Gavin McCrone: Count it before you spend
A precendent for keeping a UK monetary union was set when Ireland became independent in 1922. Scotland could opt out of the euro, much as Sweden did, while staying in the EU. Picture: PA Wire
What currency would be in your purse in an independent Scotland? And what if the UK went to war? It all needs to be sorted out before a vote is held
DAVID Cameron’s intervention in the independence debate has ensured that this issue is now going to be centre stage until the proposed referendum takes place. It is rather late in the day. Up to now, Westminster and much of the public in England have been sleepwalking towards a constitutional crisis and they are only now beginning to realise that the disintegration of the United Kingdom is a real possibility. The media and the ease with which different editions are produced for different parts of the UK must take part of the responsibility for this. While devolution and an independence referendum have constantly featured in the press in Scotland, they have seldom featured in England, even in the same newspapers.
We can now expect a great deal of debate. The UK government’s White Paper argues that, since under the 1998 Scotland Act constitutional issues are a reserved matter for the UK parliament, a referendum set up by the Scottish Parliament could be subject to challenge in the courts. This would be an appalling outcome for all concerned. The two governments must therefore put aside their differences and agree so that a power can be given to Scotland by the UK parliament for such a referendum to be held. Mr Cameron wants a quick poll with one question – in or out. Alex Salmond has chosen the autumn of 2014 and wants two questions – one on whether the devolved Scottish Parliament should have increased powers (maximum devolution or “devo max”) and the other on whether Scotland should become an independent country.
On the referendum itself, both governments agree that vote should be by people resident in Scotland. The UK White paper says nothing about minimal percentages, such as were introduced by the Cunningham amendment to the devolution bill of the 1970s. Although the 1979 referendum produced a small majority for devolution, an insufficient percentage of the electorate voted, so it could not be implemented. This resulted in much controversy. But on an issue of such enormous importance, not only to Scotland but to the rest of the UK, it would surely be extremely unsatisfactory if either independence or devo max were to win by a tiny margin, say 50.5 per cent on a 30 per cent turnout. A low turnout is perhaps very unlikely this time, but a close result with a tiny majority, as happened in Quebec when separation was rejected, is perfectly possible.
The coalition government clearly regards devo max as a fall-back position for Alex Salmond, if he does not win a vote on independence. With only some 30-40 per cent likely to vote for independence on recent polls, it is probably true that more people would vote for devo max, seeing it as some sort of compromise between independence and the status quo. But given Alex Salmond’s success in the recent parliamentary election after the polls had predicted a substantial lead for Labour, the unionist parties would surely be unwise to assume that independence would be rejected on a straight vote. Bill Jamieson has recently said in this newspaper that if the unionist parties really want to preserve the UK, devo max, despite its many difficulties, should be a fall-back position for them too.
If the status quo is rejected, independence would be the simpler of the two outcomes, but even it would involve negotiations on the national debt, on dividing the North Sea, on the currency to be used by Scotland, on defence bases and the future of Trident, on immigration issues, on publicly-funded pensions and on the European Union. George Osborne is recently reported in this newspaper as saying that an independent Scotland might not be allowed to keep the pound, might have to join the euro and would no longer have an influence on UK fiscal or monetary policy. The Scottish banks, the Treasury is reported as arguing, would no longer be able to print bank notes. There are obviously going to be a lot of scare stories, not all of them in the end helpful to the unionist cause. So it is worth untangling some of these arguments.
If Scotland was a member of the EU, I do not think it could be forced to join the euro, despite the expectation in the treaties that all member states would eventually join. Sweden, which is an EU member state, held a referendum in which euro membership was turned down and no-one is going to do anything about that. What about retaining the pound? When the Republic of Ireland separated from the UK in 1922, it remained in the UK monetary union till the end of the 1970s, when it joined the European Exchange Rate Mechanism. However, there was an Irish central bank, which issued its own notes. These were interchangeable with Bank of England notes in Ireland. What this meant technically was that Ireland had its own currency, but chose to link the Irish punt to sterling. This meant that there was no freedom of monetary policy because interest rates were set by the Bank of England. The Irish government issued its own bonds, but its fiscal policy was very tightly constrained by the need to maintain the monetary union.
Devo max has never been defined. Scotland would, however, remain part of the UK with its MPs at Westminster. It is not clear how far it would go beyond the measures presently in the Scotland Bill. But the assumption seems to be that, while monetary union would remain, the fiscal union and the transfer union (whereby expenditure is based on some view of need and the stronger parts of the country support the weaker) would both end. Virtually all taxes and responsibility for public expenditure would be devolved with the UK continuing to handle only defence, foreign relations and most of macroeconomic policy.
