SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

Professor Gavin McCrone—Oral evidence (QQ 117–187)
lower debt than Germany before this crisis came and their budgets were in surplus, so that if
there had been strong rules, it would not have caught them. The problem in those two
countries was excessive private borrowing, not excessive public borrowing.
But nevertheless, all these things have to be looked at if you are going to make a monetary
union work, it seems to me. I do not think Scotland could just do whatever the hell it liked
in terms of fiscal policy. It would have to stick by some sort of rules as regards its budget
deficit and also things like private borrowing.
Q144 Lord Hollick: One lesson that one could draw from the current problems of the
eurozone is that, absent central institutions and absent a fiscal and monetary policy right
across the union itself, when the pressure or crisis comes, it is extremely difficult to manage
the situation. Remaining part of the United Kingdom in the sense of having sterling would
deprive, it would seem to me, Scotland from having the levers to manage its economy.
Professor McCrone: Yes, to a large extent that is probably true. It would have a few more
levers maybe than it has now, but yes, it would mean that fiscal policy would have to be fairly
tightly constrained, I think. It is interesting that in Ireland it took them quite a long time to
do anything much about the link with sterling. They just carried on as they were before
independence for quite a long time. The Irish banks continued to print notes just as they had
done before, like the Scottish banks do now, and much of the money was invested in
Treasury bonds in this country. Then they decided that they ought to have their own
currency—the Free State pound as it was called—which was introduced, I think, in the
1930s. Not until 1942 did they pass an Act setting up a central bank, which then became
effective in 1943. So, Ireland became independent in 1922, but it was not until 1943 that they
actually had a central bank, I suppose because they realised, “We had better, after all, have a
lender of last resort”. The Irish currency was exchangeable, Irish pound for British pound, at
par, but it was technically, after they started their own currency, a different currency, and
that meant that when they got to the stage where they were going to join the European
exchange rate mechanism it was much easier just to break the monetary union with the UK
than it would have been if they had still been using Bank of England currency.
Q145 Lord Hollick: Have you given any thought to the consequences of having a groat or
a Scottish currency?
Professor McCrone: A Scottish currency?
Lord Hollick: A Scottish currency, and in particular its impact on the ability of Scotland to
fund itself in the bond markets.
Professor McCrone: I am inclined to think that, if Scotland did become independent and
wanted to keep the link with sterling, it ought to start its own currency and keep it on a par
so that if there was a real serious crisis it could be decoupled without too much difficulty.
Part of the trouble we have seen in the euro is that you cannot do that. There is no reason
why a small country should not have its own currency. After all, Norway does and Denmark
does. Lots of countries that are smaller than Scotland have their currency, but they usually
tend to have it fairly closely linked to some other currency of a bigger country. Switzerland, I
suppose, is the most successful example of a small country with its own currency, so it is
perfectly feasible to do it.
Whether that would affect Scottish Government bonds depends on whether the market has
reasonable confidence in their ability to repay the bonds when they mature. The reason that
there is trouble in Europe at the moment, it seems to me, is that people do not have that
confidence. The reason why in the United Kingdom the interest rates are so low on
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