Counting Red Herrings

“What is your Plan B?” was the cry. “What is your Plan B?”

Alistair Darling was most insistent that without knowing the second preferred currency choice of Alex Salmond then the whole package offered by the pro-independence Yes campaign was worthless. What a revelation! Scotland was left slack-jawed and still hasn’t got over it more than two weeks later.

What are we to make of this lack of planning? What are we to assume about the implied dereliction of duty by the Scottish Government and specifically by that éminence gris of Better Together, the First Minister.

I am going to make a statement that will have the No campaign howling with derision but is a truism for all its apparent contention.

“It doesn’t matter what currency Scotland uses after independence.” Have you got that? Are you suitably taken aback? I’ll say it again just so that you can be sure that you read this correctly, “It doesn’t matter what currency Scotland uses after independence.”

OK, I will admit that this is a rather glib statement if taken in splendid isolation but that is how Better Together love to operate – take one single strand of a policy, strip it bare and use that as incontrovertible proof that the whole independence argument is a house of cards set to topple in on itself. So I have taken this simple statement and thrown it down as a means of capturing some attention. But more on that later.

Now, let’s just consider all the evidence. “What is your Plan B?” was the question posed by Alistair Darling to Alex Salmond. In the White Paper Scotland’s Future if we refer to pages 109-117 we will quite clearly see that the options are laid out with the preferred choice being a currency union. There are also Plans B, C and D offered but for the sake of Darling I will list all the options:

1.     Currency union,

2.     Sterlingisation,

3.     Scottish currency,

4.     Euro.

Other than currency union, which we all know the story of, the option that has been given the most mileage in the media is sterlingisation which is the unilateral adoption of sterling without a currency union. Better Together scorns this because it would put Scotland in the same boat as various “banana republics” such as Panama, Ecuador and El Salvador – all countries that unilaterally use the US dollar as their currency. I believe that Better Together is missing a trick here – they could have added Zimbabwe to the list! Cue all kinds of comparisons between Alex Salmond and Robert Mugabe! But I digress.

One thing which Better Together fails to point out is that there are further unilateral uses of other currencies out there in the wider world – it’s a common occurrence in fact. Would you believe me if I told you that the country with the highest GDP per capita does not use its own currency and unilaterally uses a major world currency? It’s completely true. That country is Monaco and it uses the euro. But that doesn’t suit the Better Together narrative, as Monaco is a country which permits low taxation and massive wealth to exist side by side.

The option of a new Scottish currency is remarkably underplayed to my estimation. This can be a virtual equivalent of sterlingisation under some circumstances. The first question would be “pegged or floating?” The logical way to go would be to peg the new currency and probably against sterling at an exchange rate of 1:1. A Scottish Central Bank (SCB) would need to ensure that it had the money supply covered in Bank of England tender which would now take on the role of foreign exchange reserves. The currency is covered, press the button, go. But this is another banana republic option isn’t it?

Or is it. Let’s see have a look around the world and see which Mickey Mouse currencies are pegged to a fixed exchange rate. The Bhutanese ngultrum is pegged to the Indian rupee. The Brunei dollar is pegged to the Singapore dollar. The Swazi lilangeni is pegged to the South African rand. The Danish krone is pegged to the euro. Whoa! Hold it right there. That’s not a banana republic by any stretch of the imagination. No, the Danish Krone is pegged to the euro through the ERM II process. So it seems that there is least one respected currency out there which is pegged.

Did you know that the Hong Kong dollar is one of the top ten most traded currencies on foreign exchange markets? It is, but the Hong Kong dollar is fixed to the US dollar by a currency peg and has been since 1983. Who would have believed that?

The other way to go with a Scottish currency would be to have it floating on exchange markets. This can be achieved in various ways. The currency can be allowed to float without restriction or there could be a pegging mechanism where the currency is permitted to vary by a percentage against a baseline currency or against a so-called basket of currencies within a fixed band up or down. Then it is the responsibility of the SCB to apply the state’s monetary policy to control the variance in the exchange rate.

The euro option is the least likely for now. To join the Eurozone a country must first sign up to ERM II and then demonstrate the ability to manage their own currency within the constraints of that agreement for at least two years. Then euro membership can be negotiated. This would necessitate the previously mentioned Scottish currency operating within a fixed exchange band with the euro. Only after completion of this process would Scotland be accepted as a full euro member.

The final option would be unilateral adoption of the euro in the same manner as sterlingisation.

“What is your Plan B?” That is the biggest red herring in Scottish political history. It’s all there to be read and understood.

The actuality now is that we have drilled into Plans A, B, C and D and come up with A, B, C, D, E and F. But that’s splitting hairs. The reality is that beyond Plan A there is an entire array of logical and workable options that the Scottish Government could choose to adopt following a Yes vote on September 18. The choices are there to be seen and to be made.

Possibly the grandest deceit being practiced by Better Together vis-à-vis the currency arguments is the mantra that if you are officially linked to another currency by union or by unilateral use then it is impossible to exercise the levers of the economy required to create any differentiation from the other, larger part of the relationship. 

