The economic questions about independence have been answered – but are politicians listening?

A dragon on the pound coin

John Ball, former lecturer in economics at Swansea University

In Nation Cymru on 13th September, Mick Antoniw joined the debate on independence, raising not unreasonable questions about the economics of independence that need to be answered, and I am happy to do so.

What I find disappointing however is that these issues have been raised – and answered – time and time again. Please feel free to disagree, but are any of our politicians actually listening?

The first is currency. The reality is that there is no reason why, in an independent state, the pound could not continue to be used. It is a fallacy to suggest that this is not possible.

During the Scottish referendum debate the Governor of the Bank of England played two hands, one saying that a currency union would be needed for Scotland to use the pound and then, strangely, saying that it could not use the pound at all.

The reality is that the countries of the British Isles already form a currency union based on the pound. Despite the doubtful arguments of the Better Together campaign during the Scottish referendum, to a great extent such a currency union already exists.

The Scottish and Northern Ireland pound, the Isle of Man, the three Channel Islands, British Overseas Territories, St Helena and Ascension Island all of whom to a greater or larger extent issue their own banknotes.

The downside – if downside it is – is that the Bank of England would remain as the Central Bank and thus lender of last resort. In terms of economic stability this would be the best, current option, certainly until any possible turbulence following independence settles.

Not unusual

There are of course other options. In the absence of a currency union so-called sterlingisation would be an alternative, certainly in the short term. In this scenario, the pound would remain the currency but used without the consent of the Bank of England.

The major weakness would be no Central Bank to act as lender of last resort and no control over interest rates – although the latter would still apply with a currency union.

Interestingly, there is an argument that such an arrangement would work over the longer term, as is the case with some Latin American countries that use the US Dollar. Since there is no lender of last resort, such a system requires discipline from the banks, which need to be more prudent and far less likely to indulge in the reckless activities that led to the crash of 2007/08.

There is, in addition, the use of seigniorage, essentially a system where the pound continues to be used on the basis of a “fee” to the Bank of England. The upshot is that, yes, we can continue to use the pound, if we wish.

The use of a non-domestic currency is not unusual. Six countries outside the Eurozone use the Euro, eleven countries the US dollar and seven countries share the East Caribbean Dollar.

If you think about it, the 19 countries using the Euro by definition do not have a domestic currency and ultimately rely on a “foreign” bank (ECB) as lender of last resort.

(There is a strong case for a separate currency, but Mick Antoniw specifically asked whether retaining the pound was possible).

Marchers at a pro-independence rally. Lluniau gan / Pictures by Lluniau Lleucu

Deficit

Mick Antoniw also refers to a London “fiscal system” and how independent Wales would be tied to it. We won’t! Presumably by “fiscal system” he actually means fiscal policy; this would clearly be part of Welsh government activity.

He raises the strange question of whether independence means the break-up of the UK’s Welfare State. Well, yes. The UK has one of the meanest and difficult to navigate welfare systems in the world. Welfare will be a responsibility of the Welsh government and like other small states in Europe, will be a priority – and fair!

And the D-word. It’s interesting how the crude number £13billion deficit is eagerly leapt upon by those who want to prove how poor we are without any thought as to how this number was reached.

To address this in detail will make this response far too long – perhaps Mick Antoniw would care to read my responses to this in earlier articles in Nation Cymru, the Western Mail newspaper and Click on Wales – and indeed other commentators.

In summary; both revenue and spending are best estimates – the former is almost seriously understated because business taxes, in particular, are reported at the business’ headquarters, invariably not in Wales.

The latter is overstated; the approach taken by the researchers was the “who benefits” approach (an entirely correct approach to such research), which in this case meant the entire UK. Thus there are expenditure allocations that are nonsense; excessive defence and pension spending and an allocation for HS2 are just three.

In reality, the deficit is almost certainly much less – and incidentally, all countries run a deficit, such deficits mount up and if not reduced are added to the overall national debt, currently standing at £2trillion (£2,000,000,000,000) for the UK.

Exciting

Mick Antoniw also asks: “Do we really want to leave the UK and the system of wealth redistribution that exists? Walking away from this would drastically impoverish many of those who are already the poorest and most vulnerable in our society?”

