Thursday 13 February 2014

Wanted to share the Sterling, but they said, No, No, No.

With the news that all three UK parties have ruled out a formal currency union in the event of Scottish Independence, the SNP have been dealt a blow to their credibility. For some time now, I've warned that a clear contingency plan needs to be in place in the event their preferred currency proposal (which may not in any case be the best option for Scotland post a Yes vote anyway) fell through.

This being the case, however, my instinct is that this move is driven more by a political calculation than an outright hostility to a currency union. By the time the UK Government is actually confronted with the question of a currency union properly, it has already lost its political bet on the referendum itself, and has nothing to gain from holding to a red line unless it is in any case in their interests to do so. The Treasury's analysis paper on the currency union indicated that it would come with a number of potential drawbacks for both countries, some of which were alluded to in Mark Carney's speech on the matter only a few weeks ago.

A currency union would almost certainly mean some set of formal restrictions on fiscal policy: tax and spending limits for at least Scotland and probably both states, and a completely new set of accountability mechanisms for the way monetary policy is exercised. It would also involve a clear set of rules regarding the circumstances in which a bank would be bailed out and who would bear the cost.

It is worth, at this point, debunking one of the myths perpetuated by the Yes side, that because the Bank of England is nominally independent, and no politicians sit on the Monetary Policy Committee, that it therefore is not in any way "influenced" by politicians, Scottish or otherwise. This isn't true. The Bank of England's remit in monetary policy, whether it is is the setting of the base rate of interest or deciding the level of quantitative easing, is determined by UK Government policy.

Their "independence" is in the freedom to work within an envelope of powers to meet certain targets set by the Treasury, subject to supervisory oversight by the Chancellor and regularly being called before the House of Commons Treasury Select Committee. In the latter case, Scottish MPs have the opportunity, as do any others, to interrogate decisions and to question them where there is the suggestion that policy is being determined by the concerns of, say, London's financial sector, to the detriment of other parts of the economy.

It is also worth bearing in mind that, with Carney's appointment, we have thrown into sharp relief the pretence that central banking is in any way apolitical, and that the Bank of England's MPC are but the humble enforcers of universally accepted technocratic standards. The debate about the appropriateness of the 2% inflation target, and the metrics used to determine what ought to be done in the short and long-term to establish the most appropriate interest rate policy, is one that is clearly influenced by and involves political institutions.

This matters, because it affects the answer to the following question: to whom is the Bank of England accountable? The SNP's proposal involves shifting central banking away from instruments of domestic law, accountable to Treasury and to Parliament, towards an instrument of international law, presumably accountable to two Treasuries and two Parliaments. This is different from the much looser arrangements Westminster has with places like the Isle of Man, the Channel Islands and the Overseas Territories. They represent such a small proportion of economic activity transacted in GBP that they are scarcely able to influence the overall picture of what is, in monetary policy terms, in the interests of the Sterling area.

The same is not true of Scotland, which, among other things, is the second biggest trading partner with the rest of the UK. The need for these international arrangements make it less clear to whom or to what the Bank of England should be accountable and who, in practice, exercises control over deciding that question.

This is also why we need a much clearer account of what it means "to use the pound". It is meaningless to go around saying "it's our pound too" when it doesn't explain what is actually "ours". All currencies are ultimately just a denomination of the value of the assets held by a central bank. "The pound" as such, therefore, is an instrument of law, not an asset, as too is the corporate entity of the Bank of England. When the SNP talk about it being "our pound too" it doesn't mean anything. It is likely that we will be entitled to a share of the Bank of England's assets (or an equivalent sum settled in other assets) but this isn't the same thing.

Absent a currency union, we would be unilaterally adopting a currency of a country in a set of circumstances where we account for a not insignificant share of Sterling transactions, but with no political influence over the institutions setting monetary policy. This has the (indirect) effect of restricting our fiscal options, lacking a lender of last resort.

What may ultimately be a better back-up plan, now, is to use Bank of England notes as a reserve to set up our own central bank, and issue Scottish notes in a similar way that the Bank of England itself does at the moment. At least pegging to the GBP is our choice. It is worth pointing out that, contrary to what some more passive observers have suggested, the likes of Australia and South Africa did not "share" the pound with the UK, but had a distinct currency which they sought to peg until points that were ultimately well before independence. A currency peg, supported by an economy with a good balance of trade, thanks to oil and whisky exports, may in fact afford Scotland the real flexibility it needs, while also assuring international markets of its ability to pay its way.

A final note on the SNP's shrill response to the rejection of this currency union. It isn't "bullying" for the UK Government to prioritise the interests of rUK in considering whether a currency union is acceptable to them. There is no one else to represent rUK at the moment. It is no more "bullying" than the Scottish Government trying to bounce the Westminster Government in agreeing to a Treaty on a subject matter they don't agree with on details they haven't had sight of.

By all means, say it is empty rhetoric and tactics to dissuade voters, and that they would be in dereliction of duty not to re-assess the lie of the land post a Yes vote, but counter-threats of refusing to take a share of the debt are the stuff of the school playground. If an independent Scotland is to ensure a smooth transition into the international community, pissing off your biggest trading partner, who has a veto on your EU membership, and sending the signal to the global markets that you are a debt shirker on day one, is probably the worst way to go about it.

No comments:

Post a Comment