Wednesday 13 August 2014

Scotland's Vote 12: Castles in the Air

This is a follow-up to my previous post on the SNP and the currency issue. It looks at the SNP's claim that the rest of the UK (rUK) will accede to their demands; and statements from the SNP in the last few days.

An Offer You Can't Refuse

The SNP claim rUK will have no choice but to agree to a sterling union, for two reasons. The first is increased transaction costs between Scotland and rUK. On the SNP's own figures, these would amount to £500 million per year. This is 0.04% of GDP for rUK.

The second is the SNP plan to refuse to take on any of the UK national debt if rUK does not agree to a currency union.

Let us be clear: This is a deliberate policy choice by the SNP. It is entirely possible for a Scotland with its own currency to take on a proportionate share of UK debt, but the SNP have decided to rule this out unless rUK agrees to a sterling union. 

The SNP's figure for Scotland's share of UK debt interest is £5 billion per year. So, the SNP are threatening rUK with a financial penalty amounting to less than 0.5% of GDP, or about 1% of the rUK government budget. In SNP rhetoric, this will eclipse any other considerations. It is meant to bring the imperial British state to its knees and force it to accept whatever the SNP demands.

The difference is, refusing Don Vito's offer would leave you unable to make decisions ever again.

This is optimistic, bordering on delusional. The rest of the UK is perfectly capable of absorbing these costs. It would be prudent to take the Conservatives, Labour, and Liberal Democrats seriously when they say they will not agree to a currency union. They have reiterated their position again and again in recent days.

As Alistair Darling dryly put it:
If you look at the total value of the UK's debts, the Scottish share is a small part of it. Having been the Chancellor I would say if you have a budget of £700bn you have to be sort of phlegmatic about £5bn.
It is debatable whether refusing a sterling union is the best course of action for rUK; but the UK parties have made a very clear commitment to refusal, and they are able to act on it.

Salmond's Comments

Alex Salmond has reiterated his position on the currency issue in an open letter in the Sun:

Plan B implies settling for what's second best. And neither myself, my colleagues in the SNP, or the wider Yes campaign will ever settle for second best for Scotland.

This is not Salmond's decision alone. Sometimes you can't get everything you want; most of us learn that lesson in early childhood, but it appears to be lost on Salmond. I could rant about how I will not settle for less than an annual salary of £10 million and a private jet, but unless I can persuade someone to agree to it I will not get very far.

There is literally nothing anyone can do to stop an independent Scotland using sterling, which is an internationally tradeable currency. [...] It is simply impossible for the Westminster establishment to follow through on their campaign rhetoric about blocking Scots using the pound. They can however deny Scotland continued use of the Bank of England ...
This is correct, as far as it goes, but it raises more questions than it answers.

Salmond says what an independent Scotland could do, but is careful to avoid saying what it will do. Will Scotland pursue sterlingization, in which it uses the rUK pound as its only currency in the same way as Panama uses the US dollar? Or will it set up its own central bank and issue a Scottish pound which is pegged to sterling, in the same way that the Danish krone is pegged to the euro? They are two very different options with their own strengths and weaknesses.

If he so wished, Salmond could commit the SNP to a fallback plan if the UK parties refuse a sterling union. The Scottish electorate could then debate whether they want independence under these conditions.

Even senior political commentators seem to be confused on this point. Iain Macwhirter has written:

Sterling is an internationally convertible currency which Scotland is entitled to use. The Scottish Government would set up a currency board and issue Scottish pounds based on a one-to-one parity with sterling. Job done.

That would be a perfectly reasonable course of action. If Salmond had made a statement to that effect six months ago, we would not be having this discussion about Scotland's currency. We would be having a different discussion, one grounded in reality.

However, Salmond has said nothing of the kind. Instead he is asking the Scottish electorate to believe in pure wishful thinking, that the UK parties will reverse themselves and agree to a sterling union. If the wishes fail to come true, he has no policy beyond asking Scotland to trust him. Any fallback plan he may have is a secret which is not to be shared with mere voters.

For some Scots, this will be enough. Others will want more specific information from Salmond and the SNP on this crucial issue.

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