Monetary sovereignty, hard choices and snake oil salesmen
Dr John Ball
There was a time when those of us in the national movement could, perhaps, indulge in fanciful ideas about how wonderful a future free Wales might be. That was easy.
Today, independence has never been closer, and these fanciful ideas must now be replaced with knowledge, hard facts and, let us be honest, some things about which we will simply have to hold our collective noses. One is currency.
In presenting the case for independence, the question of currency is the most important and needs careful consideration, not least because it will be fundamental to future economic progress and external trade.
Developing the economy must be at the very heart of the case for independence, and like it or not, that means staying with the pound. This may not be ideal, but it resolves the major – and insurmountable – problems that would be presented by a separate currency.
Scotonomics
There are those, notably followers of Scotonomics, who suggest that a new sovereign Welsh state can develop and use its own, separate currency from day one of independence. This is an untested theory and fanciful idea that must be challenged – we owe it to the people of Wales.
The place to start is to examine its role in the economy.
Economic theory presents many functions, but for this discussion, three are relevant.
It must be a Store of Value, which is reflect the strength – or weakness – of the issuing state’s economy.
Unless there is a remarkable economic miracle before independence, the Welsh economy will remain weak, certainly when compared to the economies of the small states of Europe. Switzerland and Iceland, both with their own currencies, have been presented in support of the argument for a separate currency, emphasising this function: they reflect a strong economy.
It must be a Form of Exchange, allowing business to interact financially both within and outside Wales and as part of this, to be acceptable as a form of exchange.
This is particularly important, Welsh exports are worth £18bn, whilst imports, mostly from within the UK are £60bn. You do not have to be a genius in economics to understand that suppliers to Welsh businesses will not want to be paid in a strange, unknown currency.
There are further questions that must be addressed.
Deposit Flight
The first is the critical issue of so-called Deposit Flight, the situation where, once an announcement is made that the (current) pound is to disappear, to be replaced with an unknown currency, money will be moved out of banks and investment organisations. This is dangerous and would destabilise the economy even before the first day of independence. There is also business confidence. Although the scare stories associated with the three independence referenda and the Brexit vote – that businesses would leave did not come about – the strangeness of this new currency, coupled with the inevitable compulsion to use it, might well drive businesses away or deter those considering investment.
There is the question of Transactions Costs, the extra costs involved in exchanging one currency for another. Apart from the inconvenience, this adds further, and often considerable, unwanted costs, especially noting the £60bn in imports.
Which raises a yet further question. What will be the exchange rate against stronger currencies? Initially, like it or not, the international markets set the rate, and a new, unknown currency presents substantial problems in valuing against existing currencies. The result will be significant Inflation in Wales.
Direct costs
There would be substantial direct costs involved in launching a new currency. Although the use of cash has declined, it still accounts for over 20% of retail sales, meaning that notes and coinage need to be designed and produced.
This is a significant unwanted cost. There are of course also the costs involved in re-programming financial technology such as cash machines and shop tills. In the case of the latter, this would be further complicated because large retailers’ systems link directly to warehouses where costs and prices would be denoted in a different currency. The Welsh retail sector is dominated by large supermarket chains which would unquestionably baulk at this expense.
An independent Wales will establish a Central Bank. With a separate currency, the bank would have to hold a significant reserve not only to hold contingency funds and function as a lender of last resort, but also to intervene against exchange rate fluctuations.
This reserve must be in a hard currency. Calculating the amount required is difficult, although it was suggested during the Scottish independence referendum that a Scottish currency would require the reserve to be at least £20bn – almost the entire annual Welsh tax.
No control
Supporters of Scotonomics have, quite incorrectly, argued that staying with the pound means no control over interest rates, in practice these are becoming more an international phenomenon over which central banks have limited power. However, the introduction of an unknown, separate currency will inevitably lead to instability and consequently need support, inevitably by raising the interest rate, which might well need to be much higher than remining with the pound.
The most ridiculous argument against maintaining the pound that reveals an astonishing ignorance of economics is the suggestion that the Bank of England or Westminster will control fiscal policy.
