08/03/2014 Leave a comment
It’s probably not controversial to say that politicians change their minds a lot. Nick Clegg, for example, found little difficulty in voting to increase tuition fees shortly after he’d happily been photographed doing this:
It’s easy to pick out Nick Clegg over such inconsistencies (in fact it’s fish, barrel, howitzer time) but this is undoubtedly a common trait amongst politicians. Let’s look at another.
SNP Leader and Baron Greenback doppelgänger, Alex Salmond once described the pound as “a millstone round Scotland’s neck”. These days though he’s desperate to keep it. These days, we are told, that Scotland losing Sterling would cost British businesses hundreds of millions of pounds.
It’s a pretty big change in his position, so it’s worth asking why that change occurred.
Before that though, I feel I obliged to back up claim that he looks like Baron Greenback from Dangermouse:
Back to the question. Why has his position changed so much? Economically this is hard to answer. While different currency options have different pros and cons, those pros and cons don’t really change a huge amount over the long term*. When Alex was strongly in favour of Scotland scrapping the Pound in favour of the Euro, he didn’t mention those lost hundreds of millions of pounds that are now such a problem.
Unsurprisingly this has nothing to do with economics and everything to do with politics. The past six years have not been kind to the public’s perception of the Euro and while such a policy might once have been a vote winner, today it would be a huge vote loser. The experience of close neighbours, Ireland, (amongst many other Eurozone economies) has been hard for Scottish voters to miss. Here are unemployment rates as one example:
Alex wanted the Euro when he thought it would gain him more popularity for independence and today wants Sterling for the same reasons. Not that that makes him any different to any other politician but it is important to understand that all of this has a lot to do with politics and not a lot to do with economics.
In any case though Alex’s new found love for The Pound is fairly immaterial because, as we’ve seen, there seems to be very little motivation from the rest of the UK to enter into a formal currency union with an independent Scotland. While this has generated much ire from Alex, it’s worth putting this position into perspective.
An independent country cannot demand than another country enter into a formal currency union with it Unless both countries want to do it, it won’t happen and, to be fair, it shouldn’t happen.
Alex, as an expert on independence, should probably realise he can’t just pick and choose which aspects of independence he wants and which he does not. He might want The Bank of England to continue to act as Scotland’s central bank but, in the case of Scottish independence, that’s simply not a demand he can make.
Given this, it’s surprising is that he doesn’t seem to have any “Plan B” on the matter of what currency an independent Scotland would actually use. With six months to go until the vote, this looks more than a little disorganised. So what are the options for “Plan B”?
Essentially there are three:
Option 1: Dollarisation
Scotland could continue to use the pound as their currency without any formal monetary union. Several countries already do this with the Dollar (hence the term Dollarisation for using a foreign currency), such as Panama and El Salvador. Several also do this with the Euro, such as Monaco, Andorra and the Vatican City. Scotland would be, comparatively, a very big economy to try this out but it is definitely an option. There are some serious disadvantages of it, one of the big ones being that if, as a country, you have no control over your currency, you can go bust.
As an independent country, Scotland would start out with debt of around 80% of their GDP and with no control over their currency, markets would be unlikely to want to give them more very cheaply. Additionally, given recent history, the Scottish financial sector, dominated by RBS and HBOS, is unlikely to want to remain based in a country where they have no lender of last resort. NIESR go into the whole dollarisation thing in more detail here but it’s probably fair to say that:
a) To go down this route there would be an awful lot of details to sort out before September
b) Although workable, there are additional risks in dollarisation over the current system, some of which are material
Option 2: Adopt the Euro
Option 3: Create a new Scottish Currency
In this scenario, Scotland would set up its own central bank, print its own currency and have full control over both its fiscal and monetary policy. Unlike the other options, it would be economically independent. The down sides would be that the new currency was likely to be more volatile than the pound and there would be costs involved in cross-border transactions between Scotland and the UK when converting from one currency to another. There’s no reason to think that either of those would be an insurmountable problem though – neighbouring countries throughout the globe have used different currencies successfully for a very long time. Additionally markets wouldn’t panic about an independent Scotland using a foreign currency as they’d control their own, so Scotland would be able to borrow at reasonable (albeit higher) rates without being seen as a default risk. I really can’t see any reason why Scotland couldn’t do this successfully and it seems to me by far the cleanest and most workable (not to mention the only “independent”) of the three options.
As I mentioned earlier though – the economics of the debate aren’t taking centre stage (on either side) and, to be honest, it is worth asking whether they should anyway. If Alex Salmond could just communicate a sensible currency policy to the Scottish people we could then just move on to what the debate is really about…
Is it about other economic things?
No it’s not. An independent Scotland would certainly have the ability to operate successfully. Would they be on average better off or worse off? Despite what George or Alex tells you, I doubt there would be a big difference – there’s little evidence to suggest that things would vary much either way.
Is it about political things?
No it’s not. A “Yes” vote would mean Alex Salmond being in charge (and he is clearly a bampot), but a “No” vote would mean David Cameron being in charge and, if anything, he is an even bigger bampot than Alex Salmond. But that is politics for you – no matter how you vote, you’ll probably get a bampot.
So if it isn’t about economics and it isn’t about politics, what is it about?
Let me give you a hypothetical example to explain. Supposing there were clear economic benefits to the UK scrapping sovereignty and becoming the 51st state of the United States, would we all want to do it? I suspect that we would vote “No” and I doubt it would be a close run thing.
Alex Salmond, if he has any sense, should move straight past the currency discussion with a credible alternative to formal currency-union and focus on what is actually important in this debate. I suspect it is the reason he has spent his life campaigning on the subject and it isn’t about economics:
As a Scottish person, would you feel happier if Scotland were part of the United Kingdom or happier if it were not?
We can argue the economic and political details as much as we want. A question such as this goes way past economics and politics and it is essentially the question that will determine the way the Scottish people vote.
I can’t help but add that I hope you decide to stay.
* I say long term because in the short term pros and cons will change. Perhaps today being in the Euro would make people better off. Perhaps in six month’s time dollarisation would be slightly ahead. A currency choice is a long term option though and not something you can just keep switching every few months. Therefore the long term is where you should focus.