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Bill Jamieson: Scotland can’t bank on the pound

The Bank of England in London. Picture: Getty

The Bank of England in London. Picture: Getty

  • by BILL JAMIESON
 

The independence debate takes an ugly turn as the Chancellor rules out a currency sharing deal, writes Bill Jamieson

A harmless game of Call My Bluff? Or a lurch towards Mutually Assured Destruction? News that Chancellor George Osborne is set to rule out the favoured SNP option of currency sharing with the rest of the UK has immediately raised the temperature of the independence debate. And its consequences could be lethal.

The SNP has reacted with predictable fury, accusing the Chancellor of “bully boy” tactics and of raising “Project Fear” to a new and altogether more aggressive level. Already SNP MP Stuart Hosie has warned that an independent Scotland disbarred from sharing the pound as its currency may be minded not to pay up its population pro rata share of the UK’s £1.2 trillion of debt.

If this is the tit-for-tat game we have now entered, be mindful of the consequences. This will be viewed with considerable apprehension on international bond and currency markets. It immediately puts a question mark by the ability of an rUK administration, shorn of North Sea oil revenues, to honour its debt commitments – more especially as its debt-to GDP ratio would rise above 80 per cent. Lending on sterling denominated assets could well attract a risk premium. That would certainly give the rUK Treasury pause for thought.

But it is also a threat to the Yes campaign that could badly backfire. An independent Scotland seen on the world stage to be prone to issuing threats about whether it would, or would not, honour its debt obligations to achieve political aims is one that would find it difficult to attract foreign buyers of its debt.

The risk premium for lending to Scotland would immediately be raised, lumbering house buyers in Scotland with higher mortgage interest payments, businesses with dearer interest costs and the Scottish administration with significantly higher debt interest charges. If this is just a game of political Call My Bluff, it carries potentially destructive consequences for all parties.

There is also a toxic political consequence. The fury of the SNP reaction yesterday is indicative of how deep and bitter the independence battle is turning out – and with divisive consequences that could stretch for years after the referendum vote – whatever its outcome. Fierce emotions are being stirred that could long scar Scotland and its people.

Little wonder, with these passions, that a growing number, especially in business, are reluctant to express their concerns about independence for fear of fanatics immediately tearing at their throats.

Yes supporters may feel justified in their grievance that George Osborne has turned on them and has moved with aggression. But aggression is far from absent in some of the actions and behaviour of independence supporters.

Already this campaign is driving deep divisions, which will not be healed by the referendum outcome. Indeed, a likely consequence is that the independence issue will remain the dominant issue of Scottish political life and that the spirit of the “Edinburgh Agreement” if not also the letter – to respect the referendum outcome – is as good as dead.

Currency sharing was always going to be the Achilles heel of the Yes campaign. So it has proved. It may have been more politic to allow the currency sharing proposal to quietly collapse under the weight of its own contradictions in negotiations with the rUK government. But that would be to allow a referendum vote to proceed on the basis of a collective deception – a plan that few believed would work. And many in the Yes campaign have long suspected that “Plan A” would never work. What, then, would be the point of a referendum based on a premise that many of its proponents know to be false?

Two issues now press forward. First are the indications that a ruling out of currency sharing is by no means the exclusive position of a hated and demonised Tory Chancellor alone. Labour shadow chancellor Ed Balls and Liberal Democrat Chief Secretary to the Treasury Danny Alexander are also understood to be planning to deliver similar statements.

All this makes Bank of England Governor Mark Carney’s signal intervention last month seem like a polite minuet. Balls in particular argues that the eurozone crisis has shown that a monetary union is fundamentally flawed without a fiscal union. Balls is generally credited with being one of the most influential voices in keeping Britain out of the euro, partly on those grounds. And joining the euro was once Alex Salmond’s preferred option until the eurozone crisis blew up.

This alignment of Labour and Liberal Democrats with Osborne’s position has implications for any cross-party negotiating team put together to deal with the Scottish administration in the event of a Yes vote. A change of Westminster government post the 2015 general election might not, as some had been counting on, play to Salmond’s advantage as much as previously hoped.

Second is the inevitable elevation of the so-called Plan B to greater prominence. Senior figures within the independence camp have long voiced concerns over the currency sharing proposal. They fear an independent Scotland would have little more fiscal discretion in a currency union with rUK.

A separate currency has been the preferred choice of many SNP campaigners. It would, they argue, better ensure a greater degree of economic and fiscal sovereignty than a continuation of oversight and constraints that a shared currency would involve. So one immediate consequence of Osborne’s statement will be a more vigorous debate within the SNP as to the merits of Plan B.

However, preferable though this may be to many independence academics, it would, in political terms, be the hardest sell to Scottish voters and particularly to Scottish business: trade with rUK would immediately become more complex, prone to currency risk – and expensive. It would take time for a separate Scottish currency to establish itself in financial markets. And many Scots might opt to continue using the pound whatever new “official currency” was introduced.

Wherever our sympathies lie, we have now arrived at a moment of truth – or more accurately, another one. The immediate consequence is a death to the softly-softly attempt to portray independence as a choice involving neither risk nor change – “the same, only different”.

Politics is also the business of convincing people how radical, untried arrangements would work in practice – and even then many voters are none too sure. For in this debate as in almost all political debate there are, as Nietzsche observed, no facts, only interpretations. To this, of course, must be added that most potent of ingredients: emotions.

How glaring – and how shameful – it now looks that David Cameron vetoed a “devo-max” option on the referendum ballot paper. For it is this that opinion poll ratings make clear remains the preferred choice of Scots. In its absence, it is the “all-or-nothing” polarisation that with its high emotions threaten relations between Scotland and the rest of the UK. Of this we now need to be mindful, given the potential to inflict colossal damage to both.

 

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