Welsh Independence.  Currency revisited.

Given that it’s central to Wales Independence, the topic of what currency a Welsh sovereign state should have deserves a revisit. Have another look.

It can be divisive. Although it is self-evident that a nation cannot be fully Independent using the currency of another nation, there are those, even strong advocates of Welsh Independence, who have doubts, opposing views. 

As part of the push to Wales Independence it’s becoming make your mind up with regard to a currency for an Independent Wales. 

Stay with the pound.

Stay with the pound for a while.

Wales has its own sovereign currency.

Stay with the pound.

The ‘ safe ‘ option. The option with the lower costs.

No currency transfer costs.

No exchange rate issues

Stick with what we know.

This was the stance of Scotland at the time of the 2014 Independence referendum.

It was a stance that arguably cost them the vote.

Although the membership was split, Alec Salmond, the leader, favoured keeping the pound.

A banker with a bankers conservatism.

The UKr refused to allow Scotland to use the pound after Independence.

Scotland had no alternative plan, other than to state it would use the pound without the consent of UKr.

Not a credible alternative, causing confusion among the voters and alarm among Scotland's financial sector, with many threatening to move their operations to England.

Staying with another country's currency is not Independence.

No Central Bank . No control over economic monetary policy. Dependent on the primary currency..Policy made elsewhere with no consideration for Wales own economic policies. No defence against international economic shocks.

Not really Independent at all.

Stay with the pound until Wales is stronger.

This is really a strange argument.

Why, if we believe the Welsh economy strong enough to sustain Independence, we do not believe it can sustain its own currency?

The supporters of this course argue for less cost and stability.

There will be less costs although in the modern economy they are overstated.

Transition costs, for example, are minimal with the use of digital systems and currencies.

As for stability, there is an assumption of the stability of the UK pound, for movements in the pound will continue to affect Wales economy.

The fact that it is a temporary arrangement will also attract speculators willing to bet on the future currency movement when the arrangement ends. This in itself creates economic instability.

The temporary arrangement would carry the same restraints as a permanent one.

Wales would have to follow the monetary policies of the UK.

It wouldn’t have the economic and financial levers to follow its own economic path.

It is difficult to see, with  these constraints, how Wales could raise the finance necessary to grow its economy even at a modest pace.

Nor could the supporters of this policy give a timescale in which this policy would run.

Wales' own currency.

Wales would not be Independent without its own currency.

So what's the problem?

There are 163 of the 193 countries recognised by the UN who have their own currencies.

Those who have not, have very particular reasons.

Caribbean countries stick with the dollar due to tourism.

Their economies are tourist centred and the bulk of tourists are American. The dollar makes sense in these circumstances,

Other countries with poorly developed economies couldn't sustain their own currency.

Not a category that relates to Wales.

So Wales with its own currency.

Those advocating retaining the pound have failed to credibly argue how Wales can grow its economy, without the economic tools to do so

The argument that Wales will have a significant budget deficit and balance of trade deficit on Independence, is being increasingly seen as overstated. 

Professor Doyle, among others, have shown that the present accounting system that purports to show such deficits, bears little relation to the Welsh economy in Independence.

Nevertheless even the smallest of deficits will need to be financed in the short term.

Wales, becoming a sovereign state is not likely to have financial capital.

There will be no severance pay on leaving the UK.

There will be costs to start up.

IT systems for tax and benefits.

Institutions of state will need expanding

It was estimated that Scotland, at the time of the referendum, would require approximately £1.5 billion in start-up costs.

Additionally, Wales would need to stimulate a stagnant economy from the start.

Investment in energy resources.

Investment in skills and technology.

Investment in the infrastructure.

All of which has been underfunded.

There are efficiencies to be made, different priorities for an Independent Wales, but they are limited in the short term.

Wales would need to raise finance. Large sums of finance.

To do so it would need to have its own currency, its own Central Bank. The ability to offer security.

Wales could issue bonds if it remained with the pound, however this would be limited without the ability to offer some guarantees.

It would also be costly.

So, Wale’s own currency.

Wales has the economic and financial levers at last.

Control of monetary policy, interest rates. Togethether with fiscal policies.

