Our new Lib Dem Secretary of State for Scotland, Alistair Carmichael, is a solicitor by trade. I have a modest and well-intended piece of advice for Mr Carmichael – stick to the elegance of the law and don’t venture into the treacherous waters of economics.
Mr Carmichael has just given his first major speech on constitutional matters. Readers will remember that he got his new post when the former incumbent, Michael Moore, was summarily fired after being bested in a televised debate by the SNP’s Nicola Sturgeon.
That debate also hinged on economics. Ms Sturgeon waved a negative campaign leaflet published by the No campaign that claimed an independent Scotland would lose it’s triple-A global credit rating – meaning higher interest rates. She reminded a flummoxed Mr Moore that the UK has now lost its triple-A credit rating, as a result of economic policies pursued by the Cabinet in which Mr Moore sat. Game, set and match to Ms Sturgeon.
Enter Alistair Carmichael, who considers himself an Alpha male, politically speaking. Mr Carmichael’s task is not actually to run the Scotland Office (despite a ministerial salary of some £79,000 on top of his MP’s remuneration) but to engage in robust public debate over independence.
This week, in his first big constitutional intervention, Mr Carmichael demanded the SNP Government “stop dodging key questions” and outline its Plan B for a separate currency should the rest of the UK (rUK) not agree to the SNP’s plan to keep the pound post independence.
Here is the answer Mr Carmichael: Scotland will keep sterling anyway, just as Ireland did when it became independent in 1922. We already use sterling, prices and contracts are denominated in sterling, so why mend what isn’t broke? In practical terms, if for some reason the rUK objected, all they could do would be deny Scotland access to newly printed sterling notes from the Bank of England. Even then, sterling notes are available everywhere in the globe. Besides, the Scottish central bank could just print its own new pound notes. Provided it held adequate financial reserves to back them, they would trade one-to-one with Bank of England notes.
But as Alistair Carmichael has decided to enter the economic debate, I have a question for him: what is his government’s Plan B for sterling if independent Scotland did create a separate currency of its own? After all, Mr Carmichael, if (as you argue) a sterling currency union is unworkable, then it’s only fair you tell voters how the rUK Government will handle their side of the situation. As you say yourself: “We cannot be offered a prospectus of ‘it will be all right on the night’.”
Here is the nub of Mr Carmichael’s problem: the present United Kingdom relies heavily on Scottish exports of oil, gas and whisky to generate foreign currency earnings. Even then, the present UK runs a massive current account deficit – importing more than it exports, and borrowing internationally to cover the difference. In fact, this deficit is actually getting worse.
If Scotland retains sterling after independence, its foreign trade earnings will flow into the common pot (as they do at present) helping reduce the current account deficit. But the moment Scotland shifts to a separate currency that changes. Instantly Scotland will start to run a trade surplus, boosting its currency and raising its international credit worthiness. That, all things being equal, will bring interest rates in Scotland down. But just the reverse happens in rUK.
The EU Commission forecasts that the present UK trade deficit will hit 4.4 per cent of GDP next year – the highest of any major industrial country. Take away the circa £50 billion annual export earnings from Scottish oil, gas and whisky and you will near double the trade deficit of rUK. It would climb from 4.4 per cent of GDP to a staggering 10 per cent. That is unsustainable and the financial markets would punish rUK piteously. The rUK’s international credit rating would plunge, sending interest rate upwards, depressing economic growth.
Which is why, after a Yes vote next September, the rUK Treasury (and Alistair Carmichael) will suddenly find advantages in retaining a sterling link with Scotland. Of course, as a quid pro quo Scotland should demand representation on the Bank of England. After all, we don’t want a profligate rUK Labour government running up a Greek-style public sector deficit that it can’t pay back. Another question arises: Why is the present UK suffering a worsening trade deficit? Didn’t the coalition, in whose cabinet Mr Carmichael sits, promise to “rebalance” the economy towards exporting?
One reason is the massive contraction in Britain’s industrial base during Gordon Brown’s tenure as chancellor, when he did everything he could to promote those banking wizards in the City of London. This mistake was compounded by the massive economic contraction that followed the 2008 credit crunch. The upshot is that there is not a lot of manufacturing capacity with which to do any exporting. Result: any increase in consumer demand will only boost imports. And that is exactly what is happening today.
Last year, with recovery thwarted by his own daft austerity programme, Chancellor George Osborne cranked up the property market by pumping cash into subsidising house purchases. That has led to a mini boom in property prices and boosted consumer confidence – we all feel richer if the value of our home goes up. Consumer confidence leads to retail therapy. Unfortunately, what we buy in the shops comes from abroad.
The trade deficit and housing boom will end in higher interest rates and dearer mortgages – as the Bank of England warned this week. Stick with the UK next September and that’s what you’re voting for. Personally, I’d like Scotland to stop wasting its export surplus on a perennially mismanaged UK economy. I’d rather use our foreign currency earnings – £50 billion per annum soon adds up – to create a Chinese-style sovereign wealth fund run from Edinburgh.
Yes Mr Carmichael, some day booming Scotland will have its own currency. And the rUK’s B Plan is?