Is this is a serious question? What wealth redistribution? Ultimately, wealth redistribution is about opportunity, education and a healthy economy.

I have a message for Mick. In the twenty years since the establishment of the Assembly, poverty has increased, education standards nosedived and the economy is one of the most backward in Europe. On your party’s watch.

Federalism, you suggest. No sir.

No one is suggesting, and certainly not me, that a move to independence will be easy – but the challenge of building a new and dynamic nation is exciting and challenging.

Let’s embrace it!

Dr John Ball is a former lecturer in economics at Swansea University’s School of Management and an expert on regional policy. 

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Petroc ap Seisyllt
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Petroc ap Seisyllt

Good article and the fact that several tax havens of a 99% independant nature use the pound but are not in the UK speaks volumes. Of course Jersey, Mannin and Gibraltar self govern. All three have higher GDP than Wales now. Two other £ countries went to war against Britain for independence and still stayed in the pound, Eire and Cyprus, plus of course dear Malta … both of which joined the EU long after Eire and the UK. All three swapping the £ for the € eventually. All three have higher GDP than Wales now. Independent Wales can do… Read more »

Simon Gruffydd
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Simon Gruffydd

Eire had it own money and central bank, the Irish punt, until they foolishly gave it up to be ruled by the EU central bank under the Euro regime.

Ernie The Smallholder
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Ernie The Smallholder

Why not have our own Cymru currency alongside the £ and the Euro. It is said that the US dollar is a reserved currency for the world trade in Oil etc.
Ultimately currencies must represent true value as they are just IOU notes from their respective central banks.
UK currency “I promise to pay the bearer…”
– The case is we ALL may need to get back on the Gold standard and stop printing debt !

Simon Gruffydd
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Simon Gruffydd

John states, “The reality is that there is no reason why, in an independent state, the pound could not continue to be used.”. Agreed – but only very foolish nation would be bound by another nation’s central bank. This famous quote sums up the situation more acutely: “Permit me to issue and control the money of a nation, and I care not who makes the laws.” -Mayer Anselm Rothschild, Banker or “I am afraid that the ordinary citizen will not like to be told that banks can and do create money … And they who control the credit of a… Read more »

Dr John Ball
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Dr John Ball

As it happens Simon I don’t necessarily disagree. The point I was making was in direct response Mick Antoiw who raised the question of whether we could continue using the pound. For the record, I very much like the idea of a separate currency and the economic advantage and control it would provide. However I am in favour of keeping the pound, certainly in the short term. For me there are two reasons. The first is simply the initial and short term economic uncertainty, the second reason is the new central bank would need funds to act as lender of… Read more »

Simon Gruffydd
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Simon Gruffydd

Quote ” the new central bank would need funds to act as lender of last resort”. I’m sorry John, your heart may be in the right place, but that statement shows you don’t understand the nature of money. There is nothing about money that can ‘sit in vaults gathering dust’ – not since 1971 at least. Additionally, if you envision an independent Wales continuing to use debt as the basis of its monetary system we will remain unfree, noncompetitive and poor. This is not a left-wing or right-wing ideology. It’s simple mathematics.

Dr John Ball
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Dr John Ball

We could of course endlessly debate the niceties of the western monetary system. You raise three questions that should be addressed. Firstly, I don’t have a thin skin but please, do not offend my professionalism or knowledge, I may not know all the answers but I am attempting to generate a debate and understanding of the issues that an independent state will face. The required reserve may not actually “gather dust” – I thought it was a rather good phrase – but the reality is that the bank WILL have to have access to reserve funds – and I am… Read more »

Richard Carr
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Richard Carr

If an independent Wales decided to continue to use Sterling as a currency, its interest rates would still be decided by the Bank of England, who would have its terms of reference given to it by what would then be the English Government, with Wales having no say in that. Would that really be “independence”?

Dr John Ball
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Dr John Ball

Let me make it clear that I was simply addressing a question set by Mick Antoniw, I am not necessarily in favour of maintaining the pound, but the question was put and answered. Richard’s comment is something of a red herring. The Bank of England is independent of government and sets interest rates in accordance with its duties as a central bank. Many of the small nations of Europe – which we are happy to use as examples – are (happily) tied to a “foreign” bank through membership of the Euro; this has not affected their political or economic independence.

