Bill Jamieson: Road blocks on the way ahead

UNLIKE the rest of Europe the UK seems to offer a safe economic haven – independence threatens that, writes Bill Jamieson

What feeds our sense of inequity and injustice is less our absolute state but how we compare with previous times or with other countries. We may well feel dissatisfied relative to where we were five years ago. Compared with the boom years 2003-7, the economy barely has a pulse. Unemployment is high. And our prospects look bleak. Who would want to live here, or invest here?

But seen through what is unfolding on the continent, we may view our relative condition in a different light. How does our “austerity” programme compare with other countries, particularly when, since the second quarter of 2010, the spending of the UK government sector is reckoned to have risen 1.6 per cent?

Is it really the case that no-one wishes to touch UK assets? Were this the case, why is it that the cost of government borrowing measured by the yield on 10 year gilts has fallen to a multi-year low of 1.79 per cent? That fall reflects overseas buying, both by private institutions and by governments such as Russia, where the slice of the country’s reserves invested in sterling has risen from 5 per cent pre-crisis to 9 per cent.

Buyers have been found for more than £158 billion of the non-core assets of the stricken Royal Bank of Scotland, a disposal programme helped by Asian and Far East buyers. Meanwhile, private overseas wealth continues to accumulate in the UK.

This relative preference for the UK is not only financial. Recently our hapless Border Agency has been put on alert ahead of a potential wave of Greek economic migrants. Britain, for all its consumer recession, pinched budgets, fractious politics, prissy regulation and enterprise-sapping red tape, is being viewed, not just as a desirable place to live, but as a safe end haven in a stormy world and in particular from the unfolding debacle that is the eurozone.

Fragile though it may be, there is a plausible story here of “safe haven Britain”. And it presents quite a challenge for Alex Salmond. It’s not just whether an independent Scotland could borrow at, or below 1.79 per cent – a salient point given the SNP’s insistence on the need for more borrowing powers. It is also whether, in the light of the torrid experience in the eurozone, the Bank of England, as Salmond proposes, could function over two separate spending and borrowing administrations.

It is here that many in the business community have reservations. Business needs to be sure what the macroeconomic (tax and spending) framework will be, what the regulatory and monetary policy framework will be, and whether these will provide some stability. Uncertainty is the business killer. And this could prove a killing field, bearing in mind that 2014 itself would, in the event of a pro-independence vote, not be the end, but only the end of the beginning. Not only has very little been said about the UK government’s reaction to Salmond’s central bank sharing proposals, but it is not at all clear whether, in the light of experience in the eurozone, this proposal has life outside of Bute House.

Monetary union in Europe has proved a disaster for many participants. Low interest rates, suitable for Germany, unleashed a torrent of excessive government and private borrowing in other countries. And in Spain, as our columnist Peter Jones well noted earlier this week, regional debt and borrowing levels have added greatly to the country’s financial crisis. Indeed, I would put the problem more bluntly than Peter: the regions have flattered their accounts by failing to pay suppliers €17bn (£13.6bn). Valencia is 765 days late on bills. The debt of the regions has reached €135bn or 12.6 per cent of GDP. Setting aside the plight of Bankia, an amalgamation of provincial banks which required a €4bn bail-out in mid-May - and a €23bn bail-out two weeks later – is it conceivable that a UK government would allow its central bank to become lender of last resort to an independent entity with its own tax, spending and borrowing powers? Such an arrangement would be unthinkable for a Westminster administration that has set such store by its credit rating and which would recoil at the prospect of Spanish bond yields at 6.45 per cent now more than treble those in the UK and dangerously close to the point of unsustainability.

In the light of the eurozone experience, the proposal of the SNP that an independent Scotland would be able to pursue a separate fiscal policy while retaining sterling as its currency and the Bank of England as lender of last resort is beyond credible. That its advocates are broadly the same as those who a few years ago were eager advocates of membership of the euro cannot but raise questions as to how much thought and preparation has gone into this latest “solution”. At the very least, the rest of the UK would insist on a fiscal discipline pact with a thoroughness that would make Germany’s Angela Merkel seem like Lady Bountiful. But the proposal may not even get this far. Truly, until the position of other parties to the deal is clarified, this is all akin to asking them to don a blindfold and hope for the best.

To this high-as-a-kite proposal, the SNP’s deputy leader has now suggested that Scottish representatives be appointed to the Bank of England’s monetary policy committee, this to ensure interest rates are appropriate to Scottish conditions. Such a proposal would immediately invite demands from Wales for similar representation, requests for delegates from the West Midlands and doubtless a rep or two from the Devon and Cornwall Chamber of Commerce. It would turn rate-setting into a Balkanised cacophony.

The Bank’s credibility, already fragile, and with it that of both governments, would be shot to bits. You cannot control inflation on the basis of fractious and feuding geographies.

What lessons has the SNP learnt from the eurozone debacle? And how will Salmond persuade savers and borrowers that its proposition will match the relative safe haven status the UK now appears to have? We may find out the hard way that in this realm the dividing line between relative success and absolute failure can be dangerously thin.