With interest and support for an independent Wales growing, what currency could it adopt in the event of it going alone?
Well, there may well be some longing for the pound sterling or a desire (Brexit notwithstanding) for the euro or the US dollar; or indeed, for a new, separate Welsh currency.
While it might be fun to indulge in what name such a new currency would carry (please, not the punt!) this may be impractical, certainly in the short term.
The reality is that there is no reason why, in an independent state, the pound (or for that matter the euro) could not continue to be used. It is a fallacy to suggest that this is not possible.
The countries of the British Isles could 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 and British Overseas Territories all to a greater or lesser extent issue their own bank notes.
The downside – if downside it is – 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 turbulence following independence settles.
The use of a non-domestic currency is not unusual. Six countries outside the Eurozone use the euro, nine countries the US dollar and seven countries share the East Caribbean Dollar. 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.
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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 of course 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.
There is of course the option of a new, separate currency, an idea backed by many supporters of independence. This is certainly not as fanciful as it may seem. Wales would be fully responsible for its own future, policy priorities and choices.
Such a system would allow control of both fiscal and monetary policy (instruments fundamental to driving economic growth, and heaven knows we need that!), macroeconomic policy, control of inflation and address current deflationary pressures.
A unique problem with a “new” currency is familiarity and loyalty. At the time Malta joined the euro and gave up the Lire, I was at the Malta Stock Exchange (Wales please note) and was surprised by those to whom I spoke who lamented the loss of the “pound” (the way the Maltese described the Lire).
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Many small countries that have emerged over the past century – and for that matter only since the end of empire and the Soviet Union – not only developed their own currencies, but were within a short time economically strong enough to join the euro.
It is particularly interesting to note the relative ease with which the two nations of the former Czechoslovakia launched their own, separate currencies at the time of the break-up.
There would be a need for a new central bank. Since the end of the Second World War no fewer than 25 new central banks have been established, many in Europe. The role of a central bank – inter alia – is to set the interest rate and act as a lender of last resort.
This latter responsibility of course requires that such a fund be available. Estimating the amount such a fund should hold is not easy; as an example, at the time of the Scottish referendum the Governor of the Bank of England suggested that a new, Scottish Central Bank would require an initial fund equivalent to approximately one- quarter of Scotland’s GDP.
How this figure was arrived at is at best unclear (as indeed were other comments during that campaign). However, an equivalent figure for a Welsh Central Bank – if the Governor’s figure is realistic – would be approximately £16 billion.
While there will be the need for such a fund, it will not necessarily be required from day one. The existing clearing banks – all of which are required to hold their own reserves – would be required to register as separate, Welsh businesses probably within a Wales Stock Exchange.
As subsidiaries of larger banks, these would in any event have the “protection” of the parent bank. This is what happens in other European states.
Government funding originates from two sources, the first and obvious is taxation,
Governments need to balance the books and consequently, borrow. This additional source of finance is raised by government selling bonds that carry an annual interest, a redemption rate and – of fundamental importance with a new and initially weak and unknown currency – are invariably denominated in a currency other than the domestic currency, almost always US dollars.
Although the life of such bonds varies, interestingly some countries (including Ireland) have successfully issued bonds with a one hundred-year maturity, an attractive proposition for a new state. There is of course concern that this debt will be borne by future generations.
However, if the success of other small European nations is replicated – and there is no reason why it should not – such funds properly used in a new, exciting and innovative nation state, they will ultimately be the beneficiaries.
Government bonds of all types and all countries are sought-after investments because of their relative security; even countries with (doubtful) economies successfully issue bonds.
Recent bond issues have been taken up by investors in Argentina, despite that country defaulting more than once on repayments. Recent bond issues by European countries that suffered after 2008 have also been in demand, notably Greece.
No-one is suggesting, and certainly not me, that a move to independence will be easy, and a sensible and informed debate is required. Nevertheless, building a new and dynamic nation is exciting and should be embraced.
- Dr John Ball is a former lecturer in economics at Swansea University and an expert on regional policy.