Saturday, 16 November 2013

Currency, currently

Currency demands 'should be set out,' read yesterday's BBC Scotland's Politics headline.

Darling piles on pressure over Scots currency after yes vote, cried the Herald.

Salmond under pressure over currency plan, said the Guardian, as agreed by The Telegraph, who added Salmond needs a Plan B.

Goodness me, something must have happened, right? Over the last couple of days almost every news outlet in Scotland has some kind of story relating to "pressure" on the Scottish Government over currency plans; why, Mr Salmond must be veritably red-faced and sweating under the strain of it - nobody likes a Darling pile-on, after all. There must have been some kind of significant development, surely?

The short answer is no. The No campaign are really reachin'.

What we have here is a concerted rehash of old arguments, from multiple fronts. The No campaign like these kinds of arguments, because they're very likely to be the ones that go round and round in circles right up until the vote. The reason for this is because the current Scottish Government's proposal for a formal currency union with the UK is one of those takes-two-to-tango situations. The UK government has no intention of even talking about tangoing, on pretty much any big issue, until after the referendum.

The SNP's position on currency has not shifted one iota from what they first proposed in 2011. Due to the UK's policy, as articulated by David Cameron, of not "pre-negotiating" Scotland's potential exit from the UK, any theorising on the pros and cons of the SNP's currency proposals is entirely speculative. We know with no certainty that the UK government would agree to a formal currency union. We don't know what conditions they would try to attach if they agreed to such a pact. We don't even know if we'll be dealing with the Tories as we are currently or with an administration led by Ed Miliband.

But, of course, speculating is fun. And I think we can have a good stab at all of these questions.

I'll get the last one out the way first before tackling the other two: it is my opinion that Labour are going to get a doing at the next General Election. I say this with zero relish, because the alternative is another five years of Cameron. With any luck we won't have to deal with that in Scotland, but one can only sympathise with the English, Welsh and Northern Irish. I base this theory on the fact that Ed Miliband's personal approval ratings have been consistently dire, and indeed yesterday's Ipsos-Mori poll but him 2 points behind David Cameron at -23. Sadly for Mr Miliband, we live in the age of personality-driven politics. To contextualise this, no leader of the Opposition with these kinds of personal ratings has ever won a General Election, and certainly not a year and a half out from said election. Two years out from the 1997 General Election, for example, Tony Blair was sitting pretty at +20. The best Ed can hope for is a hung Parliament within which he cobbles together a coalition, but even that I consider unlikely given I expect the Conservatives to be the largest party.

What this means is that, even taking into account the 2015 General Election, I suspect we'll be dealing with a similar sort of Government to what we are now in the event of post-Yes negotiations.

So back to currency, there are a few excellent reasons - analysed in detail by much wiser economists than me, not least the Scottish Government's own Fiscal Commission (including Crawford Beveridge and the Nobel Prize-winning Joseph Stiglitz) - why the UK should accept a formal currency pact in the event of Yes vote. The first, and most obvious one, is trade continuity. Reciprocal trade between Scotland and the rest of the UK represents a significant portion of each economy.

The second is to protect Sterling from the dangers posed by the overnight doubling of the UK's balance of payments deficit which would occur were Scotland to leave the Sterling zone. Scotland's Oil and Gas exports alone boost the UK's current account by some £40 billion, never mind its formidable Food and Drink exports industry. With the UK's balance of payments deficit as a percentage of GDP already sitting at an eye-popping 4.4%, the myriad problems that would arise were this figure to begin encroaching into 10% territory - a figure unheard of among industrially developed nations - could wreak havoc on interest rates, mortgages, lending and investment, and potentially even cause a run on the pound.

The third is to ease the political transition. The division of assets and liabilities within post-Yes-vote negotiations will be messy enough; surely it would be better and more transparent if the two countries' respective debts were denominated in the same, stable currency?

So I think they'll probably go for it. But what if they should impose overly-stringent conditions?