The ability to raise large amounts of money for investment and to bridge the short term start up costs.

What's not to like?

What are the objections?

Costs.

There are costs to currency transactions and they would increase for Wales as the GBP becomes a foreign currency.

But should they be seen as a deterrent to an Independent currency?

Transaction costs

We all experience currency transaction costs whenever we travel outside the sterling zone, or purchase foreign goods.

The difference post Independence, is that UKr becomes a foreign country for this travel or purchase.

Should we be concerned?

In modern day money movements, these costs have been minimized. Digital transactions have made them easier and less costly.

Wherever you go and wherever you purchase from your card provider, bank, or even the importer of goods calculates and deducts the transaction fee automatically and so it will be with regard to UKr.

Exchange rates.

Exchange rates and the redenomination of currency is another concern raised by the more conservative.

As with transaction costs most of the public use of currency will see little or no difference.

The public in Wales will, post Independence, spend in the same currency in which they are paid and exchange rates are not a concern.

Financial institutions will have the task of reorganising balance sheets between currencies.

They however, have the experience and expertise.

Businesses will need to adjust to the new markets in a new currency, however just as at present many already hedge against exchange fluctuations by forward contracts and money market futures trade.

There is one area that will need to be addressed, that of mortgages and private and occupational pensions. These are generally held by people without expertise or resources.

It is estimated that there is presently £40 billion of mortgages in Wales.

After Independence, they will be designated in a foreign currency [ GBP ] and as such subject to exchange rate fluctuations.

These groups in particular need support.

Mortgages.

Clearly after Independence, mortgages will be loaned in the domestic currency and the problem of exchange rate fluctuations would not apply.

There are however estimated to be £40 billion worth of mortgages presently in Wales.

What to do about them?

These mortgages are in various stages of repayment.

Some will have a few years to go. Some will have recently started.

How to mitigate any cost that Independence may have, will depend on that repayment factor..

There is the possibility of remortgaging to a financial institution located in Wales.

An option for those with a long term liability.

Currency swaps. A financial means of fixing repayments regardless of currency exchange rate fluctuation.

Balance sheet exchange. If the holder of the mortgage has a branch in Wales after Independence, it may just mean moving the mortgage from one balance sheet to the one in Wales.

This is not an advice post, just indicating that there are many and varied ways to mitigate currency exchange fluctuations that may occur.

This is also a transition rather than a permanent position, however, it is a situation concerning those with the least expertise. It would seem reasonable that the new Wales government would concentrate advice and even financial help in this area.

Private pensions.

The other area of particular concern to those with private or occupational pensions.

They too held and paid in GBP.

Will they be subject to currency exchange fluctuations.?

Pensions, less of an issue than mortgages.

Pensions are a private contract between the recipient and provider and the terms of the contracts vary.

There are a number of ways to deal with this issue.

The most straightforward is the transfer to a pension provider in Wales.

In addition the same financial options apply to pensions as to mortgages.

Scotland was to put in place a Pension Fund,to ensure that pensons did not suffer in Independence.

A similar arrangement could be put in place for Wales.

These problems, if they are problems, are transitionary, a diminishing transition.

It should also be remembered that both mortgages and pensions can and are presently  adversely affected by policy decisions of the UK government.

Any shortcomings should also be set against the advantages of an Independent Welsh currency in growing and protecting the Welsh economy.

Currency crisis

Some of those of a more nervous disposition, see financial predators waiting to pounce on a new Welsh currency, hoping to make a fortune.

Wales will have a stable economy and established state institutions and there are very few cases of the currencies of such nations experiencing currency pressures,

Wales will have a floating currency.

The IMF [ International Monetary Fund ] analysis found that floating currencies are the least likely to experience currency pressures.

The alternatives to this, fixed or pegged to another currency, carry the restrictions of staying with the pound.

Additionally Wales would need a large foreign currency reserve in order  to support a fixed currency rate.

So what’s the problem?

The objections to Wales' own currencies have reasonable solutions.

These objections must be set against the advantages of Wales' own currency.

Wales needs its own currency. It will need to raise significant investment finance and it is difficult to see how it can without a fiat currency [ a currency guaranteed by the state ] and the controls and advantages of a Central Bank.