A post-script to my previous post on this, thanks to another friend who can’t be named and tweeting by Monique Ebell and Angus Armstrong at NIESR.
1. First-off, on the insidious association with the notion of Sterling as an ‘asset’ that the Scots have a right to and could trade for a share of the national debt. Oh, the cunning. Of course, given that everyone accepts Sterling in the UK, if I have some in my pocket, that is an asset to me. I expect to be able to swap it for something useful. But the SNP are mixing up that concept with the idea of not ‘some’ Sterling, but ‘the Sterling currency area’. That’s a very different animal. In a sense, it is also an asset. It is a system of bookkeeping, recording who has done what in the past and who owes what to whom. And other things too. But it is not something that can be divvied up, with individual groups of society doing with it what they will. Scots can take the wealth they have accumulated if they go their own way after the referendum. Some of that will be stocks and shares, denominated in Sterling, and, at some point, they will be able to sell them, and convert them into whatever currency they need, and buy goods and services. They will also be able to take notes and coins with them. Could be Sterling, or it could be these exchanged for Scottish notes, or euros, or whatever. But they can’t take a share of ‘the benefits conferred by being a member of a currency union’ with them to do with as they wish. What they want to do is set independent fiscal policy. But in so doing they will undo the benefits that the Sterling currency area confers on everyone else. The sneaky thing about the language here is the slippery connection of the Sterling ‘asset’ with the national ‘debt’. And it’s obviously not a coincidence. Otherwise, why not say simply that if the Rest of the UK [RUK] refuse to allow them to remain in the Sterling area, Scotland will want compensation across a range of other issues. Eg they could trade this for a delay in the repatriation of the nuclear Trident submarines. Instead, they make this corrosive association with debts and assets.
2. An analogy to try to bring to life why one group doesn’t have a right to impose an externality on another. Think of a city playground. There’s one a hundred metres from my house in Kentish Town. Imagine a nirvana where dogs were not allowed into that playground. But then a group of residents bordering one corner of it decided that their use of it would involve dogs running around and crapping all over the grass, because they had decided to be ‘independent’ and adopt their own rules for dogs. Would we agree that the dog libertarian residents had a ‘right’ to do what they wanted with their access to the playground? Of course not.
3. Suppose the SNP decide to try to blackmail the RUK into letting them remain in the Sterling area with independent fiscal policy. They are now explicitly threatening to refuse to honour their share of the national debt. My friend guesses that this would be worth about 8 percentage points on the RUK debt to GDP ratio. Quite nasty if the RUK feel forced to honour it to avoid a default.
4. But what kind of a threat is it? For two reasons, it might not be such a good one. First, it would be equivalent to a default. That is likely to raise the cost of funding debt the Scots issue independently, and force them to run tighter fiscal policy for a very long time to come. At a time when the shape and behavior of the new state is uncertain, and in these fragile times where risk tolerance for investors in suspicious sovereigns is low, the funding premium could turn out to be very large. Second, suppose the RUK agree to be bullied, and the Scots then take their share of the debt. Next period, the Scots are done for, because there is nothing binding future RUK parliaments and electorates, ensuring that they honour the commitment to allow the Scots to continue to be a member of the Sterling union. (Or, pedantically, nothing to prevent them setting up their own currency union which they refuse to admit Scotland into). Once the debt is handed over, there won’t be much the Scots could do about it. As with many issues, the SNP haven’t given any details of just how they will try to bully the RUK, so we don’t know whether they have a way to get around this.