/PA

Alasdair Galloway

The most recent whine by the Unionist side recently has been when they picked up on a statement by the EU that “all EU member states, except Denmark, are required to adopt the euro and join the euro area”, which Douglas Ross used to pose the question “Who’s lying to the Scottish people, the European Union or Nicola Sturgeon?” There are a great many reasons why Ross’s use of this quote is both wrong and highly misleading.

First of all, we need to draw a distinction between formal rules (all the codified laws and regulations that are issued by a legislative process or formal decree) and informal rules (which are generally unwritten, often deriving from custom or practice.)

The statement used by Ross is an example of the former – the codified rules of the EU – while the responses put forward by the First Minister are examples of the latter, in particular that as the FM said “Many countries in the European Union still use their own currency. Bulgaria, Czech Republic, Hungary, Poland, Romania and Sweden – a member state since 1995 still uses its own currency.” By the end, as Tom Gordon wrote in his report on that week’s FMQs Ross was “turned … into man-mince”, “the diddy with the riddy”. Wait a minute ….checks notes …..yes, it was Tom Gordon!

But it actually goes much further than this, though it is at a level of technicality that a “diddy” like Ross really wouldn’t understand, or didn’t want to. You don’t just fill out a form and start using the Euro. There are serious tests that have to be passed before they’ll let you use their currency. The Commission did learn something from the Greek shambles after the banking meltdown.

First, a currency must be in the European Rate Mechanism for a period of two years, during which time its value to the Euro must not vary outwith set parameters (which can actually be as wide now as +/- 15%).

But this has implications for independence. First of all, it is not clear that the EU would accept an application from a country which does not use its own currency. How can you argue without bursting out laughing that using someone else’s currency – and in particular of a state that has just left the EU – you are going to enter ERM2?

There could though be a central bank, as, after all, the French or German central banks do rather less now that their countries use the Euro. But the lack of our own currency would without a doubt be problematic for even getting the negotiation process started, which makes all the more strange the determined clinging to the idea of using the pound “informally” if our aim is to join the EU asap. It is an improvement on 2014, which always struck me as a bit daft, because suggesting there would be an agreed currency union left an open goal to Westminster to say “oh no, there won’t”, and of course Osborne came up to Edinburgh to tell us so.

Therefore, an “informal” (ie not agreed) use of sterling would not face that difficulty, BUT it might still mean no negotiation with the EU. We just don’t know the answer to this because no one has asked the question before.

The SNP position is that Scotland will move to its own currency when conditions allow. But the Sustainable Growth Commission (SGC) report talks of using the pound for an “extended transition period” (3.203) and sets six tests prior to launching a Scottish currency.

1. Fiscal sustainability – that the Scottish Government has achieved its fiscal objectives and holds a strong and credible fiscal position
2. Whether the Scottish Central Bank has achieved international and market credibility, as indicated by the price of its debt insurance
3. That a Scottish currency would meet the requirements of Scottish businesses and citizens for stability and continuity of their financial arrangements
4. Does Scotland have sufficient reserves for currency management
5. Would a Scottish currency better reflect Scotland’s new and developing trading and investment patterns
6. Is the Scottish economic cycle sufficiently out of phase with the UK’s cycle, or at least well correlated with the cycles of other trading partners, so that a separate policy is both feasible and desirable.

These it seem to me, beg several questions. First of all, as we’ll see a strong and credible fiscal position is something that we will need to have if we are to use the Euro, but launching our own currency, while it would require fiscal probity, is one step removed from that.

Many of the other points are taken up by Tim Rideout – Convenor of the Scottish Currency Group – who gives a robust rebuttal of the six tests here (https://www.taxresearch.org.uk/Blog/2019/05/02/tim-rideout-rubbishes-the-six-tests-for-establishing-a-scottish-currency/” – it’s interesting to note how excited the First Minister seems to be at the prospect of Rideout speaking.