Well, for starters, a formal currency union would likely contain fiscal stability clauses, but that cuts both ways. It would also be a good thing. Let's remember, however, that the UK's debt-to-GDP ratio is higher than Scotland's. The UK's economic recovery has been slower than Scotland's. Even the UK's spend on welfare as a percentage of the budget is higher than Scotland's. Such a pact would be mutualist by definition; the UK would have no leverage to impose stringent conditions on Scotland that it didn't impose on itself. Finally, we return to the possibility that were conditions considered too onerous by an independent Scotland's negotiators, they could simply say "no."

The No side like to argue that a currency union would not entail "full independence". Monetary policy would be controlled in another country, they say. True - but crucially, by an operationally independent regulator. Moreover, given negotiations for fiscal stability would cut both ways, and the relatively strong position Scotland would have within such talks, it seems unlikely that we couldn't sweet-talk our way into having Scottish interests in some way represented on the Monetary Policy Committee. Which is a damn sight better than what we have at the moment.

The reality of the twenty-first century is that no nation on Earth has "full independence", and it is foolish to think in such absolutist terms. The rise of supra-national institutions and the increasing trade integration of globalisation means that the pooling of sovereignty is more a part of international life that at any point in history. The crucial thing about pooling sovereignty is that said sovereignty is volunteered optionally. Scotland has never previously had this option. It's the kind of decisions sovereign countries make.

But as Simon Johnson in today's Telegraph puts it, having wheeled out everyone's favourite sniper-from-the-sidelines Jim Sillars: what is Salmond's Plan B? Without a Plan B, Jim Sillars helpfully suggests, he, and presumably all Scots, are "snookered."

He's going to be snookering you tonight

This is all part of a drive from the Better Together folks and their friends in the media to force the Scottish Government into putting forward alternate plans for a separate currency, in which event we'd all be lucky to ever hear the end of how embarrassing a "U-turn" the SNP had made.

The Scottish Government ain't going to bite. Their currency plan A is: use Sterling. Their currency plan B is: use Sterling.

Trinidad and Tobago could start using Pound Sterling tomorrow if they wanted. It is fully tradeable, and fully convertible. About the only recent development I've seen in the currency debate is Alistair Carmichael's intervention. The new Scottish Secretary suggested that the UK agreeing to a currency union was "very unlikely." As far as I know, he's the first to say such a thing. Whether it was just bluster he made up on the hoof, pre-referendum politicking by the Coalition, or genuine UK thinking on post-Yes negotations remains to be seen.

Let's say, for sake of argument, that the UK will cut off their nose to spite their face and decline a formal currency union. Scotland's Plan B would simply be to use Sterling informally, as the Irish did for decades. It would hardly be ideal - we really would have no control over monetary policy in that case, but according to the No campaign, we wouldn't have any within a formal pact either so what's the difference?

The only sure result would be a swifter transition to an independent Scottish currency. Like many in the Yes movement, such as the Jimmy Reid Foundation and the Scottish Green Party, I support a currency union as an interim arrangement only. How long this transitional period should last is a matter for bigger brains to consider, but I don't support jumping into an independent currency straight off the bat. It's not that I don't think we could, just that things are going to be politically disruptive enough after a Yes vote without adding disruption to trade. Let's walk before we can run, eh? Privately, I imagine many in the SNP leadership will feel similarly. At the moment, proposing an initial currency union is sensible politically and economically. For the time being, the UK and Scotland's economies remain fairly convergent in terms of productivity, and as a result a currency union should be a stable transitional arrangement. But as the economies diverge as they inevitably would post-Independence, it perhaps would become less prudent to keep the Bank of England in control of interest rates while the UK, say for example, continues to engineer a property bubble in the South-East.

For the current and succeeding UK governments, all refusing a formal, mutual pact on currency would do would make the transitional period between Sterling and an independent Scottish currency that much shorter. A currency union buys the UK time. Time to get its bewilderingly low production and excess consumption in check. If the UK decides it doesn't want to do that, then by all means Scotland can speed up the establishment of an independent currency and wave back from the horizon at London as it sails off into the sunset with a trade surplus.

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