Knifonomics (part 36): skewered Salmond

Posted on February 17, 2014 by lisztomega

I apologise in advance for the length, and slightly parochial nature, of this post. However, if you live in the UK, it’s very important.

The Knife has long had a very low opinion of the strangely overrated creature that is Alex Salmond. He rarely produces a cogent argument for his separatist madness, but then again, he’s rarely been challenged. The Scottish media – with a few honourable exceptions – is largely supine. The UK media seem to regard it as a sideshow. It is, but a dangerous one.

Well Fat Eck has now met his match, with numerous commentators deeply unimpressed by his bluster. After a typically low profile few days while he dreamt up some new insults and excuses, he made his usual feeble railing speech today.

As so much of real life centres round economics, as opposed to reliving Braveheart, it is helpful to examine this area in detail. Step forward the remarkable Adam Tomkins, Professor of Public Law at Glasgow University. Not only does he have a very handy Twitter account, he also has a superb and very honest blog: Notes From North Britain. This is only an extract from a truly excellent post, despite its length, it’s a fine read, and a masterly summation:

What the Chancellor said was that there will be no currency union between an independent Scotland and the rest of the United Kingdom. He said this on the basis of independent, expert and hard-headed analysis — all made public — prepared by HM Treasury and signed off by the Permanent Secretary to the Treasury, no less (the civil servant who is leading the UK Government’s ongoing series of Scotland Analysis papers, about which I’ve written before). The Chancellor’s verdict — that it could not be said to be in the best interests of the rest of the UK to enter into a currency union with an independent Scotland — is not a narrowly partisan position adopted in the interests of the Conservatives. It is, on the contrary, a position with which the Liberal Democrat and Labour parties whole-heartedly agree. For the Lib Dems, Danny Alexander gave a statement agreeing with the Chancellor and for Labour Ed Balls wrote in the Scotsman explaining his reasons why a Labour government could not “enter into a new sterling monetary union to share the pound with an independent Scotland”.

None of this means that an independent Scotland could not use the pound. Any country anywhere in the world could use the pound if it wanted to. Likewise, the UK could abandon the quaint notion of having a currency of its own and could use the US dollar if it wanted to. But, for the UK to use the dollar in this way — or for an independent Scotland to use the pound in this way — would have massive drawbacks. (Just pause to wonder: why is it that so few states in the world use the currency of another state? Why is it that most states in the world prefer to have a currency of their own?)

Using the currency of a foreign state without entering into a monetary union means that you surrender the entirety of your monetary policy to that foreign power (in the words of the Scottish Government’s own Fiscal Commission, it would mean that “the Scottish Government would have no input into the governance of the monetary framework”). Using the pound without entering into a currency union would mean that the Scottish Government would have no power to print money. Its borrowing would be in a foreign currency, making it inevitably more expensive. Even if it had a central bank it would have no power to create reserves. Any shock to the economy would have to be absorbed using only fiscal policy (because Scotland would have no monetary policy of its own). Suppose that the oil price crashes (and it is notoriously volatile): any shock to the economy would have to be absorbed by putting taxes up or cutting public spending. Murdo Fraser MSP drives the point home even further: an independent Scotland unilaterally using the currency of a foreign state would mean, he says, that “there would be no one to stand behind our financial institutions in the event of another economic crisis. That means waving goodbye to RBS, to Standard Life, to Aberdeen Asset Management, to Alliance Trust, and to a whole host of other financial institutions, who would have no interest in continuing to be based in Scotland without that protection. It would be a disaster for the Scottish economy”……

…..The Nationalists reacted in four ways, each of them profoundly wrong. First, they said “it’s Scotland’s pound too”, insisting that no-one could take it away from us and that Mr Osborne was “bullying Scotland”. Secondly, they said “if we cannot keep the pound, we’ll not take our share of the UK’s debts”. Thirdly, they said “it’s all just campaign talk, it’s a bluff that will change on day 1 after we vote Yes”. And finally, they said that the Chancellor’s stance was in breach of the Edinburgh Agreement. This last point is perhaps the most disingenuous of the lot, and I’ve dealt with it before. It is time for the SNP’s wilful misrepresentation of the Edinburgh Agreement to stop.

That the SNP reacted in these ways was not surprising. But what has been disappointing is the way that some in the Scottish media — and several commentators who should know better — have failed to see how ill-conceived the SNP’s reaction has been. Let’s look at this in more detail.

First, the line that it’s Scotland’s pound too. This is straightforwardly wrong in law. There is no secret about this. I’ve written about it at length here. I told the House of Commons Scottish Affairs Committee all about it last month. Better Together posted my legal analysis on their Facebook page. And the Treasury’s supporting documentation, published alongside the Chancellor’s speech, contains a perfectly accessible four-page annex on “the legal position of the UK pound”. The currency is not Scotland’s (and it’s not England’s either). It is the currency of the United Kingdom. If Scotland votes Yes to independence it will have voted to leave the United Kingdom: that’s exactly what “independence” means — independence from the United Kingdom. If Scotland leaves the UK it leaves the UK’s public institutions, which would become the institutions of the rest of the UK. The UK’s assets and liabilities would fall to be apportioned equitably between the rUK and an independent Scotland, but the pound is neither an asset nor a liability. Any gold or other reserves left in the Bank of England would fall to be apportioned. So would the national debt. But the pound itself would not. It is Scotland’s pound now because and only because Scotland is part of the UK. If Scotland votes to leave the UK it votes to leave the UK’s pound.

It really could not be more simple, could it? But it is staggering how many folk get all this wrong. Iain Macwhirter, one of Scotland’s leading political commentators, wrote on his blog that “the pound is common property”. Straightforwardly wrong in law. For Macwhirter, the UK Government setting out and standing up for what is in the best interests of the rUK was as act of “coercion by the UK political establishment, an act almost of economic warfare”. Such bellicose interpretation is so over the top that it would not be out of place on the most extreme of the Nationalist blog sites. STV’s Scotland Tonight has a strong claim to be Scotland’s flagship news and current affairs programme, but its researchers were evidently too busy to read the legal analysis on the position of the UK pound which the Government, the House of Commons and others have published, leaving its hapless presenter to ask the Chief Secretary to the Treasury why his Government were refusing to apportion the pound as an asset and failing to correct the First Minister when he said that the Bank of England is an institution of which an independent Scotland would have a share. An all-party House of Lords committee explained as long ago as April 2013 that the SNP’s plans for sharing the Bank of England post-independence were “devoid of precedent and entirely fanciful” but, since then, neither the Scottish Government nor its Fiscal Commission have done anything to explain why these conclusions were mistaken. One can only assume that this is because they know damn well that they are not mistaken.

As for Scotland refusing its share of the national debt, this is basket-case economics. The debt is currently the UK’s. In order to reassure creditors (and to preserve its credit-rating) the Treasury has made plain that it will continue to honour the debt even in the event of Scottish independence. But this does not mean that Scotland would be born debt-free. On the contrary, as part of the separation negotiations the rUK would secure from Scotland an agreement to service an equitable share of the UK’s debt. There is no chance that Scotland could walk away from this obligation without punishing consequences being imposed at the hands of the international money markets. An independent Scottish state would need to borrow from day 1. There is no question about this (for those in doubt, Ian Smart explains it here). A responsible Scottish Government would do everything it could to ensure that it was able to borrow on the most favourable terms possible. This precludes absolutely any refusal to service a fair share of the UK’s debt.

Worth reading the whole thing. Keen intelligence v paranoid rants.