Government intervention in the economy – fiscal policy – is undertaken to dampen or assist growth, invariably the latter. Policy has two instruments: changes in taxation or government schemes such as infrastructure development. The former has in practice been limited, the latter has a stronger multiplier effect, driving wider growth.
These are direct government activities and would not be affected by either the Bank of England or Westminster. It has also been argued that somehow interest rates effect fiscal policy. This is nonsense, they have nothing to do with fiscal policy.
If we are to succeed in persuading the people of Wales that impendence present s a bright future, we must be honest with them, present the facts, good and bad and not indulge in fantasy economics worthy of snake oil salesman selling worthless fake remedies.
The pound is understood and used by the people of Wales. Why present further problems when there is no need?
Dr John Ball is a former economics lecturer at Swansea University and an expert on regional economic policy.
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I’ve always rated Dr Ball and his comments on the subject of currency are to the point. Financial issues will not be solved by the creation of a currency symbol, however romantic. He makes no comment about Wales joining the Euro. But presumably this would not be available in the first instance.
Currency is so much more than the creation of a symbol. How could a nation survive collecting taxes, paying everyone and borrowing in a currency that is not issued or backed by the central bank in that country? It is totally impractical. You simply recreate the UK! There is no nation on the planet similar to Wales (or Scotland) that uses the currency of its biggest neighbour.
There are countries that WG use the USD, but there are massive trade offs, which the author ignores. And as you point out, it also depends on the particular circumstances of that country
However, none in the global North. Wales is a mature and stable democracy with the wealthiest of trading partners next door. It would simply be the biggest economic experiment (for no obvious gain) that any new nation could undertake to use another (hostile?) nation’s currency. It lacks the most basic kind of political economy analysis.
I’m not sure what you mean by “massive tradeoffs.” The use of a strong, non domestic currency does not involve this, in fact they assist economic growth.
Not being able to set monetary policy, having to borrow a foreign currency and risk sovereign default. Being unable to decide on what government liabilities to issue (reserve balances or securities), not having as much control of fiscal policy, not being able to devalue to avoid austerity, not being able to create currency in times of crisis (COIVD), not spending enough currency to maintain full employment, not having any control of the financial sector in Wales, having no influence over the money supply, or credit creation. Basically, all the things that independence would offer if you had your own currency.
Combining this comment with John Ball’s observations illustrates flaws in the economic arguments for Welsh independence. Imports can only be paid for in a currency acceptable to the supplier.
A fact that bears absolutely no relevance to Welsh independence. There are almost 200 countries that have their own currency! And they all trade with other nations. Every currency has an exchange value, which means that every currency (certainly in a modern, wealthy nation in the global North) is a reliable form of payment.
Those currencies need to be converted into those the seller wants. A country that sought to pay for imports by issuing more of its own currency would risk forcing down its exchange value, raising the price of imports in the domestic currency and so importing inflation.
The relationship between government expenditure and currency valuation is much, much more complicated than that. That is a very over simplfied view that doesn’t account for a whole host of things that would be within the control of a currency issueing state.
You keep making claims that you do not explain. A country cannot cover a balance of trade deficit by issuing more of its own currency unless exporters are willing to hold it, for which they would demand a rate of return that reflected the perceived risk of doing so, if they were willing to accept it at all. This constraint is not given the attention it deserves in MMT advocacy, perhaps because most of that comes from the US, which enjoys the ‘exorbitant privilege’ of being able to import by issuing dollars, as everyone will accept those as the world’s… Read more »
If an independent Wales ran a current account deficit by importing more goods and services than it exported, that deficit would have to be covered by foreign investment (including debt). Foreign willingness to buy Welsh assets would depend on the expected rate of return.
Monetary sovereignty cannot fill the gap. Increasing the supply of domestic currency would put downward pressure on the rate of exchange leading investors to demand higher interest or profit.
This is a mainstream textbook view. It all makes logical sense, but it is not real-world economics. Wales will not need anyone or any foreign institution to buy its debt. And they can only buy that debt with currency initially spent by the Welsh government. So on many levels, your observation is not relevant to Wales with its own currency.
