We need to recreate the Sterling Area. I know, the idea seems ironic, ludicrous even – did we not just go through the agonies of Brexit to avoid precisely that fate? But rather than being a post-colonial throwback, properly executed, it would be the kind of visionary move that would catapult Sterling to the global top table of Reserve currencies, bind us into Europe in the kind of relationship we should have had all along and cement the Union with Scotland forever.
The United Kingdom can lead a currency block of nations characterised by broadly similar economic conditions, with long-standing cultural and historical compatibility. We are already in a currency union with Scotland and other British nations that of course meet this test. Adding Ireland, Norway, Denmark and other like-minded countries would create a block of GDP approaching €5 trillion – approximately one-third of European GDP and similar to Japan and so making it one of the world’s Reserve currencies.
We must start by learning the lessons of the Euro – this would provide a clue why Ireland might want to join the Sterling and the road map to achieve it. While the monetary union that the Euro brought was ground-breaking, it was flawed. A union on fiscal policy was lacking, exacerbating the differences in GDP per head between core and periphery nations. Ireland was forced deep into debt by the 2008 crisis and who else but perhaps it’s oldest ally to answer its call. The UK injected a £3.2 billion bailout package allowing the Irish government to alleviate the financial stresses.
So why would Ireland benefit from exchanging one monetary union for another? For a currency group to be effective, trade must be the top priority. Who better for Ireland to collaborate with than its biggest trading partner, the United Kingdom, preserving its low tax zone status and attractiveness to multinational business?
Of course, there would be sensitivity of Ireland to ‘backdoor’ re-unification, but with the UK’s size, and the current integration of these economies with a shared language, there is at least a cultural fit. Moving the central bank to Edinburgh would draw much of the sting from this and tie in Scotland into the world’s most successful union. The union and currency would therefore be generic, although the British might have to live with symbolic gestures such as removing the sovereign’s head from its currency.
As it turns out, such a union between the UK and Ireland was proposed by Norway back in 1953. The ‘Northern European Sterling Area’ proposal predates the EU’s creation by 4 years. The UK was a founding member along with Norway, of course, but also Sweden, Denmark and Ireland. Proximity among similarly developed nations inter-reliant in trade created a strong argument for a viable and stable currency union, better able to weather future turbulent economic events and compliment and improve the economies of each of the partner countries.
Since the proposal of such a union, not too much has changed. For the Norwegians and Danes, the EU has never sat comfortably, only joining the EEC in the 1960s following Britain’s lead. Norway has even publicly and emphatically rejected membership to the EU on two counts, once in 1972 and again in 1994.
Northern European nations have acted as a separate political bloc with an agenda leading to a split in the EU, marked by dissatisfaction, and in the case of UK, Brexit. Given all this history of dissatisfaction with the EU and the potential to join a more favourable monetary union, does it seem so strange to suggest that joining the Sterling Area could be the solution?
by InvestUK Executive Chairman Rupert Gather