Alf Young: Are we converging on devo max?

Could it be that all those voices from civic and business Scotland calling for a third choice in the 2014 referendum may have their way, after all? No, not because nationalist and unionist politicians are poised to bury the constitutional hatchet and strike some improbable deal to include a second question on devo plus or devo max on the ballot paper.

Rather, by the time we get to make our choice on Scotland’s constitutional future, might we be unable to get a proverbial sheet of rice paper between what the SNP actually means by independence and what most people think of as fully-devolved fiscal autonomy within a continuing United Kingdom?

I ask because that’s where the debate appears, inch by painstaking inch, to be heading. For the SNP leadership – but not for all nationalist foot-soldiers – the union of the crowns of Scotland and England now appears sacrosanct. We are promised a continuing social union with the rest of these islands, from Strictly Come Dancing still on the television to English ales still on tap in your local Wetherspoon’s bar.

We know the nationalist government in Edinburgh is keen to preserve the UK-wide market in electricity, not least because it wants to sell some of the fruits of its promised renewables revolution to our nearest neighbours, but also because it wants those same consumers to continue subsidising the massive investment required through their gas and electricity bills.

There is also support for continued freedom of movement across Scotland’s borders with the rest of the UK; for the retention of a customs union; and the extension of the proposed new high speed rail link out of London beyond the English Midlands to this side of the Scottish Border.

This week, in a major speech at Glasgow Caledonian University, Scottish Finance Secretary John Swinney put important new flesh on the SNP’s recently-formed desire to keep sterling as Scotland’s post-independence currency. Back in March, when George Osborne was briefing that, if it voted for independence, Scotland would have to join the euro or launch its own currency, Alex Salmond insisted: “The UK Government would have absolutely no power to stop an independent Scotland from using it (the pound).”

The first minister was right, in the sense that Panama or Equador are free to use the US dollar, with absolutely no influence over American monetary policy. However, on Monday, Mr Swinney went a great deal further. “Our framework is one of monetary union with the rest of the UK,” he told his audience. “Regardless of what may be said in the heat of constitutional debate it would simply not make sense for anyone to resist the creation of a formal sterling zone and the mutual benefit it would bring.”

He didn’t stop there. Mr Swinney publicly endorsed, without reservation, the UK coalition’s plans to abolish the Financial Services Authority (FSA) and shake-up the way financial services are regulated in future. “As the Bank of England takes on the role of regulator for UK financial services – a very sensible and long overdue position – retaining the pound will preserve the highly integrated UK financial services market,” he said.

There wasn’t so much as a whiff, in his remarks, of the kind of criticism coming from others, including the departing chief executive of the FSA, Hector Sants, that the coalition’s reforms are putting far too much regulatory and monetary policy power into the hands of one individual, the man or woman who succeeds Sir Mervyn King as the next governor of the Bank of England.

A party that was wedded, for so long, to embracing the euro at the earliest opportunity, now appears so obsessed with detoxifying its own currency options post-independence, it will say and do almost anything to strike a formal monetary union with the rest of the UK. So cross-border regulation, UK coalition-style, is fine. Nicola Sturgeon has also raised the prospect of an independent Scotland paying the Bank of England to continue as lender of last resort to banks here. All the SNP wants in return is one seat on the Bank’s nine-strong monetary policy committee.

What next? The Scottish Government is said to be preparing its own banking code. But now that the Westminster coalition has announced its somewhat watered-down legislative plans to implement the Vickers Commission’s proposals on banking reform, who would be surprised if the SNP gives that Cable/Osborne package the thumbs-up too?

Even if Sir John Vickers thinks the UK Government is being too soft on some issues, like the adequacy of the proposed controls on bank leverage.

There is, however, one daunting obstacle in the way of creating the formal monetary union with the rest of the UK which Mr Swinney now seeks. The main power the SNP will not surrender, post-independence, is outright control of fiscal policy. How Scotland chooses to tax and how it chooses to spend. That is what independence is fast coming to mean. Full fiscal autonomy, exercised by an independent nation state that, because of the euro’s woes, now also needs to keep the pound as its currency.

But the euro’s woes are directly attributable to the creation of a monetary union where the 17 members continued to pursue their own individual tax and spend policies. And now that experiment has gone off the rails, the only-touted answer is tighter fiscal discipline across the zone as a whole and more Europe, more political union. Even David Cameron and George Osborne are egging them on.

The UK, as is, has avoided that fate. And the reasons are obvious. As Paul Krugman put it in a lecture last month at the London School of Economics: “The UK has all the advantages of its own currency and a single national government.” But if the SNP has its way, that single government will go, the currency union will be renewed, and tax competition north and south of Hadrian’s Wall (notably on tax on corporate profits) will become the norm.

Mr Swinney claims “it would simply not make sense for anyone to resist” such a proposition. I can safely predict now the UK Treasury will resist it, tooth and nail.

The SNP will put it all down to unionist intransigence. London will respond that it is not prepared to lay down the conditions for visiting a eurozone-style crisis on the economies of these islands, whatever their constitutional destinies.

If it’s smart it will also tell the SNP: You can have your formal money union, if Scotland votes yes. But only if Scotland agrees to a binding fiscal pact with the rest of the UK, prescribing such things as national spending profiles and permissible degrees of tax competition.

Convergence would then be virtually complete. Such a settlement would end up looking very much like devo max, even if that option never actually appears on any ballot paper.