My argument does make logical sense and I’m afraid yours doesn’t. If a person or business in a Wales with its own currency wants services from England they will need pounds; if they want goods from China they will need yuan. How will they obtain those? If Wales exports enough to cover its imports there is no problem but, as Dr Ball states, initially at least that is unlikely to be the case. So those currencies (or their equivalent in an easily exchangeable reserve currency such as the dollar or euro) would have to be borrowed (or otherwise invested in… Read more »
Another fairy tale, but why bother with the facts? There are 193 members of the UN, so I wonder where 200 comes from.
Read my earlier comment.
It would only be temporary until we get back in the EU.
There are a number of replies from you through this thread, each of which requires a response. This first is typical of the way you make unsupportable, throw away comments that lack evidence (“no nation on the planet…”) and further illustrate your lack of economic knowledge. The use of a non domestic currency is in fact relatively common. At the last count nine countries used the Euro, 15 the US dollar, 15 the West Caribbean dollar, 7 the East Caribbean dollar and by definition, 21 European states used the Euro. In addition, there are 16 currency unions in the world,… Read more »
There will be a longer response from me to your article published by the Nation later today (I think). Hopefully that will be of more considered use to you. No prosperous medium sized global North nation like Wales uses someone else’s currency. Wales would not be in a currency union with England. It would simply use the currency of another nation without any say or influence. No serious nation would even consider this as an option.
No need to fret, we can carry on using the pound until we join the EU, then we adopt the euro, or rather it adopts us.
That is the one thing we can say for certain. You an only enter € after at least 2 years of having your own currency. It’s a binary choice.
It may well be that in the future a sovereign Wales may wish to join the Euro. At this moment in time, sadly, the Welsh economy does not meet the criteria.
It can’t join the Euro until it has its own currency and uses that for a period while it stabilises towards a Euro-like economy. People who suppor the continued use of Sterling really should make sure they point that out. If you want to see Wales in the Euro, the sooner it has its own currency, the quicker that will happen.
Put this into context. Wales is the only country out of the four nations including those British island dependencies not to have its own printed currency or National Bank. Yes, Welsh Labour created a Development Bank of Wales, but it has no ability to print Welsh paper currency or function like a central bank does. One could be create if both Labour and Tories had the will, but they don’t. They think of Wales as an appendage of England. Only Plaid Cymru would have the will to rectify this ongoing national slight and push for a independence referendum. The Development… Read more »
Totally agree. The EU admit that the Euro is as much a social binding tool as a monetary necessity for the union. An institutional analysis of money provides a clearer understanding of the power of money and currency. It is not simply ‘just another thing’. It is peculiar and deserves special attention.
Printing paper is not the same as issuing currency. It’s what members of the Eurozone do.
Great to see debate around the currency in an independent Wales. As the founder of Scotonomics, I am pleased to have contributed to the conversation. Dr Ball’s article was all very 2014. It was a rehash (for me, anyway) of many of the arguments that persuaded Alex Salmond in 2013 to opt for a currency union. In the opinion of most commentators, it was that decision that sank the independence movement in Scotland. A decade later, we have almost a clean sweep of Indy supporting organisations who (at least on paper – yes, I am looking at the SNP leadership)… Read more »
The difference btw Wales ans Scotland is the public deficit, and this is the bigger issue than currency, though interlinked. Wales wouldn’t be able to print money or issue government bonds in its own currency. Ultimately this means 25% cut in public spending on day 1 of independence because that’s out current deficit (which is increasing btw). Sticking with the pound is necessary for stability etc but the budget deficits would have to be tightly controlled to avoid running out of currency. Borrowing costs (gvmt and private) are higher for countries without a central bank. On currency, you have to… Read more »
I don’t think I could disagree more, Peter. Every part of that statement belies the real-world use of deficits, currency and bond issuance and monetary operations. The single biggest indicator of sovereign insolvency is not public debt: it is borrowing in a foreign currency. Wales must avoid that at all costs. It must allow the public deficit to float to whatever level enables it to provide the best material lives for those in Wales.
To put it simply, Wales can afford 75% of it’s public services. After independence, where does it get the remaining 25% of funding? The pound will in this case be the foreign currency.