I would suggest spending five minutes on this, as it is important and likely to become more so, but basically Rideout’s argument is that

1. Control of monetary policy, if we use the pound informally, would remain in London, so what does that do to independence?
2. There would be no lender of last resort in Scotland, with consequences for any financial services operation, who presumably would register in London (as the large banks do already actually).
3. Scotland would still face risk, but lack the funds to address this
4. We could not join the EU, probably.
5. Re debt, Scotland doesn’t have any – the Scottish Government isn’t allowed to go into debt, but more importantly, if we borrowed £12 billion for each of 12 years we would reach the same level of debt as the average EU country.
6. The lack of a currency to manage means a Central Bank cannot be credible.
7. Does it meet our needs? In Rideout’s view the only difference would be the picture on the notes and the name of the currency.
8. Re Reserves, every Scottish pound has to be bought from the Scottish Government (as issuer of the new currency) with one pound Sterling, so £50 billion on day one
9. Trade Patterns – many of our sectors do most of their trading outwith the UK
10. The only way to decouple from the UK is to set up your own currency.

I agree with most of this, but there are some points of difference. I would be a bit more sanguine about being able to join – or at least engage with, short of membership – the EU. For instance, it might be possible to secure an accession agreement – a means of access to the Single Market, Free Movement etc – prior to actual membership, on the basis of an agreed plan to move away from the foolishness of sharing the pound, to at least launching our own currency which makes adopting the Euro an option.

I would not be sure about leaving the UK without any debt. My own view is very strongly that we will have to engage with Westminster (albeit with a very long pole, and a nose peg). If for instance legislation is deemed necessary – even a vote on a Treaty – it is very likely they will insist on us funding at least some share of debt. On the other hand, a century ago (near enough) Ireland committed to taking a share of UK debt and never paid a button. Eventually it was just written off.

As above I don’t agree about the Central Bank not being credible without a currency. For instance, its role at the outset would be doing the prep work for launching a currency. Are the German or French National Banks not credible?

Lastly, he’s right about many sectors doing most of their business with the EU (and post-Brexit finding this very difficult), but there are also other sectors doing most of their trade with the UK – indeed there will be establishments that are part of an integrated UK operation.

But, on balance I agree very much with Rideout, in particular his point that if we don’t get currency right, and using sterling with no control could “completely sabotage the foundations of the re-established country”. We also need to remove ourselves from the UK trade cycle, and if we share their currency we won’t do that.

It’s very odd that the SNP leadership seems so tied to Sterling. It might be argued that this is a continuation of the 2014 policy of “doing nothing to frighten the weans”. Is Rideout not correct to argue that “as soon as reasonably practicable” these are decisions for Scotland’s elected representatives after independence?

Therefore, IF the Scottish Government at that point has more resolution than they seem to have just now, we clear away the first problem, that an application cannot go in without a currency. However, this creates its own difficulty.

This is that if we go to the expense, difficulty and trouble of setting up our own currency will we just go into ERM very quickly, stay in for 2 years maintaining the value at whatever cost, and then chuck the whole thing by joining the Euro?

For me, joining the Euro is a practical question – is it what is best for the Scottish economy? It could be. But it’s also demanding with regard to fiscal rules, and it also means that we give up control of monetary policy to the European Central Bank which is controlled by the big countries, including France and in particular Germany (it’s not in Frankfurt by accident!). It would for instance be possible to look to peg a Scottish currency to the Euro – which would avoid most of the problems of trading between currencies – and to look to follow the fiscal rules, at least informally. This is what the Danes have done successfuly for many years.

So, personally I don’t really have a strong opinion, other than that perhaps we ought to run our own currency for a time and see how that goes.  Swedish experience suggests that the Commission isn’t going to do anything about it. If the Euro seems a better bet (eg for trading within the EU) then we should think about joining. However, as above, it is a practical question, not an ideological one.

What does seem certain to me is that while Sterling might be the best bet in the very (and I mean VERY) earliest days, a Scottish currency should be launched as soon as “we possibly can”, as Rideout argues. The important outcome is surely what is best for Scotland and its economy, not the credibility of a report that even its author admits has been passed by by events since publication.

Secondly, Scotland would have to show that as a member of the Euro, it is fiscally sustainable, which is where it all gets a bit technical. Even worse, Covid in particular, but also the Ukraine war have done terrible damage to their current set of rules, or put another way, even the Germans aren’t following them any more.

The argument is the problem of the need for some level of consistency between monetary policy – set by the European Central Banks – and the fiscal policies followed by individual member states. This might be solved by a fiscal union – allowing the EU to set the fiscal parameters for member states, but its perfectly clear that there is not nearly enough political will in member states to give up much national sovereignty over fiscal policy. A fiscal union is a non-starter in the foreseeable future.