For Alistair Darling to use this mantra and to promote it widely is to be knowingly malicious. As a former Chancellor of the Exchequer he knows all about monetary policy – the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. He will also know not to confuse that with fiscal policy – the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. Alistair Darling happily conflates the two different areas of policy into one lump when he knows very well that linked currencies would certainly have to aspire to the same monetary goals but fiscal policy could vary wildly.

There are plenty of ready examples easily at hand to demonstrate this to be the case. The Eurozone sees 18 countries – 19 when Lithuania joins in January 2015 – pool their monetary policy through the ECB but conduct very different fiscal policy aims. Rates of personal income tax, corporate tax, value added tax, capital gains tax, … they vary from country to country as each member positions itself to take best fiscal advantage of its economic conditions. Why would this be any different for an independent Scotland in currency union with the rUK?

Quite simply it wouldn’t be any different. Monetary policy would, to a greater degree, be set by the Bank of England but responsibility for fiscal policy would sit with Holyrood. If Scotland chooses to be business friendly and cut corporate tax then so be it. If we choose to slash, or even abolish, Air Passenger Duty then it will be done. If the Scottish Government decides that Inheritance Tax is an anachronism and should be scrapped then that’s how it shall be.

But the continued and oft repeated weasel words of Alistair Darling and Better Together are being given an unquestioned and unquestioning stage by the media in Scotland and in the rest of the UK.

The preferred option since the publication of the White Paper has been a currency union with the rUK. This has been and remains the official position despite all forms of political intervention from the three main Unionist parties. Make no mistake though, this is political intervention. As Nobel laureate Professor Joseph Stiglitz pointed out on August 20^th, Westminster’s position is purely political posturing for the purposes of affecting the outcome of the referendum. As he further concludes on Scotland, “Once they get independence, if that happens, then I think there would be a very different position.” Professor Stiglitz has forgotten more about economics in his 71 years than George Osborne will ever know and yet it’s Osborne who thinks he has the whip hand in fiscal matters.

There have been rumblings that if currency union is not permitted by Westminster then Scotland could abdicate responsibility for the share of debt accumulated by the UK government on Scotland’s behalf. Quite frankly this is probably as legitimate a bargaining position for the Scottish Government as is Westminster’s of denying a union. It is quite traditional for parties to a round of negotiations to come to the table with rather a radical starting position. Then a compromise must be sought. The matter of what equates to an asset of the UK is up for dispute as the Scottish Government’s viewpoint is that sterling is indeed an asset whilst Westminster sees it only as a functioning part of what is now and what will remain in the future as the UK.

The two sides are well apart but matters such as UK national debt nudging £1.3 trillion and increasing by £1 billion per week is a key issue for all concerned. For the sake of round numbers Scotland is indebted through Westminster’s benevolent hand to the tune of approximately £118 billion with that figure going up by around £93 million every week. Just for your information, the Treasury in London keeps telling us that the UK is in recovery but somehow it still manages to add £100,000 to national debt every minute of every day. If that’s regarded as success I would hate to see the Chancellor’s definition of failure. But this simply demonstrates that there are two sides to every story although the Scottish media tends to keep quiet on one of those sides.

Could Scotland walk away completely from the national debt? The answer is undoubtedly yes. That’s an undesirable endgame but it’s a potential outcome. Westminster would simply not be permitted to swallow that outcome though so a compromise would be forthcoming. The most likely compromise would be currency union. Professor Stiglitz knows how the world works but then so does Alistair Darling. He knows full well that there must be give and take. But he will never admit that and wraps up his Better Together rhetoric in a cloak of certainties which is as convincing as the Emperor’s New Clothes!

If the Scottish Government did walk away from the negotiating table and wash it’s hands of the national debt then the potential to start a new country from scratch but debt-free might be seen by many as an optimal position. Plan A would be out the window but B, C, D and the rest would be in focus.

So I would therefore modify my opening statement:

“It doesn’t matter what currency Scotland uses after independence for the moment.”

What’s the difference now? The difference is that we are not in a position to judge the best potentialities until we have the full range of true postures established. Will the Unionists insist on political dogma over economic prudence? If that is the case for the rUK then every man for himself and the devil take the hindmost! We will only know the best currency scenario when all the cards have been played. An independent Scotland could easily manage to thrive with any of the currency scenarios. Sound fiscal policy (and if necessary monetary policy as well) will see the economy through to the desired end. Be sure of one thing, the White Paper was not penned by one man in a stream of consciousness. No, instead it was put together after a vast amount of consultations with experts in every field – Professor Stiglitz was one of many – and when those contributions were completed the whole exercise was costed.

Scotland’s Future most certainly can be seen as a huge and all-encompassing exercise in joined-up political and economic thinking, the likes of which have scarcely if ever been seen in the modern political arena. The risks and the potentialities have been, to the largest imaginable part, taken into account. The sums do add up and do you know what? It doesn’t matter what currency we use as all the outcomes can be favourable.

But Alistair Darling does not want us to be counting on what is established in the White Paper; he wants us to be counting red herrings.

Hey Alistair, what’s your Plan B if the rUK has to service £1.3 trillion of debt all by itself? Hey Alistair, what’s your Plan B for basing your Trident submarines with their WMD’s? These are not red herrings, these are substantial and critical questions for Westminster that they cannot afford to have to find answers for.

Currency Plan B? Relax, it’s not important.