Wales can afford 100% of its public services—neither taxation nor bond sales fund government expenditure when you issue your own currency. Wales’s issue will be that, like every other nation, Wales will be resource-constrained. Are there enough doctors, policemen, concrete, timber etc to create the type of economy that people want? The currency can be used to create or curate those resources. The debt is misdirection for Wales, as with every other nation. Issuing currency doesn’t solve all the problems, but it is an important tool that can be used (I would argue the most important) to attack those problems.… Read more »
We can discuss the effect of printing money until the cows go home. But you can’t print another countries money! . so if you do what the authors suggest -an independent Wales uses the pound, it would have to slash public services, or raise taxes. Borrowing would be impossible or very expensive. If an independent Wales has its own currency and printed money to cover it’s deficit, it’s not pretty. I lived in a country which actually did this and saw hundreds of thousands lose savings, lose their pension and now has an actual (not inflation adjusted) GDP lower than… Read more »
Hints at the difficult decisions that must be made when you run a country. Leaving someone else in charge of the most important levers isn’t really independence. There is no operational difference between ‘monetising’ the deficit and ‘printing money’. Borrowing simply shifts money from – reserve balance accounts -which is one savings account to another – longer term securities.
I’d like to understand more about what you mean by a different type of economy. It would be difficult for Wales to pursue radically different economic policies from England while maintaining an open border.
Not al all. Isn’t that the point of independence? With fiscal and monetary control, a very different type of economy is possible.
Constitutional independence does not make a nation independent of the world around it. Trade is essential in the modern world. A closed border in Ireland post-Brexit has only been avoided by the north accepting the rules the EU sets.
I had intended to leave this discussion, which has generated much heat if not much light.
However, once again you answer with a one word throw away – “a different type of economy is possible.” Details please. I won’t hold my breath.
I was amused that my understanding was from 2014; Thomson’s ideas are more in keeping with the nation state mentality of the early twentieth century. He is quite wrong about Scotland – the truth is that Salmon prevaricated about the currency, I don’t know why but I suspect that he was influenced by dreamy nationalists and a separate currency. He also seemed to bow to the view of the then Governor of the Bank of England that continued use of the pound would require a currency union. He didn’t seem to know that Scotland was already a member of the… Read more »
Interest rates and fiscal policy are not independent. A country that runs a fiscal deficit that it chooses to fund by debt will increase the supply of its bonds, forcing down their price (and hence raising the interest rate it has to pay. Paying interest on historic debt adds to a fiscal deficit.
Lyn, this is the neoclassical economic theory but it has been consistently disproved by experience. More borrowing does not increase the interest rates of new bond issuance. The interest rate paid on bonds is a policy choice. Wales can set that at zero, 1% or 5% and it will always find a buyer. It could, in fact, take a very different approach and not issue any long-term government liabilities. The world really is your oyster when you start to make the difficult decisions based on what is best for Wales. But it very much requires a new framing of the… Read more »
The only guaranteed buyer is the central bank, which can indeed issue as much fiat currency as it likes for such purchases. But, unless there are underused resources in the economy to fulfill the additional demand that creates, such currency creation would be inflationary.
You’re confused about fiscal policy. Policy is aimed at reducing or expanding the economy and has nothing directly to do with interest rates.
A fiscal deficit is an entirely different thing.
Fiscal policy has indirect relationships with interest rates through several channels, a couple of which I mentioned. Central banks can set very short term rates but have limited control over longer term rates, which are influenced by investors’ opinions on economic prospects and future deficits. As both interest rates and fiscal policy are concerned with reducing or expanding the economy they cannot be viewed in isolation from each other, even if they are directly determined by different institutions. The struggle between Trump and Powell over the Fed’s reluctance to reduce rates because it anticipates a rise in the US fiscal… Read more »
Singapore is an interesting case study. They remained in a currency union with Malaysia for two years after independence before issuing the Singapore dollar which was exchangeable at par with the Malaysian dollar and pegged to sterling to maintain investor confidence, until sterling collapsed when they pegged to the US dollar. The concern about using sterling is not so much direct control of fiscal policy but whether the Bank For England can be a good faith partner or whether the institution that was kickstarted with the profits of slavery and bankrolled centuries of global exploitation will conspire with the ruling… Read more »
What is plan A?
