Having said all that, there’s no doubt that Darling rather effectively exposed
the Yes-camp’s failure to come up with convincing answers on fundamental
questions relating to a newly-independent Scotland – particularly on the
currency and central banking. Even if parts of the voting public didn’t
clock such weakness as they watched, Salmond’s answers illustrate why
independence would harm Scotland and even be dangerous for the rest of the
Among the political cognoscenti, at least, doubts over which currency an
independent Scotland might use have become endemic. Salmond’s position is
that, after having voted to leave the UK, Scotland would continue using
sterling. Down at Westminster, meanwhile, the ruling Tories and Liberal
Democrats, as well as Labour, categorically rule out a formal euro-style
currency union, under which countries share a common central bank.
This suggests we may end up, if Salmond does reverse the No camp’s lead,
seeing an informal currency union – with Scotland keeping the pound and
buying sterling reserves on foreign exchange markets. Known as
“dollarisation”, it’s the way many developing countries piggyback America’s
Repeatedly pressed on this issue by Darling, Salmond didn’t impress. If the UK
isn’t prepared to grant a full currency union, he warned, an independent
Scotland might not shoulder its share of Britain’s £1,400bn national debt.
He then admitted, though, that eschewing debts “wouldn’t be reasonable” –
which he’s forced to say, even though it undermines his bargaining position,
as to do otherwise would hinder an independent Scotland’s ability to borrow.
Darling was then able to warn that an independent Scotland, having chosen to
severe ties with the Bank of England, may not be able to bail out its
all-important banks during any new financial crisis. Such concerns were also
highlighted in a report published last week by the National Institute for
Economic and Social Research, one of the world’s most respected independent
think tanks. Entitled “Scotland’s lender of last resort options”, the study
concluded large Scottish banks may not qualify for bail-outs under
independence. Without the official arrangement Scotland currently enjoys
with the Bank of England, the Scottish banking system “would need a new
lender of last resort”.
Darling picked at this weakness throughout the two-hour TV battle. “Had
Scotland been independent at the time of the  financial crisis, it
would have gone bust like Ireland and Iceland,” said the former chancellor.
“Scotland would not have been able to deal with it, without the help of the
rest of the UK”.
It’s a telling point, given Scotland’s extremely large financial services
sector – and the notorious role played by Edinburgh-based institutions such
as RBS. Back in April, the ratings agency SP similarly warned it would
be “challenging” for an independent Scotland to bail out its banks – and
with good reason.
The combined balance sheets of the UK’s banks amounts to a massive five times
annual GDP. We have the most bloated banking sector of any major economy,
making our public finances extremely vulnerable in the event of another
ruinously expensive bail-out. An independent Scotland, though, would be even
more financially top-heavy – with bank balance sheets totalling an
astonishing 12 times national income. When Iceland’s banks crippled the
entire country in the aftermath of the 2008 collapse, the equivalent figure
was seven times.
That’s why, under independence, the UK’s financial authorities may require
large Scots-based banks using sterling to relocate to the rest of the UK,
according to NIESR. This loss of large chunks of its vital financial
services sector – which drums up £11bn of business outside Scotland,
accounting for 15pc of all exports – would then hit an independent
Scotland’s balance of payments, prosperity and jobs.
Mayor of London Boris Johnson gave a powerful speech last week, as he launched
a report by his chief economic advisor Gerard Lyons, arguing that the UK
shouldn’t be afraid of leaving the EU, if it can’t persuade Brussels to
adopt significant market-friendly reforms. Since its 1999 conception, the
single currency has become “an engine of mass job destruction”, Johnson
noted. Average unemployment is 11.5pc across the 18-nation currency block.
It’s more than 25pc in Spain and Greece – and double that rate among
youngsters. “Half a generation has been chucked on the scrap-heap for the
sake of a misbegotten political project,” the London mayor boomed. This is
bang on the money.
Scottish independence – a political project, bestowing even more trappings of
office on Edinburgh’s already cossetted political elite – feels similarly
incoherent, another triumph of hubris over economic common sense. The euro
has spread nothing but misery and economic dislocation. A Scottish Yes-vote
on September 18 – followed by a half-in, half-out currency union – could do
But there’s something else. My bigger fear is that while Scotland may become
officially independent, it would still be viewed as UK-backed by global
markets in the event of another crash. Could London really stand idly by if
Scotland’s large commercial banks – some still with vast liabilities, and
still unresolved off-balance-sheet losses – imploded, given the complex web
of cultural and financial links between us? Of course not. The risk to the
rest of the UK’s financial markets and credit-rating would be too great.
Scotland’s often rapacious financial services industry knows this only too
well, and could become ever more reckless – especially if a newly emboldened
independent Scottish government adopts a lax regulatory regime in an attempt
to “compete with London”.
An independent Scotland will keep using sterling whatever Westminster says,
and its banks will continue to rely on a London-launched bail-out, knowing
it will come even if a formal currency union is denied. That’s why the
entire UK should have a vote in this referendum, because the entire UK will
have to rescue Scotland if its vast banking sector goes bust. That’s the
biggest danger posed by Scottish independence, as I’ve said before – a
massive moral McHazard.