In the absence of any clear direction on currency, Peter Jones would like to offer the First Minister an alternative
MEA culpa. I think I owe you an apology over this matter of Scotland’s currency under independence, Alex. Whether it comes to me actually having to fess up depends, of course, on a Yes vote and the course of negotiations with the UK government. But the rejection by it and the main opposition party of our sterling currency union plan looks pretty ominous.
I say “our” plan because you will know that back in 2001 I co-authored a book on independence. I was commissioned by Prof Robert Hazell of the Constitution Unit, University College London, to write some chapters on the economics of independence (Scottish Independence: A Practical Guide, by Jo Murkens, Peter Jones, and Michael Keating, Edinburgh University Press, 2001)
In them, I went through the various currency options and discovered that, in theory, there are about ten of them. I concluded that mainly on the basis of the benefits to ease of trade and because the rest of the UK (rUK) is Scotland’s biggest trading partner, then negotiating a sterling monetary union was the best option for both Scotland and rUK.
At the time, I have to confess, the idea that there would be a monstrous financial crisis, that huge great banks would keel over and need to be bailed out by government, that even entire countries like highly successful Ireland (remember those days?) would become effectively bankrupt and need bailed out, just didn’t occur to me.
In mitigation, I’d point out that it didn’t occur to armies of people a lot better versed than you or I in international finance and economics either. I suspect that if Scotland had become independent prior to 2007, then a sterling monetary union would have been agreed without much fuss.
But what’s done is done, and we have to recognise that. Back when the book was published (and it set out a whole lot more about the process of achieving independence than the SNP had ever thought about) the party received it quite well, I remember from reviews in the Scots Independent.
That is, apart from the bit where it said that negotiating membership of the EU would be tricky as it would need the unanimous agreement of all other member states, which is what EU president Jose Manuel Barrosso was saying at the weekend. So maybe he has been reading it too.
But leave that aside, and let’s concentrate on sorting out this currency business. I’m comforted that my assessment of Scotland’s best option has been supported by your Fiscal Commission with its impressive weight of economics professors and Nobel prize winners.
Under the surface, you and I both know that the Commission disagreed on what was the best option, which Joe Stiglitz as much as said when he gave evidence to Holyrood last year, but in deference to the fact that you had already adopted the monetary union plan, they agreed to line up behind it.
I have read that they now intend to tweak it and hone it up a bit. I have also read your critique of the Treasury document which you delivered yesterday in Aberdeen. Both texts point to what is, politically, your best strategy.
That is to tweak and improve your Plan A – sterling monetary union – so that you can appear reasonable in the face of the Treasury dog-in-the-manger and have some substantive negotiating points should it come to that. But you also need a Plan B. As Professor John Kay (he used to advise you, you’ll remember) has said, a good negotiating hand needs a fall-back position.
The major Treasury objections are very well summarised in permanent secretary Sir Nick MacPherson’s letter. He said: “Scotland’s banking sector is far too big in relation to its national income, which means there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk which it creates.”
This can be dealt with. It would entail re-structuring the UK banks into distinct rUK and Scottish operations, which would have to happen anyway since you want to have a Scottish financial regulator. Assuming both bits are subsidiaries of an overall group operation, then the Scottish and rUK governments would become responsible as implicit guarantors and contingent bailer-outers of their bits of the bank.
This would mean that rUK’s exposure to the banks would be exactly the same as before. There is the little problem of where the group HQ would be based and that, as you know better than me having worked for RBS, would be south of the Border as the group HQ needs the biggest sovereign backer it can get, which ain’t going to be Scotland.
There might be a lot of political shouting about that, but you can always point out that since Messrs Goodwin and Hornby exited banking, the group HQs have effectively been in London anyway with not too much adverse effect on jobs.
The other big problem raised by Sir Nick is that if Scotland turned out not to be as rich and prosperous as you say it is, the country might fall over like Ireland did and need rUK to rescue it.
You can deal with that by going a bit further that you did in Aberdeen and putting all the oil revenues into a sovereign wealth fund which might be held on a sort of escrow basis. Then it could become money under the mattress which can be used to bail ourselves out or to make repayments, should there not be enough other tax revenues, on Scotland’s bit of the UK debt you are willing to take.
There’s a small problem of probably having to raise taxes or cut spending but, hey, a bit of pain is sometimes needed to win the big prize. People understand that.
This we could call Plan A.1. Meantime you need to privately work on Plan B – which really should be a Scottish pound pegged on a 1:1 basis to the rUK pound, so minimising trade transaction costs.
Since writing that dratted book, I’ve come round to thinking that this is probably preferable to monetary union since it gives you control over monetary policy and no need for the likes of George Osborne poking his nose into your budgets. You’ll need to keep it secret, but having Plan A.1 provides some cover against predictable flak.
Anyway, there you are, and if you want to chat some more, we could always have that game of golf you keep talking about. Cheers.