This article.
I see. That makes sense. NB there is no Celtic Union and absolutely no desire for that to happen. You can’t have the Euro unless you have had your own currency. Sounds like a new plan B is needed. As I oultined plan a (the article) would be the worst of all worlds.
I’m not sure you understood the proposal. When Northern Ireland reunites with the republic they’ll get the Euro and EU membership on day one by becoming a devolved region of an existing member state unless you’re suggesting that reunification would result in Ireland being forced out of both the EU and Euro. And there can be no technical reason why Wales can’t do exactly the same, albeit on a temporary basis as a transitional arrangement to full independence. The name “Celtic union” is simply a name for this new arrangement and I’m not sure who you’ve asked to decide there’s… Read more »
I think “proposal” is stretching things.
You also can’t join the euro with greater than a 3% fiscal deficit, which means Wales has to reduce it’s spending by 22%!
Would you care to provide figures in support?
I assume that by “the article” you mean mine.
If it’s the worst of all worlds, I think it worth asking again – why haven’t you answered the issues raised in the article?
I suggest that the obvious thing to do is look at Ireland which until it joined the ERM used Sterling
I understand that the result for Ireland was not pretty
Richard Murphy has a lot to say about currency options for an independent Scotland
Ireland is not a case study for Wales. Wales is a modern, relatively industrialised nation with a land border with a big, wealthy neighbour. Ireland is a particularly peculiar case. Although it may contain some interesting points to learn, it is far from a suitable benchmark. If you are going to set yourself up as an offshore tax haven, then you need to use a reserve currency. That’s not the plan for Wales, one would hope.
This is very good. Personally I’m a supporter of Wales having its own currency, though probably for the exact opposite reasons to why its being advocated by Scotonomics and their supporters. Currency is just like any other commodity: when it’s scarce its value goes up, and when it’s abundant its value goes down. When countries that have their own currency issue too much of it, imagining that doing so will help them to cover their deficits, all that happens in practice is that the value of the currency goes down. Beyond a certain point this leads to complete collapse –… Read more »
You are confusing fiat money and gold standard commodity money. It’s mainstream. “Learned helplessness” that will stymie a progressive Wales. A Welsh currency has value because you can buy things with it, you get paid in it and taxes are collected in it.
A Welsh currency could only buy goods or services produced in Wales, not imports.
Exactly!
And how to pay for things from outside Wales?
Don’t you like oranges?
The economy of Wales is small and could be transformed quickly in the lead up to independence. He not only fails to have any conception of what currency-issuance implies, but is also depressingly defeatist on the notion of grown-up Wales taking responsibility for its future. He should come to the anti-austerity conference just over the border in Bristol in September and have a chat. https://modernmoneylab.org.uk/events/bristol-conference-2025/
Thanks for notifying us of this conference. I’ll be there.
I am strongly opposed to austerity but I have yet to read a convincing argument from advocates of MMT that tackles the questions of international trade and global supply chains.
I’m not sure who “depressingly defeatist” is, I assume its me. Two quick points. Whilst I would be delighted to see the economy improve, quite how it can be transformed “quickly” fascinates me. Please tell me how. I am, thank you, very much aware of currency issuance. What I have presented are the very real problems that would face a separate currency, a grown up and honest assessment, not the fantasy being peddled by Scotonomics. Please read the article slowly and respond to the issues raised. And what’s your point about austerity? I looked at the agenda for your Bristol… Read more »
Presumably, with the UK pound being an international currency, there would be nothing to stop an independent Wales from adopting the UK pound as its currency. But surely the same would apply to the Euro? If an independent Wales has the aim of joining the EU, adopting the Euro as it’s currency could be one of the many steps needed to fulfil that aim.
Thank you for, your comment, there is nothing to stop an independent state adopting the pound.
Joining the Euro would be a matter for the Welsh people. However, the economy would have to be healthier than it is now.