Alf Young: Nicola needs to talk; you can Bank on it

IN BETWEEN hard-hat visits to construction sites across Scotland and trying to get EU Commission president Jose Manuel Barroso to talk belatedly to her about what hoops an independent Scotland might actually have to jump through to stay within the European Union, there’s someone else Nicola Sturgeon will soon need to talk to. He’s Mark Carney, the Canadian central banker who emerged last month as George Osborne’s surprise choice as governor-designate of the Bank of England.

Since the eurozone crisis scuppered any prospect – were it to stick to its boom years’ “We’ll-embrace-the-euro-and-enjoy-its-lower-interest-rates” line – of the SNP securing a “Yes” vote in 2014, Scotland’s government has been signalling its alternative. An independent Scotland would now retain sterling as its currency of choice and the Bank of England as its central bank and monetary authority. You might even call it a better-together alternative.

However, with the Europe question still unresolved, this week that currency question was also thrown up in the air. On Tuesday, John Swinney told a House of Lords committee his government was engaged in a constructive “dialogue” with the Bank on continuing monetary union. By Thursday, a Bank spokesman was insisting: “We have not entered a dialogue about the possibility of changing monetary arrangements for Scotland in future.”

Alex Salmond did meet the current governor, Sir Mervyn King, back in February. And the Bank did answer some technical questions from representatives of the Scottish Government. But the man Scottish ministers desperately need to talk to isn’t King, who’ll be gone by next summer; it’s Carney. And he has already been saying some radical things that, by implication, could have a significant bearing on what kind of relationship Scottish ministers might have with the Bank, should an independence mandate be secured.

Up until now, the SNP has argued that independence, by moving the main fiscal levers in the economy from London to Edinburgh, would allow a sovereign Scottish Government to pursue higher growth than has been achieved in recent years as part of the union. That aspiration – higher sustainable growth – is the centrepiece of its programme for devolved government. It is also its big pitch for an independence mandate.

But in a speech in Toronto on Tuesday, Carney talked openly about the policy dilemmas currently facing central banks. They may have steadied theirs ships, but they haven’t yet found a way of filling their sails with fresh wind.

What other strategic options might they pursue, should the kind of lacklustre growth much of the western world has experienced since the great banking crash prove to be, not a passing phase, but a persistent new reality.

Nominal interest rates set by central banks are now so low they have nowhere to go but up. More unconventional policy tools, like quantitative and credit easing, have been tried on a growing scale, but with limited impact on demand.

The Bank of England, for instance, has printed enough money to buy up some 40 per cent of the outstanding stock of UK gilts and has missed its current inflation target month-upon-month for the best part of four years. But UK growth is stalling again, with talk of a triple-dip recession. And our much vaunted AAA credit rating is in peril.

Without tying his reflections to any particular jurisdiction, Carney wondered out loud whether a whole new policy framework might eventually be required, one where monetary policy would no longer target inflation, but switch instead to targeting nominal GDP, the measure of national output that includes the impact of price changes. A target of 5 per cent nominal GDP could be satisfied, in more benign times, by growth of 3 per cent and inflation of 2 per cent. In tougher times, when growth evaporated, it could also be satisfied by allowing prices to rise by 5 per cent without taking corrective action.

The Chancellor, having just extended austerity all the way to 2018, publicly welcomed the prospect of such a debate. The Bank of England is fretting about the risk to its credibility. But if Carney does take his new charge down this route, where does that leave the SNP’s twin aspirations to keep the pound but outgrow the rest of the UK economy? It certainly suggests nothing can, or will, be agreed any time soon. Carney doesn’t take charge until next summer. And any change in strategy would take longer still.

But if the Bank, under Carney, were to embrace nominal GDP rather than inflation targeting, the terms under which the rest of these islands might be willing to agree an ongoing monetary union with an independent Scotland would move to an altogether different level of complexity. There is already confusion over whether a formal fiscal stability pact would be demanded. What might a growth pact look like? And could Alex Salmond and his colleagues live with it?

Throw in the future supervision of banks and other financial institutions in an independent Scotland and the uncertainties multiply. The SNP seems to want the Bank of England to take on that responsibility too. But, as former Bank executive Brian Quinn pointed out in a recent paper to the David Hume Institute, that could prove to be “an empty choice” when what the SNP wants, in this regard, runs into the terms of the emerging European Banking Union, where a deal now seems to have been agreed.

The terms of that deal, which emerged this week, seem to have satisfied George Osborne. But, when and if Scotland’s Deputy First Minister finally gets her face-to-face with Jose Manuel Barroso, will the commission be happy to see Scotland, as a putative new member state, doing a side deal on bank supervision with Threadneedle Street?

Or will it insist, as Brian Quinn thinks it might, on an independent Scotland having to “establish its own regulatory and supervisory system de novo” at significant expense? And if it did, might that lead banks like RBS, as it has already hinted it might, to reconsider where they are headquartered?

These are big questions. And reasoned answers, as we have all discovered over EU membership, are hard to come by. Since February, a financial commission working group, a sub-set of the First Minister’s council of economic advisers, has been thrashing out some putative answers with Scottish government officials.

According to the available minutes, at the group’s last meeting, last month, members discussed with senior civil servants, among other things, the “importance of designing economic institutions (eg regulation and fiscal commission) alongside economic policy”.

As Mark Carney’s intervention and the European Banking Union deal, both of which came after the group last met, demonstrate, the rest of the world is not standing still as they put together their thoughts on what the macroeconomic framework for an independent Scotland should look like.

Let’s hope that, by the time the group’s interim recommendations are published, early in the New Year, Nicola Sturgeon has managed to talk to someone in Brussels. And that she’s also found the time to contact Mark Carney, too.