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davywavyFor reasons I don't understand LJ appears to have deleted this since I posted it, so here it is again.
I've been watching the debate over the the Scottish Independence referendum over the last week or two, largely because it's the most entertaining thing to be going on in the world of economics and politics. Yeah, there's other stuff happening; a second Chinese shadow bank has defaulted, bitcoin has been getting DNS attacked, Greek unemployment went over 60%, the UK economy continued to recover*, but none of those things are very funny. Instead, as office politics usually are, the UK/Scotland stuff has become incredibly petty, beginning with Scotland's call for a UK/Scotland pound currency union last week followed by yesterday's annoucement by all three of the main political parties that this simply isn't going to happen.
In turn this announcement led to this extraordinarily entertaining interview in which Scottish Deputy First Minister Nicola Sturgeon flat refused to answer a straight question for ten full minutes. Quite seriously I haven't seen anything like it since that time about ten years ago when Michael Howard sat and flat refused to say whether he'd sacked someone or not** as Paxman asked him the same question again and again.
Anyway, the question being asked was, in the light of the three people most likely to be in a position to sign the cheques - Osborne, Alexander and Balls - after the next election saying a currency union wasn't going to happen in the event of a yes vote, what was the SNP's plan B? In return Nicola avoids the question and just repeats that a union would be in everybody's interests and so it should happen. It's remarkably entertaining and if you can watch it I recommend it for a few laughs in case Father Ted isn't on.
First up, it must be acknowledged that in the event of the Scots voting for independence a UK/Scotland currency union would indeed be in everyone's interests. There would be considerable cross-border trade which would benefit from a single currency. This is both unarguable and true. However, what Nicola doesn't mention is that the currency union would be not only hugely to Scotland's disproportionate benefit, but all the alternatives to Scotland are far, far worse and by naysaying the idea the exchequer has really blown a hole in the SNP's case.
The reason for this is a simple one: The SNP's economic plans for a future nation are built on two key pillars: oil and financial services.
Now, I've seen all kinds of figures about the oil and everyone in the debate has an opinion of how much there is left, how much is extractable, and so on, but it's very likely that there's a reasonable amount of oil left, it's worth lots of money, and the lion's share would be in Scottish territorial waters. You can be confident that there's less left than the Yes camp would like, and as the global economy shifts to gas and photovoltaics the value will fall, but it's probably still worth a fair amount.
The problem arises with financial services. The financial services industry in an independent Scotland would be worth some 1200% of GDP. To put that into perspective, the UK industry when the balloon went up in 2008 was worth about 450% of GDP and we're still feeling the aftershocks of that now. A banking crash to a independent Scotland would be, to put it mildly, problematical.
Anyway, in the event of independence Scotland would have to choose a currency, and this is where it gets interesting. You see, in order to support a financial services sector of that size, Scotland would need a Central Bank as lender of last resort which could take a punch and their own economy on it's own isn't big enough to support one. So, the options are:
1) A currency union with the rest of the UK with the pound and the Bank of England as lender of last resort. This would indeed be the best outcome, especially for Scotland as the BoE would guarantee the Scots financial services industry. Essentially by demanding the union, what the SNP was attempting to do was bounce Westminster into agreeing to underwrite the risk of the Scottish financial services industry with the resources of the entire UK, whilst the tax revenues for that industry would go to Holyrood. I'm not even remotely surprised the exchequer took one look at it and said no. I don't blame the SNP for trying it on - Alex is nothing if not a trier - but for them then to claim that Westminster is acting like a bully for saying no is risible.
2) Join the Euro, and use the ECB as lender of last resort. The problem here, of course, is that everyone knows what the ECB did to Ireland and Cyprus - two other peripheral nations with disproportionately large banking sectors. Ireland had a financial services sector of 900% of GDP and since that went wrong standard of living has declined 25-30% in that country based on the ECB's austerity measures. For all that people complain about Westminster's austerity, look over the Irish sea for how badly wrong it could have gone. Ireland stands as a stark warning to a country with a banking sector relatively 30% larger what joining the Euro might mean.
3) Launch an Scottish currency and set up a central bank. As I said above, a Scottish central bank simply couldn't have the heft to counterbalance the weight of the assets and liabilities of the banks. Moreover, a Scottish currency would be a petrocurrency and therefore relatively quite strong, which would damage the export revenue which Scotland would be reliant upon. The solution to this would be a currency peg to the pound to keep the Scottish currency artificially undervalued which would in turn risk a trade war with the remainder of the UK, which isn't really in their interest once again.
4) Simply use the pound without a currency union, which Nicola suggested Scotland might do in the interview. There's nothing to stop them doing this, but frankly it's not going to happen. This is a complete bluff and will be called very quickly. The reason it's clearly a bluff is because without a lender of last resort the financial services industry will relocate to a jurisdiction where there is one, and that frankly means London and that once again blows a hole clean through the SNPs financial projections.
