SCOTLAND is in a no-win situation with its currency – better to have a seat on the Bank of England, writes George Kerevan
WHY are Labour and Conservative politicians so set on rejecting a currency union with an independent Scotland? Sure, there are technical issues regarding how such an arrangement would be managed. But the vehemence of the rejection of the notion is both surprising and personal.
For Instance, Ed Balls says he will refuse to serve as Labour’s Chancellor of the Exchequer if a currency union is created. I understand Nye Bevan resigning from the Labour government in 1951 after the introduction of NHS prescription charges. (For younger readers, that’s when Labour politicians believed in a free health service.) But staking your political career on something as esoteric as the lender of last resort? What’s got into Ed?
Another member of the ubiquitous Oxford-educated Establishment, Ed Balls got his political leg-up as Gordon Brown’s chief economic advisor in the 1990s. If anyone is responsible for keeping Britain out of joining the Eurozone, it is Balls. An early confidante of disgraced publisher Conrad Black, Balls is a convinced British economic nationalist.
Tony Blair was sympathetic to joining the euro. It would have given the UK more influence in the EU and placated the City of London, which wanted to secure its domination of the European financial markets. After all, the French wanted a currency union with Germany precisely in order to make Paris into Europe’s financial capital.
Balls came up with a Plan B based on the UK staying out of the eurozone. The City would be placated by massive deregulation, essentially turning it into the world’s biggest offshore banking centre free of overt political supervision. The Bank of England was given independence to set interest rates – code for keeping politicians from interfering. At the same time, the Bank of England was deprived of its traditional role as City policeman. This job was given to a new body, the Financial Services Authority, which proved so bad at actually protecting customers from bank piracy and miss-selling that it had to be abolished.
By the way, the credit crunch and global financial meltdown in 2008 was not caused by Fred Goodwin and RBS. It was caused by the actions of US banks operating in the City of London, where they could safely hide their excessive gambling in derivatives from the US authorities.
What did Labour get from this Faustian bargain designed by Ed Balls? Free of Eurozone membership, Labour was able to borrow and spend as much as it wanted – for a time. Initially, the media was misled by Gordon Brown’s early commitment to stick by Tory spending plans. As ever, Brown’s nerve had failed him. But in New Labour’s second term, when Tony Blair demanded a massive increase in health spending, Gordon happily turned on the spending taps.
Unfortunately, this resulted in what economists call a “structural” budget deficit. This happens when a government is still borrowing at the height of an economic boom, when it should be saving. If you borrow when tax receipts are already at their highest, you will be in serious trouble when the economy bombs. But Brown and Balls had convinced themselves (and the London press) that their combined economic genius had abolished boom and bust. Then came the run on Northern Rock in 2007.
But whiz kid Ed thought he still possessed a “get out of jail free” card – sterling devaluation. Outside of the euro, Britain was free to slash the value of the pound sterling, making exports cheaper. Eurozone countries such as Greece lacked this option, and had to “devalue” internally by cutting wages. Alas, Ed’s devaluation wheeze – actually a backdoor wage cut – worked no better than his attempt to abolish boom and bust. The Gordon and Ed duo had spent so much political capital on the City of London that Britain’s manufacturing sector atrophied. Result: the UK’s industrial base proved too small to take advantage of the devaluation.
In fact, our current account deficit – the foreign currency the UK needs to borrow every year to buy necessary imports – has reached record levels (and will double without Scottish oil and whisky earnings). The current mini boom is purely the result of the government subsidising the commercial banks to fund mortgage lending.
Yet Ed Balls remains unrepentant. He is like a gambling addict who thinks that one more throw of the dice will recoup all his loses. For Ed intends to repeat all his old mistakes if he becomes Chancellor after next year’s UK general election (contingent, of course, on a No vote in the Scottish independence referendum). He wants to borrow and spend to boost the economy.
To do that he needs the complicity of the City of London, which means more political compromises with the big bankers. The last thing Ed Balls needs is Scottish representatives on the Bank of England Monetary
Policy Committee and banking supervision unit, defending the interests of Scottish businesses and consumers.
Gordon Brown and Ed Balls did irreparable damage to the UK economy, which remains on life support. Put Ed Balls in Number 11 and the result will be more debt, rising interest rates and economic stagnation. So why would Scotland still want a currency union?
As well as reducing costs and paperwork for business, it provides a political framework for the two nations to work together to supervise what will remain an integrated banking system. True, Scotland could establish its own currency quite easily, backed with the massive foreign exchange reserves accruing from oil and whisky exports.
But we would not have the easy option of floating the Scottish currency, as many contracts are legally defined in US dollars and sterling. As a result, and for the foreseeable future, Scotland would need to peg its currency to sterling. This means our interest rates and monetary policy would be the same as that of the rest of the UK, regardless. Better then to have a seat on the Bank of England (renamed?) and influence decisions directly.
And if Ed Balls objects? Fortunately, he’s already offered his resignation in advance.