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Here’s what might happen if Wales had a completely separate, standalone independent currency.

Introduction

A floating currency is any currency which allows its value/exchange rate to change on the international foreign exchange markets. The pound sterling, euro, US dollar, Australian dollar, yen and rupee are all floating currencies.

Unlike a fixed/pegged currency (Part V), there’s no need for a central bank to maintain their own currency’s value to a foreign currency. This gives the central bank and government much more freedom when it comes to monetary and fiscal policy, particularly when it comes to economic shocks.

The Requirements

The requirements are broadly similar to those of establishing a pegged currency (Part V):

  1. A physical Welsh currency – Notes & Coins, as well as a suitable name and identification code.
  2. A Welsh Central Bank – To provide lender of last resort services, issue currency, advise/decide on monetary policy issues and financial regulations in Wales, enable the government to borrow.
  3. Financial regulations – These could either be copy-and-paste of the UK’s/England’s or we could determine a completely new regime. We would need a Welsh financial regulatory system too.
  4. Foreign currency reserves – Technically, we wouldn’t need them as urgently as we would if we wanted a fixed exchange rate, but it would be sensible to have them. A Welsh share of the UK’s reserves, as mentioned in Part V, would be around £5.7billion in today’s (2017) prices. That’s at the necessary 5-10% of GDP level and would probably exceed it once a share of gold reserves are added.
  5. Re-denomination – All contracts, bank accounts, mortgages, insurance policies etc. would need to be back-converted to the new currency. Wales could stick with the current decimal 0.00 format, or we could opt for an Icelandic or Japanese style 0000 format (i.e. £1 could become 10 Welsh “coronau/crowns”) which might help mask inflation.
  6. Taking a proportional share of UK national debt – Lenders will be reluctant to lend to a country that walks away from its debt obligations and in order to borrow at a good interest rate, Wales would have to maintain a good credit rating. The exact amount of debt would need to be negotiated, though realistically Wales should probably only accept a share that matches UK national debt, our GVA per capita relative to the rest of the UK and population share. There are scenarios where Wales could walk away from our debts, but in order for our currency to have legitimacy and to retain the right policy tools, we’d have to accept some of the burdens.

The Cost & Opportunities of introducing a Welsh currency

This applies equally to many previous parts (Part V in particular) but is perhaps most suitable to be placed here.

According to the Bank of England, in 2017 there were 3.66billion banknotes in the circulation of all denominations. Assuming a proportional percentage of them (4.9%) were in Wales, that amounts to 180million banknotes with a total face value of around £3.6billion.

The exact costs of printing a single polymer-based bank note (like the new £5) are hard to pin down, but in Canada is said to be 19¢ per note (11p). So replacing my rough estimate of every current banknote in Wales (180million) would cost around £20million (not including design costs), with an ongoing annual cost of replacing damaged notes, which will probably be ~£200,000. These replacement notes are bought at face value so the central bank and government make a significant profit on every replacement note (called seigniorage).

As for coins, if we opt for a decimalised denomination, it may be worth scrapping 0.01 (1p) and 0.02 (2p) coins for physical transactions and making the 0.10 (10p) or 0.05 (5p) the lowest available coin in circulation.

The Royal Mint estimates there are 30billion coins in circulation in the UK (Wales = ~1.5billion). The cost of replacing them will vary on the complexity of the design and the mix of metals used to make them.

Printing and minting notes and coins is now a wholly privatised sector, with open competition from companies to produce them – so the costs could well come down, particularly for coins.

The next question is: What could go on Welsh banknotes and coins? In order to prevent any arguments over gender, we should probably have landmarks, symbols and events on the notes instead of famous people – or even uniquely designed modernist art, like the Norwegian krone.

One note could commemorate the first National Eisteddfod, for example, and another could have a picture of Eryri.

We could even be radical and go completely digital (Part VII), doing away with coins and notes with all transactions carried out electronically. The technology isn’t quite there yet to enable a universal switch from physical currency to digital, but it’s not far away either.

