The road towards the
Scottish referendum has been pitted, bumpy and full of twists and turns.
Along the way the
arguments have been muddied by political obfuscation and some amateurish
propaganda against a ‘Yes’ vote by sections of the business community.
Can it really be the
case that from Friday morning the Scots household will have to pay more for
their porridge, eggs and milk?
Food for thought: Can it really be the case that from
Friday morning the Scots household will have to pay more for their
porridge?
Yet it would only be
foolish to pretend that if a country of 5m people and 8 per cent of the nation’s
GDP broke away from the union, it would not be profoundly disruptive.
Breaking up, as the
countries of the former Soviet Union and Yugoslavia found, is extraordinarily
difficult. Fortunately – despite the poisonous atmosphere of some of the
campaigning and the foolishness of the Government in not giving the Scots a
third option of greater devolution – a divorce may change UK politics for ever,
but it will not result in the violence that has occurred in less mature
democracies.
Such conflict that
will take place will be on the financial markets.
Predictions that
sterling could be staring into the abyss are almost certainly over the top, but
we should not underestimate the profound immediate consequences for the Scottish
financial system, its economy and ultimately output and living standards in the
newly independent country.
All kinds of currency
scenarios for the new Scotland have been mentioned. They include keeping the
pound (if Westminster will allow it), or opting for an independent free-floating
currency that will eventually seek to become part of the eurozone. That would
effectively mean dancing to the tune of the Bundesbank and the German
Constitutional Court rather than the Bank of England.
These are all
possible but none offer stable scenarios. In the event that the pound is
maintained it would mean Scotland keeping to monetary and fiscal targets set by
the existing state’s monetary and fiscal policy.It might be possible
to have a different fiscal envelope – higher taxes and higher spending – which
is parallel to that of the rest of the UK, but it will be a distance from the
low-tax model Alex Salmond embraces.
Keeping the Scottish
pound in line with sterling would require some kind of currency board to enforce
the monetary discipline (including, perhaps, higher interest rates).
But the risk would be
of an Argentine-style forced devaluation and abrogation of debt when pressures
on the domestic economy became too great.
One of the
difficulties is that the Scottish financial system only functions because of the
Bank of England and UK taxpayer subsidy.
That includes £350bn
of quantitative easing, super-low interest rates and the equity holdings of the
Government in Royal Bank of Scotland and Bank of Scotland (part of Lloyds). Both
banks have plans to head south, along with Standard Life. Some of the deposits,
despite the current consumer protection of the Financial Services Compensation
Scheme, already have fled the country.
Moreover, Edinburgh
might cast an eye over Greece, where youth unemployment is 53 per cent, or Spain
where it is 50.5 per cent. It is not exactly the dream scenario.
This is not to say
Scotland could not be a viable state. Such oil revenues as they are, around 90
per cent depending on where you draw the lines, will come their way.
And the Scottish
economy is by no means a basket case. Outside of Greater London it is one of
the UK’s strongest regions. GDP per capita is close to the national average.
That, of course, is
before the Edinburgh financial community, one of the strongest in the UK outside
of the City, migrates to the Square Mile and Canary Wharf.
The biggest threat of
all in such circumstances is uncertainty.
Uncertainty about the
safety of the banking system, uncertainty about the currency, about the fiscal
settlement and about almost every aspect of Scottish life from the trade
preferences for Scotch whisky, to the disposal of nuclear waste and whether the
national or euro lotteries could extend to the new state.
That could be a
torrent by Friday lunchtime, requiring the Bank of England to resort to its
lender of last resort powers for the first time since the autumn of 2008, when
it covertly lent RBS and HBOS £61.6bn to prevent the ATMs freezing up. As for
the euro route, it is out of the question now, and maybe for ever if Spain,
Belgium and France, all with their own secessionist tendencies, have their way.
These are all known
unknowns and the kind of things markets detest. The pound has already been under
pressure, partly the result of Russian oligarchs (fearing an asset freeze)
moving their billions to Dubai.
Other investors,
overseas and domestic, can be expected to do the same in the case of a ‘No’
vote. Heavy selling pressure will see sterling forced lower and bond yields
surging. In Scotland itself the lack of credit and a credible currency and
fiscal system will lead to a recession every bit as deep as that of 2009, if not
more cataclysmic, and surging unemployment and falling wages.
Independence may come
but it may be decades before the Utopian dream of Nordic prosperity is, if ever,
achieved.
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