The nuclear option

So George Osborne, sources are letting it be known, will rule out the notion of a formal currency union with an independent Scotland? Interesting negotiating position if you're an utter walloper (1).

In that case, when Scotland hopefully votes yes to independence, the Scottish approach to relocating the Rest of the UK's nuclear bombs will presumably be; your problem pal, pick 'em up next Tuesday and F'right off in the meantime. Or not.

Actually negotiating both points would very obviously be the right, nice, sensible, intelligent and decent thing to do. Or is that asking too much of a Bullingdon Club Tory?


(1) interesting reading English people commenting on this and how its all about Scotland wanting its cake and eating it. Even if it was, and? Jealous? And that's besides the obvious benefits a currency union would also give to English businesses that trade with Scotland - or is the approach here one of sour grapes mixed with cutting 10% of your nose off to spite your face?

Arguments for Scottish independence part 3: Assets and practicalities

Picking thru the requirements of what an independent nation needs, Scotland is already very well placed thanks to devolution and stuff left over from the 18^th century

Here’s a brief list:

Legal system? Check.

Education system? Check (schools, universities and professional associations fer goodness sake)

Multi-party democracy? Check (plus independence would remove a tier)

National health service? Check

And so on and so on. Really, the existing infrastructure is so well developed and already sufficiently autonomous  as to render many of the practical arguments against independence redundant. Hence, much of the pro-union chat focuses on the softer benefits of the union, like how we’re better together just because we are really, and how being in the union meant Scottish people got to wear British swimming trunks at the olympics. Now that’s all lovely I guess, except the union also means being part of an electorate that voted in the ConDems and appears to support punishing the disabled.  

However, that’s another post. Getting back to the practical issues, there is one, glaringly big exception, which is the financial system and the economy more generally. This is accordingly where the more practical opposition to independence is going to town. Its also a big-big-biggie given the credit crunch and Scotland’s unfortunately disproportionate contribution to the British experience.

Except, the pro-union mentality on display really needs to get a grip. Following on from the HM Treasury propaganda, this blerk here has produced a less biased, more constructive analysis of “Scotland's currency options”. But, even then he just can’t resist the cute point scoring. Like when he talks about currency boards and describes the Irish experience as follows “Ireland chose to fix its exchange rates at parity when leaving sterling. The Irish central bank then spent the next fifty or so years defending the exchange rate until joining the ERM”, he forgot to mention sterling had a fixed exchange rate for much of the same period that HM Treasury also spent years defending i.e. the actual point here isn’t currency pegs are somehow intrinsically a bad thing, rather its what was ultimately a fixed exchange rates proved a serious constraint (by contrast a Sterling currency peg right now would be to a floating currency).

However, its when he says (in the 3rd paragraph) “An independent Scotland would have to move swiftly to create the necessary institutions and capital markets. This would include a central bank, a payments system, deposit insurance, prudential and conduct financial regulators, a debt management office, an exchequer, a tax collection agency, a fiscal commission, equity and capital markets and, of course, a currency mint.” I’m left thinking cool the beans there a minute bawjawz, cool the beans.

This is because of how he chooses to discuss an independent Scotland’s assets and liabilities. In liability terms, its about how Scotland would need to take its fair share of UK national debt with it. Now, this is an important point to make, however, the discussion of Scottish assets is less good, because it focuses almost exclusively on oil.

Actually, though, Scottish assets also include Scotland’s share of UK level institutions, you know the ones Scottish taxpayers have paid into and been governed by. As with the divvying up of the national debt – incurred partly to finance the creation and running of said institutions – giving us a bit of them would only be fair.

To give a practical example drawn from bawjawz’s willfully intimidating shopping list, establishing “prudential and conduct financial regulators” – fine, we’ll have a copy of the PRA (was FSA) rule book we helped pay for please, some 12 month secondees to the existing Edinburgh office and we’ll advertise for new staff on Monday. And yes the job adverts will big up how existing PRA staff can transfer their existing skills to a city with more affordable housing and a better commute than London.

Oh and not having such a complex financial system as London to regulate means it could well be cheaper and potentially safer to do so here given there’s only the one Scottish bank with serious, but shrinking investment bank capabilities as opposed to the teaming hordes scattered across London. Bonus! (and another example of the positioning issues affecting the pro-union lot; they, rightly, say an independent Scotland would have a disproportionately large exposure to the financial services sector, but it would also be at a remove from so-called “casino” banking e.g. a Glasgow insurance company call centre poses less systemic risk to the Scottish economy than Mayfair's hedge fund bods do to the UK. And, they probably pay more tax!).