Absent a pound currency union the best solution for Scotland would be its own currency. Alas, this has problems. Although the SNP has stated that they would retain membership of the EU as a successor state, the EU itself says different. Keen to discourage other separatist movements like that in Catalan, President Barroso has clearly said that this won't be happening and the Spanish have said they'll veto any automatic accession. If Scotland wants to join the EU it looks likely they'd have to do so as a new entrant, and the rules clearly say that one of the conditions of membership is working towards membership of the Euro in good faith - and that takes us back to 2, above. What's even more annoying for them is that they'd lose their share of the UK's rebate meaning that the Scots, who complain they fund the rest of the UK, would end up paying more into the EU to make up for the rebate itself.
From where I'm standing it looks at this moment as if the wheels have come off the economic case presented by the SNP in their Scotlands' Future book in a quite dramatic fashion. Mark Carney, Governor of the Bank of England, said last week that a currency union would require some sacrifice of sovereignty to the central bank, and that went down badly. I expect the outright rejection of such a union will go down even worse. Right now, the reaction of the SNP has been to accuse Westminster of bluffing and bullying and I've got to say that if your economic case is based on the assumption that the guy who will be signing the cheques is lying when he says he won't then your case has probably got some serious flaws.
Still, I've never said that Salmond isn't canny. It's possible he might pull something out of the hat but for the life of me I can't imagine what it might be at this stage. If he does it I'll be dashed impressed.
It's all to play for, eh?
*Incidentally, I'm just curious what became of all the people who were saying that 'Austerity isn't working' a year or two ago? I mean, I said there was going to be a recovery a year ago but I wasn't expecting more than 1.5-2%. 3.4% economic growth is remarkable. If I feel a bit surprised at this, I can't help but wonder how everyone who said there wouldn't be a recovery feels right now. A bit of a pillock, I expect.
**A stupid move. He should have said "Of course I sacked them. I'm in charge, and sometimes that's what being in charge means". But no, he bottled it.
I've been watching the debate over the the Scottish Independence referendum over the last week or two, largely because it's the most entertaining thing to be going on in the world of economics and politics. Yeah, there's other stuff happening; a second Chinese shadow bank has defaulted, bitcoin has been getting DNS attacked, Greek unemployment went over 60%, the UK economy continued to recover*, but none of those things are very funny. Instead, as office politics usually are, the UK/Scotland stuff has become incredibly petty, beginning with Scotland's call for a UK/Scotland pound currency union last week followed by yesterday's annoucement by all three of the main political parties that this simply isn't going to happen.
In turn this announcement led to this extraordinarily entertaining interview in which Scottish Deputy First Minister Nicola Sturgeon flat refused to answer a straight question for ten full minutes. Quite seriously I haven't seen anything like it since that time about ten years ago when Michael Howard sat and flat refused to say whether he'd sacked someone or not** as Paxman asked him the same question again and again.
Anyway, the question being asked was, in the light of the three people most likely to be in a position to sign the cheques - Osborne, Alexander and Balls - after the next election saying a currency union wasn't going to happen in the event of a yes vote, what was the SNP's plan B? In return Nicola avoids the question and just repeats that a union would be in everybody's interests and so it should happen. It's remarkably entertaining and if you can watch it I recommend it for a few laughs in case Father Ted isn't on.
First up, it must be acknowledged that in the event of the Scots voting for independence a UK/Scotland currency union would indeed be in everyone's interests. There would be considerable cross-border trade which would benefit from a single currency. This is both unarguable and true. However, what Nicola doesn't mention is that the currency union would be not only hugely to Scotland's disproportionate benefit, but all the alternatives to Scotland are far, far worse and by naysaying the idea the exchequer has really blown a hole in the SNP's case.
The reason for this is a simple one: The SNP's economic plans for a future nation are built on two key pillars: oil and financial services.
Now, I've seen all kinds of figures about the oil and everyone in the debate has an opinion of how much there is left, how much is extractable, and so on, but it's very likely that there's a reasonable amount of oil left, it's worth lots of money, and the lion's share would be in Scottish territorial waters. You can be confident that there's less left than the Yes camp would like, and as the global economy shifts to gas and photovoltaics the value will fall, but it's probably still worth a fair amount.
The problem arises with financial services. The financial services industry in an independent Scotland would be worth some 1200% of GDP. To put that into perspective, the UK industry when the balloon went up in 2008 was worth about 450% of GDP and we're still feeling the aftershocks of that now. A banking crash to a independent Scotland would be, to put it mildly, problematical.
