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What if David Cameron says No to Scotland using Sterling?

Nov 10

Posted by Jeff in Constitution, Economy | 146 Comments

The raging wrangling around the benefits or otherwise of Scotland becoming independent continues apace, though possibly largely on Twitter and blogs rather than in pubs and coffee shops across the nation. The SNP seemingly has the upper hand with the unionist camp reportedly reduced to trying to set its own referendum that fits with their timescales, a risky ploy that, despite clear merit, may result in a Scottish backlash from the masses.

I do wonder however if David Cameron has an ace up his sleeve that would send the SNP spiralling into disarray, a simple, single line that he just needs to publicly utter that would be game, set and match for the unionists. That line would be as follows: “A United Kingdom of England, Wales and Northern Ireland would not recognise the currency of Scotland if it sought to use Sterling against our express wishes”

What could FM Salmond and the SNP realistically do then? Proceed with saying Scotland will use Sterling even though the political leaders of the Bank of England have said No? Do we really aspire to being the “naughty neighbours” leeching off down south’s pounds and pence? Is it not a bit like divorcing your partner and asking to still borrow their purse or wallet?

We are seeing right now what a basketcase country can do to a shared currency, with Germany and France amongst others looking on aghast as small Greece pulls the Euro down into the mire. It is unlikely to ever happen of course, but why should rUK run the risk of Scotland doing the same to Sterling? Why shouldn’t England, Wales and Northern Ireland want to protect its currency within its own borders during these troubled times? Look at the mess that Ireland got into with banks that were too big to fail but also too big to support; rUK shouldn’t be expected to take a punt on its currency in similar circumstances closer to home.

The problem with the Euro is that the Continent has seen a union of currencies but no fiscal union. So if Scotland wants to loosen its fiscal union with the UK, then so it follows that a loosening of the currency could follow, and David Cameron is well within his rights to argue that it should follow. It’s not petty and it’s not foolhardy of unionists to argue so, despite what some in the SNP would believe, but it does happen to be a good strategy for completely undermining the Nats.

It has been suggested that it is not David Cameron’s decision to make, that Scotland can use the Sterling regardless of what England or Mervyn King or George Osborne says. Well, I don’t think it’ll work that well in reality and I certainly don’t think that the proud people of Scotland would like the idea of being a Western version of Cambodia, a country that uses the US dollar as its de facto currency like some sort of sovereign scoundrel.

The SNP has pegged too much of its credibility on Sterling and changing tack now to suggesting that a Scottish currency is Plan A would see its independence chances done for (assuming that championing the Euro remains political suicide for the next few years).

I personally believe that a Scottish pound would be a great idea, it gives us the opportunity to be nimble enough to have export-led recovery during tough times and import-led booms during the good times, not to mention plenty of cheap holidays.

Why does the world need a new currency one could reasonably ask. Why does the world need a new country one could reasonably counter.

Perhaps there is a way for Salmond to raise the bar, to raise his party’s vision beyond clinging to the currency that we know. Perhaps the FM could deliver a speech searing with soaring rhetoric that pleads for activists and the public alike to dare to be the equals of the Swedens and the Norways, to embrace the idea of a small country with a big currency, powered by a roaring economy. That standing up for ourselves means going the whole way, a truly clean slate upon which to build a better nation in the mould that Scots want. I’d cheer, I’d clap, but I don’t see Salmond gambling that enough Scots would follow his words with their votes. We just don’t like change enough to do it.

So until then, Alex Salmond seems to want the Bank of England and Westminster to dance to his tune for his own party’s convenience, despite wanting to pull Scotland out of the union. It won’t work. It can’t work, and it’s only a matter of time before Cameron, Osborne, Clegg or someone else publicly and decisively calls him on it. It would be a challenge that even the First Minister’s trademark chuckle couldn’t shake off and could quite possibly ruining irrevocably the SNP’s chances of a Yes result.

Don’t believe me? I’ll bet you any number of your British pounds. (I don’t take Euros)

Alex Salmond and the Euro of Doom

Nov 5

Posted by Guest Blog in Economy, Europe, Holyrood | 34 Comments

A guest from Paul Freeman, who’s known to his Twitter fans as @setindarkness, and who also blogs here. Thanks Paul!

