This morning’s interview on UK’s Radio 4 ‘Today’ program with Deputy First Minister for Scotland, Nicola Sturgeon, of the Scottish National Party, had me shouting at the receiver. I don’t know whether she and the SNP leadership understand the monetary economics lurking behind the costs and benefits of alternative currency options for Scotland and the rest of the UK (RUK) and are simply obscuring things to make them look rosier for the Yes campaign, or if they simply don’t get it. They say such idiotic things on the subject that it’s hard to tell. And it worries me that their interventions, both clumsy and poisonous, are debasing this debate, and economic discourse generally.
This morning, Nicola repeated the silly assertion that it would be in the RUK’s best interest [I think she actually used the word ‘overwhelmingly’] to retain a currency union with Scotland without any restrictions on Scottish fiscal policy. Jim Naughtie deftly pointed out that the example of Europe was surely a pointer that it would not. Nicola replied that unlike the Euro Area, the UK constituted an ‘optimal currency area’, so there would be no problem. This is another silly falsehood. I’d like to see what analysis she thinks backs up this claim, by the way? She was making a very abbreviated (brevity not her fault) version of an argument that goes like this: if two economies are hit by very similar shocks, that would warrant similar monetary policies, and so there would be no cost on this count to having the same monetary policy, i.e. the same currency. Unfortunately, this argument ignores difficulties presented by economies either running different fiscal policies (which is after all what the SNP want ultimately) or facing different fiscal pressures.
Excellent work has been done on this by Angus Armstrong at NIESR, and I also posted on it briefly here. But to recap. The RUK would be reckless to allow such a union. As a baseline, the RUK would want to insist that Scottish debt to GDP levels were no different from its own over long periods. And that the tendency for fiscal policy to try to counter booms and busts were also not much different from its own. On top of that, the RUK would wish to insist that fiscal policy were more conservative, less stabilising, to guard against a market run on Scottish bonds that might result from large fluctuations in either its revenue (from oil) or its liabilities (from a possible failure of Scottish financial institutions, which weigh heavily relative to the size of the Scottish tax base). And over and above this, the Scots would be required to run tighter fiscal policy to save for the costs of an ageing population and declining oil revenues, and to put money aside to fund a possible bail out of its relatively larger financial sector.
It’s not surprising that Sturgeon tries to put things differently. The SNP (and newly independent Scots) would themselves want to have their cake and eat it. It would be better for them to have a currency union, and try to free-ride on the RUK ‘s deeper fiscal pockets to bail them out of another financial crisis. And, unfortunately, once a deal like this was done, it would be in the RUK’s interest to buckle under and fork out, because allowing Scottish banks to fail would likely cause knock on problems for our own banks and economy. (That’s why we helped out Ireland). For this reason it would be essential to have watertight controls over Scottish fiscal policy. Unfortunately, without political union, no watertight controls exist. Witness the fact that the austerian North Europe is powerless to stop Greece from backsliding on reform (put aside whether they are right to try to insist on it or not, the point is that they can’t) because they and the Greeks know the risk of a disorderly default is not confined to Greece.
In essence, the only currency union that would make sense would be one in which fiscal policy was pretty nearly identical to the fiscal policy that pervades under the political union.
Even sillier was Nicola’s claim that because Sterling was a ‘shared asset’ they had a right to continue in a currency union on their own terms. ‘Shared asset’? Which SNP advisor dreamed that one up? This is silly on many levels. First, somewhat pedantically, Sterling is not an ‘asset’, it’s a liability of the Bank of England. Actually, it’s a liability that is a promise to pay nothing but itself. (Thanks to a friend who can’t be named for making that point clear). But still, it’s not a financial asset. Perhaps I should be charitable: surely the SNP were not literally trying to claim that ‘Sterling’ was an asset? Surely they simply meant to refer to the fact that our monetary book-keeping system was a public good that they had the right to enjoy too? But I’m not sure about this. In the same breath Nicola argued that if the Scots were to be deprived of this ‘asset’ then they could not take their share of the national ‘debt’. This kind of language struck me as a politically sinister attempt to get the lay listener to think that the argument had some deeper financial common sense about it. ‘Yeah, assets, and debt, it kind of evens out doesn’t it? Well, that’s fair enough then, let’s give it to them.’
Leaving this aside, do the Scots have a ‘right’ to continue to be part of the currency union without fiscal controls? Morally, no. Because the services conferred by the monetary system for everyone else would be deteriorated by Scotland so doing. Once agreed to, the RUK would have no choice but to make fiscal provision themselves to insure against Scottish oil and financial risks, and to save for Scotland’s old age, bearing a disproportionate burden for doing so, and risking a run on its own bonds without it. Of course, rights may not come into it. What will emerge will depend on what the Scots could force in a negotiation. That’s a trickier question to work through, and beyond the scope of this blog. The ‘right’ thing to do would be for the Scots to take more of the national debt in recompense for the burden they would impose on the rest of us by insisting on their fiscal freedom and their own fiscal risks they would transfer to us.
What is most depressing about all of this is the attempt to debase important economic debate because of essentially political wishes. The SNP wants independence for Scotland for political reasons, and it seeks to distort, subvert and wilfully misunderstand the economics of independence in service of that (who knows, maybe laudable) political aim. When the UK Government seeks to explain things differently, the SNP went to battle, arguing ‘well they would say that wouldn’t they, for political reasons THEY seek to debase the economics’, a particularly poisonous intervention, I thought, as an outsider, since exactly the opposite was going on. When independent bodies like the OBR make the same arguments, the SNP try to cloud the issue. ‘The OBR are simply saying there is a lot of uncertainty’ was one response I read. This kind of behaviour by the SNP has costs outside the arena of the debate over Scottish independence. It prevents the lay population at large from understanding the economics of issues they have to decide on. And at a time when the crisis has put these economic issues at centre stage. It also taints the reputation of politics for plain speaking. ‘If I can’t trust political leaders to talk straight about the economics, who can I trust?’, thinks the median voter. There are plenty of non-affiliated bodies and academics commenting, but people don’t encounter them directly. There are also journalists in the print and broadcast media to explain things plainly. But these are difficult topics for them to grasp too, sometimes, and the attention span of the hypothetical customer is deemed too short to be lectured to at length.
It’s perhaps not surprising that the debate gets contaminated so much at times like these; by holding a referendum for independence, the SNP stakes almost all its political credibility and identity on success, so the payoff for some future era, on other topics, of an enlightened and informed economic debate, is too etherial for them to worry about. The restraint by the Government is convenient, but probably also not to be applauded too much. My surmise is that’s a calculation that it would backfire politically to weigh in more heavily, stoking up anti-Westminster feeling, not a view that citizens should have informed economic discussion. When it suits them, eg in the debate with Labour over austerity, the Westminster Government are perfectly capable of playing dirty: witness the claim by George Osborne that the fact that the UK is finally growing proves that tight fiscal policy was what was needed. [Which is obviously false: counterfactual GDP under looser fiscal policy would have been higher].