Anyway, in the event of independence Scotland would have to choose a currency, and this is where it gets interesting. You see, in order to support a financial services sector of that size, Scotland would need a Central Bank as lender of last resort which could take a punch and their own economy on it's own isn't big enough to support one. So, the options are:
1) A currency union with the rest of the UK with the pound and the Bank of England as lender of last resort. This would indeed be the best outcome, especially for Scotland as the BoE would guarantee the Scots financial services industry. Essentially by demanding the union, what the SNP was attempting to do was bounce Westminster into agreeing to underwrite the risk of the Scottish financial services industry with the resources of the entire UK, whilst the tax revenues for that industry would go to Holyrood. I'm not even remotely surprised the exchequer took one look at it and said no. I don't blame the SNP for trying it on - Alex is nothing if not a trier - but for them then to claim that Westminster is acting like a bully for saying no is risible.
2) Join the Euro, and use the ECB as lender of last resort. The problem here, of course, is that everyone knows what the ECB did to Ireland and Cyprus - two other peripheral nations with disproportionately large banking sectors. Ireland had a financial services sector of 900% of GDP and since that went wrong standard of living has declined 25-30% in that country based on the ECB's austerity measures. For all that people complain about Westminster's austerity, look over the Irish sea for how badly wrong it could have gone. Ireland stands as a stark warning to a country with a banking sector relatively 30% larger what joining the Euro might mean.
3) Launch an Scottish currency and set up a central bank. As I said above, a Scottish central bank simply couldn't have the heft to counterbalance the weight of the assets and liabilities of the banks. Moreover, a Scottish currency would be a petrocurrency and therefore relatively quite strong, which would damage the export revenue which Scotland would be reliant upon. The solution to this would be a currency peg to the pound to keep the Scottish currency artificially undervalued which would in turn risk a trade war with the remainder of the UK, which isn't really in their interest once again.
4) Simply use the pound without a currency union, which Nicola suggested Scotland might do in the interview. There's nothing to stop them doing this, but frankly it's not going to happen. This is a complete bluff and will be called very quickly. The reason it's clearly a bluff is because without a lender of last resort the financial services industry will relocate to a jurisdiction where there is one, and that frankly means London and that once again blows a hole clean through the SNPs financial projections.
Absent a pound currency union the best solution for Scotland would be its own currency. Alas, this has problems. Although the SNP has stated that they would retain membership of the EU as a successor state, the EU itself says different. Keen to discourage other separatist movements like that in Catalan, President Barroso has clearly said that this won't be happening and the Spanish have said they'll veto any automatic accession. If Scotland wants to join the EU it looks likely they'd have to do so as a new entrant, and the rules clearly say that one of the conditions of membership is working towards membership of the Euro in good faith - and that takes us back to 2, above. What's even more annoying for them is that they'd lose their share of the UK's rebate meaning that the Scots, who complain they fund the rest of the UK, would end up paying more into the EU to make up for the rebate itself.
From where I'm standing it looks at this moment as if the wheels have come off the economic case presented by the SNP in their Scotlands' Future book in a quite dramatic fashion. Mark Carney, Governor of the Bank of England, said last week that a currency union would require some sacrifice of sovereignty to the central bank, and that went down badly. I expect the outright rejection of such a union will go down even worse. Right now, the reaction of the SNP has been to accuse Westminster of bluffing and bullying and I've got to say that if your economic case is based on the assumption that the guy who will be signing the cheques is lying when he says he won't then your case has probably got some serious flaws.
Still, I've never said that Salmond isn't canny. It's possible he might pull something out of the hat but for the life of me I can't imagine what it might be at this stage. If he does it I'll be dashed impressed.
It's all to play for, eh?
*Incidentally, I'm just curious what became of all the people who were saying that 'Austerity isn't working' a year or two ago? I mean, I said there was going to be a recovery a year ago but I wasn't expecting more than 1.5-2%. 3.4% economic growth is remarkable. If I feel a bit surprised at this, I can't help but wonder how everyone who said there wouldn't be a recovery feels right now. A bit of a pillock, I expect.
**A stupid move. He should have said "Of course I sacked them. I'm in charge, and sometimes that's what being in charge means". But no, he bottled it.
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no subject
Date: 2014-02-14 01:09 pm (UTC)no subject
Date: 2014-02-14 01:14 pm (UTC)I wish he'd write more.
no subject
Date: 2014-02-14 01:42 pm (UTC)no subject
Date: 2014-02-14 02:25 pm (UTC)no subject
Date: 2014-02-14 03:07 pm (UTC)no subject
Date: 2014-02-15 10:42 am (UTC)Plus ça change.
Are pro-German economic policies a better fit to Scottish interests than those of London bankers and neoliberal rent-seekers?
There are no good choices on offer to the Scots: and the 'least würst' choice might be the Euro.
no subject
Date: 2014-02-15 04:19 pm (UTC)no subject
Date: 2014-02-16 02:36 pm (UTC)no subject
Date: 2014-02-18 09:41 am (UTC)no subject
Date: 2014-02-17 11:09 am (UTC)