Richard Carr
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Richard Carr

Dr Ball, I’m not sure if many Greeks would agree with you that being in the Euro “has not affected their political or economic independence.”, being in a monetary union is very difficult without there also being a fiscal union (as the recent crises with the Euro have shown) which in turn is very difficult without there also being some kind of a political union. Certainly if an independent Wales did share a currency with England, I think it’s somewhat disingenuous to suggest that they could have avoided the “austerity” of recent years if that was what England wanted. At… Read more »

Jonathan Edwards
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Jonathan Edwards

We will not get on the road to Indy unless we tackle the British Welsh mindset. 3 Things
(1) Financial deficit, the fear mentioned by every Welsh Brit. Solved by John Ball.
(2) The Welfare Union, the fear mentioned by Welsh Labour. Solved by John Ball
(3) And actual road map – not provided by John Ball. He has done plenty. Route is via Welsh Constitutional Convention. For me, rest stop at Dominion Status, because Welsh Brits will get it if they think about it.

Dafydd ap Gwilym
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Dafydd ap Gwilym

It is an excellent article and John has like many others once again explained the economics of Independence under the current overdone global system. However, that system based around the stock market, which is a very corrupt and poverty causing gambling house for the rich made legal is no longer sustainable. To be truly Independent we will need to be free of everything that has corrupted these lowlands, highlands and islands for coming up to two millennia and the rest of the world since. Economics replaced the teachings of ‘commerce’ and now we need to replace economics with a whole… Read more »

John Young
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John Young

Brilliant Many amateurs, like myself, have attempted to make the economic argument on many occasions. But it’s far better when someone with a real knowledge of how the economic system works puts forward the Indy economic case. In my response to Mick Antoniw’s nation.cymru article I said he would probably not revisit the piece because MP’s/AM’s rarely do. They put forward their view and then ignore the opinions of the people they are targeting. I find this very strange. It’s as if they don’t want to engage. What’s the point of a politician who doesn’t want to engage with voters… Read more »

Joanne Davies
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Joanne Davies

I enjoyed this article but it won’t change the fact that it will never happen.

Friends in Northern Ireland say even the most hard-line nationalists there privately don’t want a united Ireland because they don’t want to lose the pound. I highly doubt the Scots will either so I see no hope for an independent Wales sadly.

John Young
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John Young

I think there may be many Scots who would make a good argument against your point about Scottish Indy Joanne. But your other point. Seriously. You’re saying that most hard-line nationalists in NI don’t want a united Ireland because they prefer the pound to the euro ? Really ? You’re suggesting that that’s their most important consideration ? Surely if they’re hard-line the pound/euro question would be one of the least important of their concerns. Are there any NI nationalists reading this site ? If there are could you comment on Joanne’s statement please ? Or anyone else with an… Read more »

Joanne Davies
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Joanne Davies

The biggest employers in Northern Ireland are the NHS, BBC and the NI government. All pay handsomely with good pensions. They’re not going to swap that for an unstable currency like the euro, €100 fees to see a GP and €500 fee to call an ambulance and centralise all services in Dublin which is now one of the most unaffordable cities in Europe.

Ann Owen
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Ann Owen

But Joanne Davies, that isn’t a matter of the pound or any other currency – it’s a matter of state policy as to the services that the state invests in, in whaever currency.

Eos Pengwern
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John DAVIES
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John DAVIES

As a Welsh person, living in England, I understand both sides, some people think Wales is run by the English. Coming out of the EU, will be a big mistake, for Wales. Farmers will suffer and Wales will be lucky to get so much money spent on projects. Also so many jobs in Wales are government jobs. Britain is stronger together.

Jonathan Gammond
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Jonathan Gammond

A good contribution. Thank you Dr Ball. . It is great to hear from academics and former academics. Everyone has some biases but it is useful to hear opinions based on hopefully some research and deeper understanding of the issues involved.

Westley
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Westley

Why not move into crypto currencies? While using the pound for the time being 😀