Alf Young: Treasury will be trouble for the SNP

Nicola Sturgeon refused to say if the SNP has a monetary union plan B during the TV debate. Picture: Andy O'Brien
Nicola Sturgeon refused to say if the SNP has a monetary union plan B during the TV debate. Picture: Andy O'Brien
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If currency plan A is just a convenience to smooth transition, the rUK will play hardball, warns Alf Young

THANKFULLY, coming in the wake of the Farage pub siege on Edinburgh’s Royal Mile, the first televised political head-to-head of Scotland’s ongoing independence debate, aired by STV on Thursday evening, proved a largely even-tempered affair. Nicola Sturgeon and Michael Moore spent much of their hour-long encounter, including 15 minutes of each questioning the other directly, on what currency Scotland would adopt in the event of a yes vote and how that choice might be realised.

Both sides know how critical that question is. As Professor John Kay, one-time member of the Scottish Government’s own council of economic advisers, has pointed out: “The choice of currency would be the most important economic decision for an independent Scotland. All aspects of economic policy, including fiscal and monetary arrangements, are contingent on that choice.” For many years, the SNP’s favoured position was to embrace the euro.

But the crisis that still engulfs the 17 eurozone member states put paid to that. Even if Scotland still wanted to go there, it’s unlikely that, on the debt and deficit levels it would be carrying on independence day, we’d meet the entry criteria.

So, if there’s a debate within the Yes camp about currency, it’s a choice between keeping sterling and launching a new Scottish currency. But since February, taking its cue from a recommendation from the first report of its own fiscal commission working group, the SNP has insisted its settled choice is to retain the pound sterling and submit to the monetary discipline of the Bank of England.

As Sturgeon again asserted on Thursday, the SNP says the pound and the Bank of England are as much Scotland’s as they are the remainder of the UK’s (rUK).

Inconveniently the Bank of England is a creature of Westminster statute. When it misses its inflation target, it has to explain itself to the UK Chancellor. It has now assumed major new powers over financial regulation. Were there to be a yes vote in 2014, turning it into a jointly-owned central bank, imposing the same monetary discipline over two fiscally distinct state shareholders, would trigger some complex and potentially fraught negotiations.

John Kay says, if he were representing the Scottish Government in these negotiations, he would “try to secure a monetary union with England, and expect to fail.” Given how much market attention there would be the moment the votes were counted – the risk of capital flight and intense currency speculation and so on – that points to the need for an alternative plan of action by the SNP, if talks on a formal monetary union with the rUK were to fail.

But, in Thursday’s debate, Nicola Sturgeon refused to acknowledge even the existence of a plan B. All the answers about plan A’s credibility were already there in the fiscal commission working group’s February paper, she insisted. After all, didn’t it boast two distinguished Nobel Laureates among its authors.

It is certainly true the group recommends “retaining sterling as part of a formal monetary union . . . post-independence”. But the sterling union it proposes does not appear to be seen as permanent.

Recommendation 2.7 says: “The Scottish Government should refine the detail of the proposition set out for a macroeconomic framework which can operate from day one of independence and through any period of transition and indefinitely if required.”

Note the last two words. “If required”. The very next recommendation says: “The Scottish framework should be sufficiently flexible to retain the capacity to evolve the framework in the medium or long term if economic circumstances warrant it.” That is surely code for “A formal sterling union will ease the path to independence and keep market speculation at bay. But if, in time, we find that shared monetary discipline with rUK too irksome and our economy is diverging from theirs, we must reserve the ability to walk away” is it not?

Listen to Professor Joseph Stiglitz, one of the working group members, appearing by video-link from New York on 27 February, before the Scottish Parliament’s economy, energy and tourism committee.

Ironically, since so much of the case for Scottish independence rests on repatriating the power to boost Scotland’s rate of GDP growth, members wanted to talk to him about alternatives to GDP.

But right at the end of the session Labour’s Ken Macintosh asked Prof Stiglitz whether he thought a currency union with the rest of the UK was essential.

His answer was interrupted by the convener Murdo Fraser, lest the session breach Holyrood protocol by continuing while the main chamber was sitting. But what Stiglitz managed to say about the report he and his colleagues had signed off was revealing.

“We did not each agree on the weight that was associated with every recommendation,” he said. “As with any group report, it gives a sense of the group’s view, although there were differences. For the report to have meaning, we all said that there should be nothing in it that we felt was so outrageous that we wanted to dissent from it. There was a broad consensus, but we did not all give the same weight to the recommendations.”

The professor went on to distinguish between “concern about factors that might make for a smoother transition” and “the fact that, in the long run, Scotland will have to re-examine its institutions”. There had to be the flexibility, Stiglitz explained, “to move eventually to the institutional structure that is appropriate for Scotland”.

How that truncated answer cries out for further probing from anyone – MSPs included – interested in getting to the bottom of the SNP leadership’s recent ex-cathedra conversion to a post-independence formal sterling union with the nine-tenths of the UK it wants to leave behind. They claim such a union would be in rUK’s best interests too, in terms of balance of payments and continued free trade across these islands.

But if Nicola Sturgeon’s plan A really is just a convenience to smooth the transition until such times as an independent Scotland finds a structure more appropriate to its own destiny, whether a plan B exists isn’t really the point. That’s about how much hardball the UK Treasury and the Bank of England will play if they think they are being taken for a macroeconomic ride.