As an economist, I basically believe that politicians are a necessary evil. While technocrats are best left to sort out the details of things like economic policy, the clear link between a democratic mandate and the broad thrust of that policy is obviously important. Most of the time, this means that politicians end up being a mild annoyance, or occasionally a significant hindrance to resolving issues such as the European debt crisis. But, every now and then, they also really make me laugh.
One particular case in point here is an interview by John Swinney, Scotland’s Finance Minister, with the BBC (you can find the clip here: http://www.bbc.co.uk/news/uk-politics-16530358). To be clear, I have got absolutely nothing against Scotland seeking its own independence, or not, depending on what the Scots vote for in a referendum. I also have no particular views about the timing of that referendum (although, as one wag pointed out to me in the past week, it is noteworthy that the English won’t get a referendum at the same time to see whether we want to hold on to Scotland). Instead, I am simply astonished by the level of ignorance on display.
Early on in the interview, Swinney states that the SNP would ‘only ever go into a single currency’ if the economic conditions were correct, and if the Scots voted for it in a referendum. This sounds broadly sensible. But, just before this, Swinney also states that Scotland would ‘inherit the pound’. The interviewer is bright enough to pick up on this contradiction, even though the questions get then a bit muddled.
If Scotland is independent, then regardless of whether it picks either the euro or sterling, it is effectively in a single currency. There is one major difference between these two options: having some power over decisions, or not.Â As a member of the euro, Scotland would have some voting rights at the ECB, with a seat alongside Andrew Lipstok from Estonia on the Governing Council. As a country using the pound, it would have no seat on the MPC. This highlights the key difference between the two options: whether Scotland genuinely is a member of a currency union, or whether it has an implicit or explicit ‘peg’ to the pound (by effectively using it).
There is nothing particularly untoward about picking option two: Denmark pegs its currency to the euro, and various Asian economies worry a lot about controlling their exchange rates via-a-vis the US dollar. But the ECB does not set monetary policy taking Denmark into account – and neither does the Fed set policy according to what it best for Asia. Fundamentally, the MPC would set interest rates according to what was required for England, Wales and Northern Ireland (EWNI), and Scotland would have to lump it. The idea that the MPC would raise rates because Scotland had inflation, but the remaining union members did not, is laughable. And, as one of the first practical lessons of monetary economics is that you cannot peg your exchange rate and control domestic inflation, on this front the Scots would be at the mercy of conditions elsewhere.
This feeds into other policy options. Would the BoE really buy up Scottish Government debt if it had to resort to quantitative easing again? (Would it even hold onto those gilts that the Scots ‘took over’ in the event of independence?). No – it would buy new ENWI bonds, and the Scots would have to fend for themselves in bond markets at the same time as not having any monetary policy. Which, of course, leads in turn to the point that financial markets may not smile favourably on a small European nation with a debt-GDP ratio of 80% (assuming debt is split proportionally), an average non-employment rate of 30% from 1992-2007, and no monetary backstop. The Scottish Government would have to pay higher interest rates than the EWNI one. The end result is that the SNP would have far less control over economic policy than it hopes – it’s just that the market would dictate terms, rather than Westminster.
All of this is before we get into oil revenues or the thorny issue of RBS, which at its peak had a balance sheet of Â£2.5 trillion – about 2500% of Scottish GDP. Alex Salmond’s message on Channel 4 seemed to be that the SNP would keep the oil revenues, while Westminster could keep RBS – hardly a fair or realistic approach, especially as Salmond endorsed RBS’s takeover of ABN Amro.
To some extent, however, these last points are bargaining issues, rather than fundamental economics. My main concern is that the governing SNP clearly does not have a clue about the basic economic implications of independence, let alone the full impact. I’m not even sure they understand how monetary policy, fiscal policy and financial markets work and interact. Delaying the referendum for just a few more years, at least until they can learn a bit of economics, might be no bad thing at all.