A pound, yesterdayIn a recently published interview in Time Magazine, Alex Salmond was asked the question of whether an independent Scotland would keep the Pound:

The sterling, well, it really depends on the financial circumstances of the time. We would tend to stay within the sterling area until such time as it is to our advantage to join the Euro and then we would only do it with the consent of the people.

However, given the entry criteria for the Euro, jumping from the Pound to the Euro would be impossible.

As was noted in James’ recent article about Scotland and the Euro, Any other existing EU members not in the Euro have to join ERM II. You then have to spend two years in ERM II and meet the convergence criteria before you can join the eurozone.

If an independent Scotland kept Sterling, it wouldn’t be possible to join ERM II, given there is zero change of rUK ever joining, or ever wanting to join ERM II.

The logical conclusion is that if Scotland were unable to remain in the EU through existing treaties, it would have to create the Scottish Pound, join ERM II and then apply to join the eurozone, before they could join the EU.

If Scotland were allowed to remain in the EU, it doesn’t seem possible to do what Alex Salmond suggested and jump from the Pound to the Euro at some future time.

There are other options. There is nothing to stop Scotland not joining the EU. It hasn’t seemed to have done our favourite country, Norway, any harm, and it would add to the ‘remarkable similarities’ between the two countries.

You’d have to be pretty insane, but you could just start using the Euro, as Montenegro does. Whilst the European Commission wasn’t happy about it, they didn’t stop them, and now Montenegro is an official candidate to join the EU.

Finally, Scotland could go the whole way and introduce the Scottish Pound. After all, there are already notes being printed and in circulation. They are already foreign currency in most English shops. It could then decide whether to join the EU/Euro via a radical democratic device called a referendum.

All this highlights the increasing need to resolve the matter of EU membership. In my opinion, the EU wouldn’t want Scotland to leave, and Scotland’s use of Sterling would give the EU leaders a nice Swedish style opt-out, allowing EU membership without the Euro. Leaving everyone except the Unionists happy. But, the SNP shouldn’t leave this dangling before the referendum as uncertainty will not make persuading people to vote Yes easier.

Nor should Alex Salmond say Scotland will join the Euro straight from the pound unless he can show how it’s possible.

Council Tax Freeze: a bung to Westminster and to the rich

Nov 2

Posted by Guest Blog in Economy, Holyrood, Westminster | 69 Comments

A very welcome guest post here from Steve, who’s a lefty with a particular interest in how we tackle poverty in Scotland. You can tweet him at @3pSteve. He occasionally blogs at taxingscotland.wordpress.com.

Imagine you’re a minister working for the Scottish Government, and Alex Salmond says, here’s £700million to dish out to people living in Scotland. You decide how it’ll be done, who gets what, come up with a plan and get back to me.

What would you do? Maybe you’d decide to give every individual the same amount, give all 5 million of us £140 each? Maybe you’d give them a token to spend on food so they couldn’t waste it on booze and cigarettes? Maybe you’d give it all to children, or to disabled people, or to the poorest members of society. It depends on you and your own personal politics of course but let me ask you the following:

Would you start by giving over £100 million of it to the UK Government?
Would you give more to the richest 10% of people in our society than to the poorest 30%?
Would you give almost twice as much to the richest 50% in Scotland as you gave to the poorest 50%?

I ask because that’s exactly what the council tax freeze does.

We’re in year 4 of the freeze, and by the end of this year the freeze will have cost £700 million. The UK Government benefits to the tune of £112 million.

People in Scotland get the remaining £588 million shared out between them, and the rich get a lot more than the poor. To date the Scottish Government has not published an income decile analysis of the impact of the council tax freeze but John Swinney has stated a number of times that relative to income the freeze benefits the poor more than the richest.

