The AAA rating downgrade for the UK suggests the status quo is not Scotland’s safest option, writes Lesley Riddoch
Will the loss of Britain’s AAA credit rating affect the outcome of the independence referendum? It unquestionably will.
Of course, Scots realise ratings agencies have had a flimsy grip on reality. Moody’s gave banks (including Lehman Brothers) AAA status in 2008 while the real value of their worthless assets was rapidly evaporating. And who paid those agencies for their inflated ratings? The over-leveraged banks themselves.
So we know Moody’s is hardly the Dr Kildare of world finance and its verdict on Britain’s credit-worthiness doesn’t prove a real or sudden deterioration in our economy. It’s worse than that. Attention has finally shifted from “basket case” Europe to flat-lining Britain. Our downgrade has simply been a longer time coming.
The downside will be tangible and immediate. Government and private borrowing and oil traded in dollars will cost more and food prices will rise – though food and whisky exports might benefit.
But it’s the intangible status of triple A rating that will take the biggest hammering. Britain’s lifelong membership of the “safe club” also had totemic and symbolic importance. That triple A gold card was the foo-foo dust, the X ingredient, the “get out of jail free” card – the evidence that being British guaranteed extra luck and conferred extra status upon all its citizens.
Structural failings in the UK economy weren’t so different to those that brought European neighbours to their knees – but somehow Britain sailed on regardless. This Titanic-like unsinkability, this immunity to peril, this feeling that the UK was “too important to fail” has been hard for the SNP to tackle with argument and evidence alone.
AAA status suggested Britain had the special intangible qualities – status, prestige, authority and entitlement – that constituted an Oscar-winning star of a state. Suddenly, the red carpet has disappeared, the champagne has stopped flowing and the UK is not so extra-special after all. Our economy has not out-performed Europe, out-run trouble or escaped the rules of economic gravity.
Lofty Tory-led isolationism south of the Border towards Europe’s “failed club” now looks breath-takingly arrogant. Lofty pursuit of austerity – at all human costs – looks like pointless Victorian blood-letting, just as Labour’s Ed Balls’ has suggested. And the lofty claim to membership of a stable, competent and world-beating economic elite – a membership that would forever remain beyond the grasp of tiny, independent Scotland – that stands discredited as well.
The loss of AAA credit rating has created a massive dent in three distinct political arguments where the Tories once held sway: the primacy of Britain in Europe, the primacy of the Tories in economic management and the primacy of the Union as Scotland’s economic safe haven.
In truth, Britain stands revealed as an ordinary country like other ordinary countries struggling to escape the destructive vortex of banking collapse, economic recession and zero growth. George Osborne stands alone like a little man with a large megaphone – a latter-day Wizard of Oz barking commands at whoever will listen along an empty Yellow Brick Road.
No matter how much his colleagues downplay the downgrade, this has terminally damaged the Chancellor. The downgrade is “largely symbolic”, says Business Secretary Vince Cable, “not a devastating blow” according to Lib Dem Treasury minister Danny Alexander and according to Ken Clarke, the Tory pledge to maintain AAA rating “was made two years ago”. Former chancellor Nigel Lawson says it’s a “dramatic headline” but doesn’t affect the “real world”.
But whichever way you look at it, the Chancellor’s fingerprints are all over this ignominious moment – his deficit reduction and his austerity programme were explicitly designed to maintain the UK’s credit rating and guarantee lower borrowing rates as a perk of UK membership. That strategy has failed. Moody’s didn’t wait for the Budget in two weeks’ time nor the next set of growth figures. Another quarter of decline will put the UK in official triple dip recession. Moody’s seem to regard it as a foregone conclusion.
Of course the downgrade of itself might not have catastrophic results. Japan and the USA have both lost triple-A status recently and carried on much as before. But if the ratings downgrade produces political chaos, the markets may take fright and if that happens, it could trigger the downfall of David Cameron’s increasingly wobbly coalition government.
Where would such a political meltdown leave the independence debate? Certainly political and economic crisis at Westminster would suggest the status quo is not necessarily or automatically Scotland’s safest option. But the Scottish dimension of UK politics could just as easily be eclipsed by the shocking prospect and immediate enormity of Britain’s sinking ship.
Alex Salmond might appear absolutely right to have sounded the alarm bell and launched the lifeboats in 2011 or he might look as self-interested and small-minded as that mythical Scottish headline-writer in 1912: “North-east man lost at sea” as 1,500 perished in the Titanic disaster.
Even if the Yes campaign avoids the unsavoury appearance of self-harming “little Scotlanders” crowing at the UK’s expense, there’s another problem. The SNP has pledged to stick with sterling post-independence – so if the pound goes pear-shaped, the fortunes of Scotland’s new economy will go pear-shaped too.
If the SNP revise that strategy and opt for euro membership instead, they would look indecisive and conjure up the dread vision of cross-border currency exchange. Sure, the Irish already exchange punts and euros with relatively little hassle but the Irish are used to having one island with two currencies. The British aren’t.
There is a way for Alex Salmond to deploy the loss of AAA status without appearing to fiddle while London burns. AAA nations are a select group with above-average growth, stable and well-capitalised banking systems, and well-funded welfare, health and pension systems.
And –surprise, surprise – despite the BBC’s repeated assertion that Canada and Germany are the best known members, most of the “safe club” are small, independent European states like Norway, Finland, Denmark, Luxembourg, Switzerland and the Netherlands. Some are in the euro, some aren’t. But all are small, cohesive social democracies with populations of less than eight million (bar the Netherlands).
It’s an interesting parallel, but not a convincing argument without proof an independent Scotland can realistically aim for “safe club” membership. Until then, there will be no easy point-scoring over AAA rating for either side in the independence debate.