The Bank of England would continue to set interest rates and borrowing by the Scottish Government would have to be constrained to ensure that UK bonds retained their credit rating. While the Scottish Government might perhaps assume responsibility for all personal and property taxes, VAT could not be different from the rest of the UK under EU rules and I would expect major difficulties to arise, with strong objections from other parts of the UK, if it were suggested that corporation tax rates were to be devolved. Then there would be questions about whether the national debt would be divided and whether the UK government could be expected to bail out the Scottish Government, if it was in difficulty.
On the expenditure side, everything would be devolved apart from defence and foreign relations. Welfare expenditure is the largest single category that is not devolved at present. But are differences in levels of welfare – state pensions, unemployment and the various benefits – compatible with being in the same country? The other countries of the UK would certainly have views about that. And as for defence, presumably the UK defence installations, including Trident, would remain. But the UK government might decide to take some action abroad to which the Scottish Parliament was opposed. How would that be handled? Since the UK prime minister would still be responsible for the whole UK, the Scottish Parliament would have to accept UK policy.
Sorting out all of these issues and ensuring that they are fully understood by those who will vote is going to take time, so that whatever Mr Cameron says, I do not expect the referendum to take place any earlier than October 2014, the date chosen by Alex Salmond. What worries me most is that as the debate continues, it could become not only increasingly intense but acrimonious. I give politicians the credit on both sides of not wanting that to happen, but they might find it difficult to control. There are plenty of people both in England and in Scotland who might make it so. Acrimony would be damaging to both countries but especially to Scotland. It could seriously affect not only investment but the tourism business, since for both Scotland is closely linked with England and geography ensures it will remain so, whatever the result of the referendum. We must ardently hope that does not happen.
• Gavin McCrone was formerly chief economist at the Scottish Office
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Comments
There are 46 comments to this article
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fairfax
Tuesday, January 17, 2012 at 09:42 PM45:" The use of a comma before the word "but", would be poor for anyone having passed O' grade English." Y-- our fetish for comma placement and grammatical dogma is extremely amusing, albeit naive. Had you considered that it might be more interesting to address the subject of McCrone's article, rather than to be diverted by my lucid prose?
CheesyQ
Tuesday, January 17, 2012 at 09:27 PM#41 fairpax, I assume English is your first language then? Surely academics should be literate? "The adjective describes my nationality, not my subject, but it's flattering to be the subject". The use of a comma before the word "but", would be poor for anyone having passed O' grade English. Attending an Inner-city academy for a few years, does not an academic make. Retard!
bassbhoy
Tuesday, January 17, 2012 at 09:26 PMFairfax. Interesting and reasonable comment from England. Excuse me if i,m taken aback. I,m used to dealing with BNP supporters telling me what I,m allowed to do. So, you would like a debate based on facts and evidence between respectful and competent individuals in an atmosphere of open conversation. That is very refreshing. I would like that too. However, I'm afraid That unless the UK government allows the Scottish executive access to the secret files that they have been compiling for years that hold vital information about the potential of the Scottish economy, that debate would be one sided. And as long as the press continues to drag this whole process through the gutter with fearmongering and disrespect for the people of Scotland , its going to get nasty. You think like an academic which (trust me ) I admire. Alex Salmond on the other hand, thinks like a Politician. And a very good Politician indeed. He is keeping his powder dry and his cards close to his chest for the debate to come. He will not reveal all the information in his possesion until he has to. He will let the Westminster alliance trip over itself as much as possible while hoping that they will start arguing about the EU or picking a fight with Iran. I have know idea how much he knows or what his plans are, but judging by past encounters with Unionist officials he seems totally up to the task.
Tartancult
Tuesday, January 17, 2012 at 09:22 PMFairfax, I have read some of your posts - you are not an academic, in any sense of the word.
Tartancult
Tuesday, January 17, 2012 at 09:20 PM#11 For Scots - Status Quo - Loose Devo Max - Qualified Win Independence ---- Outright Win...................................What on earth are you burbling about - that makes no sense in seventeen languages.
fairfax
Tuesday, January 17, 2012 at 09:10 PMRufus (40): "38 fairpax, ", Writing as an English academic,", who are you trying to kid?"Your language is poor and your grammar is abysmal, consider using conjunctions rather than a high number of commas. You're bust like your namesake! D Minus... See me!" ---- The adjective describes my nationality, not my subject, but it's flattering to be the subject of an ad hominem anathema because of the comma-density of my prose. Many thanks!
