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Peter Jones: Sterling effort in the circumstances

The SNP may favour sterling but the Bank of England holds the key

The SNP may favour sterling but the Bank of England holds the key

THE shape of Scotland’s fiscal future will be largely unknowable until after the result of the referendum, writes Peter Jones

Current jousting about whether or not an independent Scotland would have a seat on the Bank of England’s monetary policy committee (MPC) illustrates a fundamental difficulty the SNP have with the independence project. I happen to think Alex Salmond is right to the extent that Scotland would have a claim on such a seat, but it can only be a claim and not a certainty.

And there lies a fundamental problem: the certainty that voters will want, come referendum day, can only be given by others. And the withering shredding of the SNP’s claim to an MPC seat that came from the UK Treasury shows that these others are only interested in giving certainty of denial – and not the positive certainty the SNP want.

A few years ago, I would have thought it improbable that apparently arcane matters such as seating arrangements on Bank of England committees would assume such an important place in Scottish constitutional debates. But they have, mainly because the awful crumbling of Europe’s bold experiment at a currency union has shone a harsh light on the SNP’s attempts to show how an independent Scotland could operate within a UK currency union.

Readers will know that, quite rightly, the SNP have abandoned plans for independent Scotland to join the euro. At the very least, it now seems quite possible that the euro will not exist, almost certainly not in its present 17-country membership format. Indeed, whatever shape does evolve, membership of it would be too high a risk for a newly independent Scotland.

So the SNP argue that Scotland will continue to use the pound sterling as its currency. This is economically sensible, as some 60 per cent of Scotland’s trade is with the rest of the UK. And since labour productivity rates are similar throughout Britain, the UK is about as close to being an optimal area for a currency union as you can get.

But politics, and not economics, dominates this question. Nationalist politics says that the SNP have to stick to asserting there will be no change in Scotland’s currency with independence; unionist opponents, who control the UK Treasury, are happy to deny that that could be the case. So, for an answer, we have to turn to economics. Everybody now knows, thanks to the awful mess in the eurozone, that you cannot have a currency union without the kind of controls that, in reality rather than in theory, were absent from Europe – ie limits on nation state fiscal deficits and borrowing.

Those limits are now being introduced through the fiscal stability treaty, which Britain vetoed as an intolerable intrusion into national sovereignty, but which is now going ahead as a eurozone inter-governmental treaty. Last week, the Irish voted for it by a six to four margin.

Now, it seems to me that if Scotland votes for independence, the rest of the UK would not want a wildcard state playing fast and loose with sterling on its northern frontier. As Mr Salmond has pointed out, sterling is a fully tradable currency and there is nothing to stop Scotland using it. Scottish government bonds, Scottish bank deposits and loans, and Scottish corporate bonds, would all be denoted in sterling. But if the Scottish Government was to get its borrowing and deficits wrong, then you could get the kind of mayhem that is now blighting Spain – soaring interest rates on government borrowing and folk emptying their Spanish bank accounts to put their money into German safe havens.

I suppose you could argue that the rest of the UK might also get things wrong – and Scotland would become a safe haven. Unlikely – the UK has vast experience and expertise in managing monetary affairs while Scotland has none. And for all that the SNP complain the UK government is on the wrong fiscal and growth course, the record low interest rates on UK bonds say that the markets think Britain is getting it right and does offer a safe haven.

As the example of Spain shows – with its financial chaos being made worse by unsustainable borrowing and spending by its regional governments – poor fiscal management by Scotland would also destabilise sterling and the rest of the UK.

The SNP cannot say this because they cannot afford to admit that anything about independence could be less than perfect. Unionists can’t say it either, because they would be talking Scotland down. But it is economic reality, especially in today’s uncertain world.

It also, I think, points to a political reality should Scotland vote for independence. It would be in both the economic interests of Scotland and the rest of the UK for there to be an agreement about the political structures needed to ensure that sterling remained stable.

Such an agreement would cover a number of things – controls over state deficits and borrowing would be among the key aspects, along with regulatory supervision of the banks – which point to an independent Scotland having some place within the Bank of England.

In this light, Scottish ability to nominate one of the four independent members of the MPC seems to me an entirely reasonable proposition. Such a member would not be beholden to carry out Scottish Government orders; that would defeat the whole purpose of having an MPC free from political interference. But that member would be expected to vote for interest rate changes and monetary expansion/tightening which suited the needs of the Scottish economy.

One other thing gives the SNP a strong hand in seeking an MPC seat. If independence means there must be a division of UK liabilities, such as the national debt, so there will also have to be a similar division of assets. One of these assets is the Bank of England. Dividing it, however, so that Scotland gets, say, 10 per cent of it, is quite impractical. The sensible solution would be to give Scotland a share of it by such things as MPC nomination rights.

This may seem to you and me to be an entirely reasonable proposition. The curious thing is that it looks totally impossible that we will get such a proposal emerging from political debate. Both sides have something to lose by admitting it, and neither side has anything to gain by confessing the reality – that seats on the MPC are one of the things that will have to be negotiated after a ‘yes’ vote in the referendum. Such are the political realities.

 

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