At-a-Glance Assessment

  1. Autonomy – A floating currency provides the maximum amount of autonomy, with all fiscal and monetary policy levers being held by a Welsh Central Bank and/or the Welsh Government.
  2. Convertibility – There’s no reason why there would be any problems as long as the Welsh currency demonstrates credibility and monetary policy is properly managed – but we have no experience of doing it.
  3. Credibility – A new currency will take some time to be seen as credible on the international exchange markets. There’s an argument that a Welsh currency would need to be “proven” to work, the Welsh Central Bank will need to demonstrate policy competence and the Welsh Government will need to demonstrate fiscal discipline (i.e. through pegging to an established currency) before a Welsh currency could float.
  4. Stability – There’s always the prospect of big changes in the value of a floating Welsh currency on exchange markets up or down, both of which would have advantages and disadvantages for the Welsh economy. As long as monetary policy is approached sensibly there shouldn’t be a problem.
  5. Foreign trade – Transaction costs (cost of trading) are likely to be higher with our own floating currency. All trade with England and elsewhere would require currency conversion, and based on estimates from the Scottish Government (pdf – p16) this could cost up to ~£200-250million in Wales for goods, but once services are added this figure could come down (most Welsh customers use English and Scottish banks).
  6. Identity – Wales would have its own bank notes and coins as a separate Welsh currency would be a pre-requisite.
  7. Mobility – Anyone leaving or entering Wales would have to convert their money and depending on the exchange rate this could be a good or bad thing for trade, but certainly inconvenient regardless. Changing currencies hasn’t necessarily hit cross-border trade between the Republic of Ireland (Euro) and Northern Ireland (pound) and with the increasing use of debit and credit cards, individuals are increasingly unlikely to notice – but would have to be aware of exchange rates.
  8. Synchronicity of economic cycles – Our economic cycles or fiscal policies wouldn’t need to be aligned with anyone else and our own central bank would act as a lender of last resort. However, this would mean having to introduce with our own deposit guarantee schemes and financial regulations etc.

Key Advantages

Complete fiscal and monetary policy independence – As mentioned, Wales would be responsible for all fiscal and monetary policy decisions. Whether those powers would be held by the Welsh Central Bank or the Welsh Government is up for debate, but the levers include: being able to set interest rates, monetary supply, financial regulations and full control of taxation.

Keeps more Welsh money in Wales – The chances are most of the people reading this will bank with an English or Scottish bank, hold private pensions with an English company and will have likely worked for a company that’s either been taken over by, or targeted for taking over by, a foreign firm. All that money leaves Wales and doesn’t come back.

If Wales has a weaker currency than England (which is likely), then businesses in Wales will probably seek to do more of their business within Wales, but their exports would be attractive to foreign buyers. This would probably have a massive upward boost on the Welsh economy, and we could see smaller Welsh banks established (resulting in highly paid jobs), fewer takeovers of Welsh companies and more job creation in general in the financial services sector (i.e. through the creation of a Welsh stock exchange, pension companies, mutuals, hedge funds).

Fewer Central Bank interventions – The Welsh Central Bank wouldn’t need to constantly try and shore up the value of the currency through interventions in the foreign exchange market. We can also run up large trade deficits, which would only result in the currency losing value and not lead to things like IMF intervention. We’d also be largely insulated from the economies of other countries (though they would no doubt impact our economy, they won’t threaten to sink it).

Key Disadvantages

Foreign exchange volatility – The value of a floating Welsh currency could change up or down in a very short space of time, impacting trade; one day an item a business wants to import may cost 100 units of Welsh currency, within a few hours or days it could cost 102 or 98 units. This shouldn’t be that much of a problem as long as the changes are small (i.e. 0.02 points up or down), but if Wales was hit with an economic shock – like a recession – this would inevitably hit the value of the Welsh currency internationally and either make the problem worse or even, in some cases, aid recovery (i.e a weaker currency damaging the housing market and leading to high inflation and unemployment, but increasing exports and inward investment).

The risk of capital flight – This happens when people move their money out of the country because they perceive it would be at risk from poor economic policies, economic shocks or a poor exchange rate which could see the value of their assets fall. In Wales’ case, the money and assets would inevitably go to England and we would be stuck in a cycle of trying to get foreign countries and businesses to invest in Wales instead of trying to use the capital that’s already here (i.e. in pension funds or Welsh money deposited in English and Scottish banks).

Lack of discipline – Having all financial and monetary policy tools at our disposal is a double-edged sword. It’s inevitable it may be abused by people in a position of power either for personal gain or for political expediency (see Venezuela and Zimbabwe). The best case scenario is that we end up throwing senior bankers in jail and becoming some sort of Italy in the rain, the worst case scenario is we end up as a basket case banana republic with rampant hyperinflation.

Conclusion

You would think a floating currency would be the riskiest option, but it’s arguably less of a risk than using a substitute currency (Part III) because we would have all the tools we need to maintain stability and a monetary policy that suits our export-oriented economy.

We would be in uncharted territory, making the sorts of decisions that haven’t been made in Wales for more than 1,000 years.

It’s perhaps not the best option immediately post-independence – namely because stability and confidence are essential and that’s better maintained through either a formal currency union or fixed exchange rates.

That doesn’t mean a floating currency wouldn’t be appropriate to pursue, for argument’s sake, 30-40 years after independence when we have a clearer idea of the economic picture, very much like Ireland did.

Part VII looks at radical and emerging alternative forms of currency.