I wanted to examine that in more detail, so I asked Margo MacDonald MSP if she could ask the Government for an income decile analysis of the freeze. I’d just like to say thank you to Margo MacDonald, and to Mary who works in her office. The Government obliged and sent the following table (SG info on CT freeze):

Income Decile

Bottom 10%

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

Top 10%
Saving as % of net household income

0.8%

0.5%

0.5%

0.5%

0.5%

0.5%

0.5%

0.4%

0.4%

0.3%

This shows the council tax freeze to be progressive. On average, as a proportion of household income the poorest get a greater benefit from the freeze than the richest. But in cash terms the story looks a little different. Take a look at the following table, created by combining the data provided to Margo MacDonald with official Government data on income deciles:

Income Decile

Bottom 10%

Decile 2

Decile 3

Decile 4

Decile 5

Decile 6

Decile 7

Decile 8

Decile 9

Top 10%
Av. cash benefit of 4-yr freeze

£141.44

£150.15

£182.00

£214.50

£246.35

£284.70

£330.85

£309.40

£382.72

£507.00
Cost of freeze (£m)

30.3

32.1

38.9

45.9

52.7

60.9

70.8

66.2

81.9

108.4

What this shows you is the average cash benefit of the council tax freeze for households in each income decile, and the amount it has cost to hand out those sums.

For example, households in the bottom 10% get £141.44 on average, while the top 10% get £507 on average, three and a half times as much. The higher the income bracket, the more the council tax freeze costs, targeting resources at the richest in society, at the relative expense of the poorest.

Finally, what about my claim that the freeze benefits the UK Government to the tune of £112 million? Well the freeze works by protecting the council tax payer from potential increases. Scottish Government figures show that the UK Government pays 16% of all the council tax in Scotland through the council tax benefit scheme, and so they benefit from the freeze too. Sixteen percent of the £700 million goes to the UK Government, which is £112 million.

Look again at the table above. The council tax freeze saves the UK Government more than the bottom 30% of households in Scotland combined. That’s the poorest 700,000 households in Scotland receiving less from the freeze than the UK Treasury. Does that make any sense?

The longer the freeze goes on, the more expensive it becomes. I think it’s time to ask if there isn’t a better way to give households in Scotland a financial break.

As I asked at the start, what would you do?

Papandreou pulls a masterstroke

Nov 1

Posted by James in Economy, Europe | 25 Comments

Until yesterday, George Papandreou cut a weak and desperate figure as Greece’s Prime Minister. It’s arguable how much influence he felt he had over the terms of the “bailout” and associated austerity measures, and back in June he was so unhappy with his situation that he privately offered to step down in favour of a grand coalition.

Listening to the sleek-suited representatives of the IMF and the ECB, it must have felt like Hobson’s choice. Undermine not just the Greek economy but also Europe’s with a default on one hand, or aggravate inequality and hand over control of the Greek economy to the agents of the markets.

Either way, unpopularity looms and the problems grow. But as so often, if you don’t like any of the answers, ask a different question. Or in this case, ask different people the same question: the electorate.

It’s genius, at least potentially. What’s promised is not a messy general election about confidence and personality in amongst these issues, it’s a referendum that will give a clear answer.

There are plenty of reasons for Greeks to say no. Neither option is without pain, of course, and no option could be painless given their predicament. But a No vote rejects the iniquitous voluntary 50% writedown of debt which the hedge funds are rubbing their hands over, as discussed before. It rejects a austerity programme which doesn’t just end some of the ridiculous Greek state inefficiencies but sells off the family silver and slashes the social safety net.

It surely also means Greece gets out of the gilded trap that is the Euro. They did well from it when the books could be cooked and the European Regional Development Fund kept throwing money at their infrastructure, but there can be few who now look into the retrospectoscope and still believe the single currency was in Greece’s long term best interests. The same probably applies to Italy and others – in fact, the economic arguments for diverse economies using a single exchange rate have never seemed convincing – but letting Greece burn won’t let Italy off the hook.

The proper default that would follow would also in part be a liberation rather than the Götterdammerung the market analysts and other siren voices warn about.  It largely worked for Argentina, for instance. A no vote would also be the first substantial stake through the heart of the bailout/injection/recapitalisation myth, as lovingly excoriated by Matt Taibbi *. This initiative might mean the Masters of Risk start to bear their own losses, not palm them off onto taxpayers. It’d be a push-back against the moral hazard the markets have fallen into, a problem both socialists and free-marketeers should be concerned about. (Incidentally, wouldn’t it be great every time a financial analyst appeared on the TV news they had to declare where their interests lay in relation to the story they’re discussing?)