CheesyQ
Tuesday, January 17, 2012 at 09:01 PM38 fairpax, ", Writing as an English academic,", who are you trying to kid? Your language is poor and your grammar is abysmal, consider using conjunctions rather than a high number of commas. You're bust like your namesake! D Minus... See me!
bassbhoy
Tuesday, January 17, 2012 at 08:52 PMKon I didnt say that keeping parity with sterling was my preferred option. However there is precedent. Ireland, Australia, New Zealand, and others had ties to Sterling after independence, The way its presented in the media is like we will be re-inventing the wheel. This is not the unknown. Its been done before. The US dollar could be worth a peso tommorow. the French could be using Francs in a month. No one can predict exactly what will happen in the future. If we could we would be millionaires.
fairfax
Tuesday, January 17, 2012 at 08:45 PM37: "Fairfax. I wholeheartedly agree that re-issuing the Pound Scots makes sense." -- Excellent. I agree that there have been many silly economic projections, but acrimony is bound to increase on both sides -- few divorces end entirely amicably, despite good intentions on both sides. However, the issue of currency really does need to be discussed by the SNP in a more mature way, Writing as an English academic, with many friends and relatives in Scotland, who supports independence, it is sad to see Salmond avoiding serious discussion of this issue. A currency union after Scottish independence will be bad for both England and Scotland, so it's better for the SNP to support the recreation of the Pound Scots now. There really is nothing to fear in such openness.
bassbhoy
Tuesday, January 17, 2012 at 08:35 PMFairfax. I wholeheartedly agree that re-issuing the Pound Scots makes sense. I dont make economic policy for Scotland though, and I am not an economist (although I have a laymans interest in the subject). My point on this is that the mainstream media is fearmongering. In the last few weeks the Scottish economy has been compared to Ireland, Albania, and Zimbabwe! Interest rates may be a little higher or lower than in other western countries depending on circumstances that cannot be predicted by anyone. Suggesting that an Independent Scotland would immediatley be plunged into third world status as many media outlets have proposed is insane. The SNP will argue that you will be better off in an independent Scotland. The Unionist parties will say that you will be poorer. None of them can guarantee anything. The world could go into a hyperinflationary cycle, or deflation depending on who you listen to. The Euro could be dissolved, or become the worlds reserve currency in a few years. Sterling could be in trouble without oil revenues to prop it up. No one knows for sure. However, I do know that I would rather be governed by politicians that are accountable to the electorate of Scotland.
Cuntryman
Tuesday, January 17, 2012 at 08:11 PM34 bassbhoy, to tie the SP to the GBP is possible, however to maintain parity it involves the variation of money supply on probably a monthly basis. This has a massive effect on a countries economy, some would say very detrimental. Using quantitative easing to maintain your interest rate is a measure of last resort. Hardly a way to produce confidence.
Demon Dinner Lady
Tuesday, January 17, 2012 at 08:05 PM30 bassbhoy, Are you some kind of a joker? An independent Scotland would require all those things, but you haven't mentioned anything about having a central bank or a monetary policy. Surely that should be at the heart of any independent nation?
bassbhoy
Tuesday, January 17, 2012 at 08:03 PMKon fair enough, we all have mortgages.. I cant tell you what the bank of Englands rate will be next month,but it certainly wont be set by an analysis of whats best for the Scottish economy. The idea that Scotland would be some sort of train wreck economy upon succession is ludicrous. with the natural assets and small population of Scotland I wouldnt be surprised if the RUK lost its triple A rating and Scotland kept it. My comments are based on the ridiculous fear mongering in the mainstream media recently. I feel confident that interest rates in an independent Scotland would be similar to most western democracies In the current economic downturn for anyone to predict what those interest rates will be would be madness
fairfax
Tuesday, January 17, 2012 at 07:39 PM30: "Scotland will use Sterling, a Scottish pound tied to Sterling, an independent Scottish pound, or the Euro. The option chosen will be decided by the democratically elected government of Scotland" -- The choices you have given are not entirely under the control of the new Scottish Government. There is no obligation for the sterling currency union to continue after Scottish independence, and there is no way to move immediately to the Euro (assuming the Eurozone even exists in its present form in 2014). The choice is therefore a simple one: (1) recreate the Pound Scots, initially pegged to sterling, or (2) use sterling, but be tied to monetary policy set by England, as well as higher borrowing costs as a state not issuing its own currency. Option (2) is silly, in my view, and it's difficult to believe Salmond thinks it makes economic sense. Option (1) makes lots of sense, but the SNP avoid it like the plague. This needless fear should end: creating a currency and a central bank are part of being an independent nation.
Cuntryman
Tuesday, January 17, 2012 at 07:23 PM30 bassbhoy. If the GBP and SP are linked then what will our interest rate be? I would like to know if it's worth shifting my mortgage down south or not.
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