George Kerevan: Who are champions of economic rationality?
IS TARTAN romanticism blinding us in our vision of the financial future for an independent Scotland, asks George Kerevan
Here is a question for your next pub quiz: what part of Britain uses the euro as the official currency? Answer: the Sovereign Base Areas of Akrotiri and Dhekelia on Cyprus. Both are wholly British and not even part of the European Union (EU). Yet because of their obvious geographical relationship with Cyprus (which is in the EU and eurozone) it is deemed sensible by HM Government to make the euro, rather than the pound, their legal tender. Eurosceptics please note.
I mention this because there are a lot of folk who simply can’t get their heads round the fact that the SNP wants Scotland to be part of a common sterling currency area after independence. Yet independent Ireland kept the link with sterling between 1922 and 1978. Indeed, there is a view gaining ground in that country that if Scotland becomes independent and keeps the pound, Ireland should quit the euro and join the new sterling area. Sharing currencies promotes trade and eliminates exchange costs. What’s not to like?
Perplexed Unionists retort that in any such common currency arrangement, the Bank of England, not the Scottish authorities, would still set interest rates. The Bank would remain the body that prints pounds (albeit electronically). By offering to lend these pounds to the financial system, the Bank sets a floor on interest rates throughout the sterling economy. Scottish banks could not undercut the Bank of England interest rate, because it would still be the Bank that provides their financial safety net.
However, as John Swinney, the Scottish financial secretary, pointed out in a speech on Monday, that still leaves a lot of scope – far more than under devolution – for independent Scotland to use its tax powers to promote investment, attract foreign capital, advantage particular industrial sectors, or cut VAT to boost consumption.
Mr Swinney’s point was that an independent fiscal policy would trump the austerity currently forced on us by Westminster. Who cares if interest rates are still set by the Bank of England – we have that anyway.
An independent Scotland would seek to appoint a representative to the Bank of England’s monetary policy committee (MPC) which sets interest rates.
Recently, David Blanchflower, a former member of the MPC, said it was “probably not unreasonable” for an independent Scotland to have representation. That would be a good idea under even devolution. The US Federal Open Market Committee, which sets American interest rates, has mandatory representation from its regional affiliates.
The role of the Bank of England in a common sterling currency area has led to a lot of heated debate, mostly of the variety “Salmond is crackers for thinking he’d have any say in the MPC”. This dialogue of the deaf continued when Mr Swinney said on Monday that he wanted the Bank of England to regulate Scottish banks after independence. Cue spluttering from the Unionist camp and suggestions that shared bank regulation was “illegal” in the EU – just as the eurozone countries were accelerating moves to create … er, common banking regulation.
The confusion arises from a (deliberate?) misunderstanding of the SNP’s vision of the independence process. In the Nationalist view, the Union of 1707 is being dissolved in a friendly manner. That means institutions such as the central bank are common property whose future is the subject of negotiation.
The SNP values the retention of a common currency and wants the Bank of England to manage it on behalf of both parties.
Further, the SNP sees this as in England’s vital interest (or whatever we call the “Rest of the UK” after independence). An independent Scotland with its own currency would cause lots of problems for the RoUK economy. If Scottish interest rates were even a smidgen above those in London, capital would flood northwards. Remove Scotland’s oil and whisky foreign currency earnings and the RoUK’s trade deficit would be chronic.
For a while now – though no-one on either side admits it – the SNP has been offering to settle for a de facto Confederation of the British Isles, sharing defence and a common currency with the rest of the nations of our Atlantic archipelago. That would give Scotland the autonomy it needs to grow its economy, while safeguarding the social links everyone wants to maintain. In return, Scotland would agree to a share of foreign currency reserves and pay a share of bailouts for English banks if needed. Sadly, rather than negotiate this sensible reform, the extreme Unionists – either from ignorance or, as with Labour, from naked self-interest – are determined to rubbish every SNP proposal for creating common institutions post-independence.
Bizarrely every attempt by the SNP to retain joint bodies and joint working is met with hysterical rejection. This is the knee-jerk, metropolitan conservatism that in earlier decades reduced nearly every colonial exit to a bloody shambles.
Of course, a common sterling area has its problems. The UK has been prone to high inflation as a result of an overheating economy in the south east. This imposed a higher interest rate than was good for Scotland, ending in de-industrialisation. Unless the new, common Bank of England is given a mandate to promote economic growth across the whole British Isles, rather than merely police inflation for the City, the Scottish economy would suffer.
That strongly suggests a sovereign Scotland would eventually be forced to issue its own currency, even if this was pegged initially to sterling.
The fundamental problem for the SNP is that there is no guarantee the RoUKers will see sense, even if they are cutting off their sterling nose to spite their economic face. The RoUKers pretend they are champions of economic rationality in the face of SNP tartan romanticism. In fact, it is the other way round.
• George Kerevan will be speaking on this topic at the Economics of Independence conference, on 19 June, at The Scotsman offices. www.scotsmanconferences.com
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