As for some of the other stuff on the list, well bawjawz is just being silly. Take “and, of course, a currency mint”; really? Again with the memory lapse given the EXISTING Scottish note issue and the fact the Royal Mint already makes coins to order for foreign countries.

Personally, I’m increasingly left wondering why the pro-union lot is placing sooooo much emphasis on the scare tactics even when it involves making basic factual errors. In the meantime, when you run thru the assets and infrastructure Scotland already has, from a practical perspective independence doesn't strike me as an especially daunting prospect. Saying that, the 2014 Commonwealth games mascot is an embarrassment.

Sterilising “Sterlingisation”

The Treasury’s “Scotland analysis: Currency and monetary policy” is a shameful document, a vacuousl,y polemical piece of politicking as politicised as any anonymous SpAd’s tweet. “Positively”, its overall effect makes clear Scottish independence would require changes that could, probably would incur costs, except any one with half a brain knew that already. However, its actual content – illustrated below with dirty, great big verbatim quotes - is atrocious.

Let’s start with the politicking and the self-servingly contradictory back-flips this entails; “The structure of the Scottish economy is very close to that of the UK as a whole and Scotland and the rest of the UK follow very similar business cycles ... deep economic integration across the UK”.

Cool, cos then the paper states “(t)his ensures that monetary policy set by the Bank of England is on average well suited to the Scottish economy” i.e. the status quo is just hunky dory thank you very much.

Except on the next page the paper states Scotland actually is structurally different, having “a narrower economic and fiscal base, and be exposed to a number of volatile sectors such as finance and energy (including North Sea oil and gas).”

So does that mean current monetary policy and policy arrangements aren’t suited to the Scottish economy? Nope, rather, moving swiftly on, it means an independent, Scottish economy would be more volatile and that “(t)his volatility would be felt regardless of the currency and macroeconomic framework adopted by a new Scottish state”.

By contrast, the UK economy can “absorb fluctuations to deliver comparatively stable economic conditions. This is a pre-requisite to the certainty and stability required to allow individuals, households and businesses to plan ahead for the future.”

God, see now I’m all confused cos I thought the “structure of the Scottish economy is very close to that of the UK as a whole and Scotland and the rest of the UK follow very similar business cycles”.

Thankfully, the paper then explains “In the event of independence, institutional and policy divergence between Scotland and the continuing UK would be likely to lead to a weakening of economic integration. These effects would cause monetary policy set by the Bank of England to become less appropriate over time for an independent Scottish state’s economic conditions“.

Phew, so ignoring the fact no reference is made to timescales i.e. are we talking 5, 10 or 50 years for this structural change to occur (give or take the kind of devastation a Thatcher might wreak, obviously), really the relationship between the Scottish and the UK economy is like Schrodinger’s cat, being both the same and different at the same time. Plus when you introduce a temporal dimension the economies are simultaneously diverging and presumably converging what with us all being globalised and what no. It’s just, it’s just, the one constant here is that the claims appear to vary depending on the argument being made; when the status quo is good, Scotland is the same, but when change would be bad, Scotland is different. That’s one thing to consider I guess, except its hard to do so because the paper then gets worse, much, much worse.

This worse takes various forms. One is an obsession with size like when it’s stated “An independent Scottish state would be a different economic entity. An independent Scottish state would be a relatively small economy among developed nations. Economic size is not, in and of itself, an important driver of an economy’s success, nor does it determine the choice of a currency regime. But the dynamics of small countries’ economies are inherently different” Cool, except this “and of itself” is to forget GDP per head is more important – think Switzerland or Lichtenstein - and within that the distribution of wealth and incomes is what really matters e.g. the Chinese economy/penis may well be bigger than the UK’s, but I’d rather be an average earner here than there.

Then there’s dull realities like how since 2007 an economy disproportionately exposed to finance and oil and gas would have seen these sectors arguably balance each other out. And to get even more current, the paper ignores how the acquisition of HBOS plus RBS shrinking its balance sheet by 10s of billions every other quarter means finance is smaller than it was.