Alternatively, from Papandreou’s point of view, if he gets a yes, at least he has clear support for this ill-advised programme, and both PASOK and the Euro will survive, for now. He was backed deep into a corner and now, either way, with a single bound he’s free. Whatever the result, there will be a substantial price to pay for all the unsustainable borrowing, including a higher rate to pay for future loans no matter how the vote goes, but the Greek people will have democratically chosen their own course. No wonder the chair of the Greek Chamber of Commerce was whining on the radio this morning. This vote means there is a route out, and while he may have felt unable to reject the terms, it’ll be politically impossible for the vultures to ignore the will of the Greek people.

In response to the call of a referendum the markets dived. Of course they did. Banks, hedgies, all those with massive exposure to the CDS markets and relevant derivatives, all of them were expecting another skip-load of taxpayers’ money to be transferred directly to their bottom lines, but now they have been forced to care about the reported 60% popular opposition to the deal. Those companies are worth less this morning because traders realise they may have to cover their own losses. What a radical thought. Bravo sydrofe.

* I will make you read that article if it’s the last thing I do.

Occupy the European bailout

Oct 26

Posted by James in Economy, Europe, Governance | 8 Comments

IndignadosToday sees yet another round of hand-wringing across the Eurozone, driven by another round of hand-rubbing by the markets. When will it end?

We’re told that all it takes is a decisive move, that sufficient taxpayers’ money can be thrown at bank balance sheets to stop all this instability. It’s clearly nonsense. As Matt Taibbi pointed out yesterday in gorgeous detail, these bailouts are an endless series of ways to break the rules in favour of the rich elite, and it’s no wonder the peasants are revolting. Europe’s bureaucratic bailout merry-go-round is basically the same scam, just in more languages.

If the moral hazard is withdrawn and the value of your investment is never allowed to go down, and the traders and hedgies get offered a bet to nothing backed up by public money, they’ll just stop asking for more and threatening whoever’s next in line? Really? If the banks get offered a voluntary “haircut” only on their government debts, but the hedge funds can buy those debts and extract the full value, they won’t get together and make that deal? Really?

We know that austerity isn’t the solution to government debt. Greece’s economy fell 7.3% over the year – it’s not a technical recession, it’s a collapse. The previous link to the BBC shows what the vulture funds and multinationals are making from it too: woohoo! Cheap property in Kolonaki! Can I buy the lottery? Even the New York Times knows better than our current UK administration: “Mr. Cameron’s austerity program is the Tea Party’s dream come true“, and “unlike Greece, which has been forced into induced recession by misguided European Union creditors, Britain has inflicted this harmful quack cure on itself.”

Can political union save the economic union? Those of us who never believed a single currency could work across an economically diverse continent doubt that too. It’s just an even grander elite project to replace a failed elite project. The larger a state, the harder it is to change things. This is one of the reasons I favour independence: we need a radically reformed system of governance, and that seems almost impossible even at a UK level. Assuming political union could be delivered, the democratic deficit would feel even stronger to European citizens across the continent. The wrangle and tension that would come from making all taxation and spending decisions centrally, never mind all the social policy differences, make this pure fantasy.

Personally I agree with Frances Coppola on Liberal Conspiracy yesterday – the Euro is finished. Why any responsible First Minister would tell us so confidently that joining it is part of Scotland’s manifest destiny I have no idea. But before that there’s a choice of bailouts in front of the Eurozone leaders. The first option is to bail out the banks again, become the lender of last resort, and to prop up and vindicate all the traders who thought there’s money to be made here without risk. The second option is to go beyond the current guarantees and underwrite every deposit made by every individual and business in those banks, and tell the banks they’re on their own. A big society bailout, if you like, a bailout for the people who’ve suffered through these economic hard times, not yet another one for the people who made the mess in the first place. It’s not enough, but it would be a start.

If they go the right way, they will have redeemed themselves as Götterdämmerung for the dream of a United States of Europe approaches. If not, it’ll be time for the indignados and occupiers to take it to the next level, to turf a whole generation of corrupt politicians who put banks before people out and start again.