What could Scottish independence mean for the Great British pound? | Video
European CEO speaks to Philippe Gelis, a currency expert, to discuss the future of Scotland’s currency
Transcript
Scotland will vote on its independence on September 18th, and if the country gets what First Minister Alex Salmond is rallying for – a yes vote – what will that mean for the country’s economy? And more specifically, its currency? European CEO speaks to currency expert Philippe Gelis to discuss.
European CEO: Philippe, ahead of the referendum there seems to be a stand-off where the UK government say they’ve ruled out a currency union with an independent Scotland, while Salmond says it’s in everyone’s interest to share the pound. So what is the case for and against a currency union?
Philippe Gelis: The UK government wants to keep the pound strong, in the sense that in the last 10 years, with the Chinese Renminbi rising, with the euro rising also, the demand for the pound has really decreased, and the market share for the pound has decreased.
I think they’ll want to avoid Scotland becoming independent with their own currency, so they will probably have an interest in a currency union.
As a French native, I don’t really believe in currency unions. The euro in a sense has been a failure. And I think it would be really hard for the British government to have a currency union working well.
European CEO: Well the IMF says that if Scotland votes for independence, it could raise many questions and upset markets in the short term. What backlash can we expect?
Philippe Gelis: Financial markets don’t like bad news, don’t like uncertainty, don’t like volatility, so there will definitely be a strong reaction in the short term.
In the long run, mechanically the demand for the pound will go down.
I also think that markets have a tendency to overreact, and then to go back. So I don’t know if it will be 10 percent; less or more; but I think 10 percent is a reasonable forecast.
European CEO: Well if Scotland keeps the pound, it will have to surrender some of its control over its monetary policy, and what would be the effect of that?
Philippe Gelis: I don’t think that the Bank of England will accept a currency union and let Scotland manage its own policy.
If they keep their GDP, they will have to let the Bank of England manage their policy. But it’s not working in Europe, so I don’t think the Bank of England will make the same mistake.
European CEO: Well former Conservative Prime Minister John Major said a currency union would require the UK to underwrite Scottish debts. What would the impact of that be for Britain?
Philippe Gelis: I think this would have a negative impact, but I think this will not happen. In the sense that this is something that has not worked properly in Europe, with countries like Germany and southern Europe: think of Spain, Italy.
Financial markets don’t like bad news, don’t like uncertainty, don’t like volatility, so there will definitely be a strong reaction in the short term
European CEO: Why hasn’t it worked in Europe? What’s been holding it back?
Philippe Gelis: Because the problem is basically you have different countries with different roles, different deflation, different GDP, they are fairly different.
It’s really hard, when you think about backing each other to find a good balance.
Now you have find you have a problem, you have Germany, which may back some southern Europe countries, but they don’t feel comfortable with that, simply because they consider it’s in a way transferring net worth from Germany to Spain, or Italy, or southern Europe.
So I don’t really think that the British government will feel comfortable underwriting Scottish debt.
European CEO: Europe’s leaders have said Scotland won’t be allowed into the eurozone. So given the euro isn’t an option, and if Scotland can’t retain the pound, what’s the backup plan?
Philippe Gelis: Maybe printing their own currency? Joining the euro in my view is not really an option, because the euro has proved to be in some way a failure in the last year, so I don’t really believe European countries will really accept a new member.
I think the most probable scenario is Scotland going on with the pound, but managed by the Bank of England.
European CEO: Do you think the EU was too hasty rejecting Scotland? And do you think the euro and the eurozone would benefit from Scotland joining? Given the significant figures put forward by the yes campaign.
Philippe Gelis: I think that Scotland is a strong economy, so if you think about euro GDP or euro economy, it may make sense to bring them on board. But then it’s always a complex process.
I don’t really think that the British government will feel comfortable underwriting Scottish debt
So then it’s a common decision: is Scotland really interested in joining? If they are, maybe it makes sense to go and push in to the European Union, when they’re opening theirs doors.
European CEO: How should company treasuries ensure that their business is protected from this currency uncertainty, looking forward?
Philippe Gelis: Until we have a very clear view about what will happen with Scotland and the pound, it’s really key for businesses and treasurers to reduce exposure to Scotland.
Not holding funds in Scotland, trying to reduce at a maximum the amount of accounts receivable from Scottish clients.
We need to make sure that businesses and their funds are really protected.