Rather than that kind of malarkey, the paper instead states the “UK’s key national institutions – including the Bank of England – would operate on behalf of the continuing UK as before, but would have no power to act in or on behalf of an independent Scottish state, and no obligation to create the structures to do so”. Which means what exactly?

Right now the Bank of England has one wee Scottish office (in Glasgow) and while I’ve always found its Scottish agents to be charming fellows (less sure about the calibre of the deputies), is the potential loss of a couple of fact-finding bods being seriously presented as an argument against independence?

Nah, that would be incredibly stupid that would so here lets give ‘em the benefit of the doubt and assume the argument is instead to do with monetary policy itself. Unfortunately, no examples are given of how Scottish interests actually feature in current policy setting arrangements, only that the UK inflation target recently got shoogled about. This is an unfortunate omission that implies Scottish interests aren’t formally recognised in any shape or form whatsoever in current monetary policy setting arrangements (the Scottish Bank of England agent’s reports on current business conditions being for info only and appearing to be comparable in importance to say the latest view from Cornwall).

Thereafter the paper goes mad for the bias when it sets out what the current options are for Scotland.

The first is a formal sterling currency union, except “An independent Scottish state would therefore need to agree a negotiated set of constraints on its economic and fiscal policies. In practice this would be likely to require rigorous oversight of Scotland’s economic and fiscal plans by both the new Scottish and the continuing UK authorities”.

Cool. And? Like is the strawman seriously being presented here that being independent doesn’t mean you get to do what you like? Besides, using a practical example drawn from Alastair Darling’s recent pro-union speech; can anyone seriously envisage an independent Scotland having as disproportionately large a military budget relative to the size of its economy, as the current UK lot? No, me neither i.e. there’s clear scope for an independent Scotland to reallocate public spending to more productive less wasteful things within the confines of any “negotiated constraints” e.g. it tasking Scottish tradesmen to build social housing rather than invading yet another country.

Then there’s the next option of “sterlingisation”, which would be to “use sterling unilaterally, with no formal agreement with the continuing UK”. Except, this is just wrong. No seriously, this is utterly, totally misrepresented wrong. I mean c’mon, “sterlingisation” is a makey uppy word for an arrangement that already exists and is called a “currency board”. Here let me repeat that, there’s no such thing as “Sterlingisation”, but there are things called a CURRENCY BOARD ya big fanny. And to give some real world examples, Denmark operates this kind of arrangement right now as does Bulgaria while Ireland ran one for decades. Similarly, Hong Kong unilaterally  adopted the US dollar as its go to currency i.e. there are clear, obvious, real, lessons can be learned, practical, sustained examples of this approach being taken by economies comparable in size and complexity to Scotland.

But, are they relevant? Thankfully, the Treasury offers to guide us - away from the facts - by stating a “number of smaller countries have opted for this approach, but it would be likely to be too constraining for a country of the financial complexity of an independent Scottish state”. So yeah Denmark, yeah Bulgaria, yeah Ireland, yeah global financial and trade centre Hong Kong, you just ain’t as big or as clever as Scotland. How’d d’ya like ‘dem apples?

As for the other two options, well one is joining the Euro, which means you’re having a laugh over a 1-5 year time frame, while the last is establishing an independent currency, except why bother when a formal union and/or a currency board make much more sense?

Funnily enough, the paper devotes 18 pages to a currency union, 12 to joining the Euro, 16 to a Scottish currency, but only 8 to a currency board. Hmmm, so one of the two most obvious options and what would be the fall back position in any negotiation gets significantly less attention, hmmm………. bias, prejudice, bias ……..

Anyhoo, there’s other stuff as well about what the lender of last resort for banks would be in an independent Scotland, except the chat is just shite. Like, the Fortis Bank example made two things perfectly clear, 1) no one had a scoob what do to when a multinational European bank failed and 2) since then the EU has been developing an approach to managing exactly that situation with banks setting up “living will” teams to set out how them failing could be managed i.e. the Treasury paper is presenting things no one knew how to sort out when they arose a coupla years back as if they could be considered unique to an independent Scotland, then ignores the practical work being done to address them anyway.

Really, the question “Scotland analysis: Currency and monetary policy” poses is why are government departments being ordered, at our expense, to trot out such utterly rank shite.

P.S. from what I’ve read so far the pro-independence chat on all this is utterly shite an'all.