However that is not to say that the EU hasn’t tried. Since 1994, it has imposed (or tried to) an upper limit to the debts and deficits of member states relative to their economic output. Their debt-to-GDP ratio should not exceed 60% and their annual budget deficit should not be higher than 3% of GDP.

Some teeth were put into this by the “Stability and Growth Pact” (SGP) which enforced these fiscal rules by creating the “excessive deficit procedure”, under which EU member states running too high a deficit would have to follow a path of budget adjustment. This was further enhanced by the 1/20 rule, which required countries whose debt had risen above 60% of their GDP to reduce this by 1/20 (or 5%) every year. Fines can be imposed on countries which don’t comply, but at the same time states often found ways to consolidate their budgets at less than would be necessary to reduce debt levels. Not only such as Greece and Italy breached the 3% of GDP deficit rule, but France and even Germany as well!

However, the Commission did have the wisdom to be able to suspend their rules with a “general escape clause”, which allowed their deactivation in times of “economic turmoil”. This was triggered in the wake of the COVID-19 pandemic and will remain active at least until 2023. But what effect has this had?

Well GDP as a proportion of debt among EU countries should be no more than 60%, but is actually 87.9%. This has led to open disputes between those whose preference is for low public expenditure, who argued that the rules ought to be enforced more stringently. On the other hand, those who feel the fiscal rules simply restrained growth argue that if the goal is to reduce the debt-to-GDP ratio, countries should focus on increasing GDP instead of reducing debt levels, in other words, grow out of debt, not cut to order.

Particularly in southern Europe these problems have bedevilled such as Italy and Greece whose growth figures in the past decade have been dismal, but whose debt levels have increased further. For such countries the 1/20 rule can be all but impossible. For instance, in Greece, whose debt-to-GDP ratio is 194.5%, the ratio would have to be reduced by 6.7% every year to get back into in line with the rule.

If this latter position of growing out of debt, is endorsed by the EU, it will rekindle my own support for the EU, which for far too long has followed a hard line neo liberal approach to macroeconomic management and fiscal rules.

Whichever way the EU jumps – announcements will be made on 9^th November – it is clear that membership of the Euro will bring external financial regulation with it. The question – which can really only be answered at the time – is whether this is something that Scotland choses to involve itself with. If we chose not to, it seems almost certain that we would not be the only member states to have taken this view. The Swedes have even had a referendum and opted not to adopt the Euro. The currency is looked on very negatively in the Czech Republic. Poland says it has “no plans”. The Commission don’t seem to be doing anything about it.

But perhaps most pertinently, Croatia joined the EU in 2013, but will not move into the Eurozone till the start of next year. In other words, there is not only no certainty, no timetable, there is certainly no hurry. For once – and after all even a stopped clock is right twice a day – Tom Gordon was right.

So to revert to Ross, he manages to be wrong at every level. First there is no compulsion to join the Euro. It’s hardly sophistry to say “commit to” is not the same as joining. But more than that, an independent Scotland would have to take a decision to proceed to the Eurozone. Its not like big bad Euro Commission will come looking for us. Nor is it a simple process, and will take time – for instance at least two years in the ERM, added to the various financial tests which we would have to pass (or at least put up plans to show how we would get from where we are to where we want to be). As above, it took Croatia the better part of a decade. How long for Scotland? Pass. Don’t know. Important point is that no one knows. The only caveat to that is that the stupidity of the present “use the pound till we pass the Growth Commission tests” will make it still longer. Fine to say that starting up a new country is a big ask and if there is something we can kick into the long grass for a while, let’s do that and make space to deal with the things we can’t kick into the long grass. But this should not be a moment longer than it has to be for there will never be a perfect moment. Conditions may see us satisfy some of the tests but not others, but as conditions change so will the tests that we satisfy. Sorry, but life is a risk.

Ross and the rest of them are guilty of the glib, Sod’s Law on testosterone kind of contention (it’s probably wrong to accord it the status of an argument) that we became accustomed to in 2014, and needs called out whenever possible. If you saw Jill Stephenson’s letter in the Herald last week about this, she seems not to know that Sweden is as committed to joining the Euro as Scotland would be. Sweden might have joined before the currency was launched in 99, but when they joined was after the Maastricht Treaty in  1993, which they signed and committed to on joining the Union in 1995. Either she just didn’t know, which since I have too much admiration for her as a Historian, or she lied. Your call.