William Bain lays out the evidence against a financially viable independent Scotland
Economic storm-clouds are gathering across the EU, and the impact of the downturn is being felt deeply in Scotland, with female unemployment up 25 per cent in the last quarter, amid soaring levels of child poverty, and weakening demand.
With the impact of the majority of the spending and living standards squeeze still to be felt from this April onwards, it has also become clear that there are worse times ahead than most had hoped for.
With the failure of the government on jobs and growth, if Labour forms a government after the next general election in 2015, it is likely to inherit a significant deficit and still-weak public finances. Times are tough and the UK and Scottish governments’ reckless plans are continuing to choke off prospects for recovery and depress demand.
Scottish Labour would do things differently and is pressing the UK government to begin prioritising a plan for jobs, growth and long-term investment.
The Resolution Foundation published further evidence this week that even on highly optimistic Office for Budget Responsibility forecasts of a return to the previous trend-rate growth of 2.5 per cent per year by 2015, the inequality gap between rich and poor will have widened, and that real household incomes for low and middle earner households could still be eight per cent below their 2007 peak levels by 2020 if there is near-stagnant growth instead.
The Child Poverty Action Group is predicting a record rise in child poverty levels of 800,000 by 2020 without a change in economic course now. Evidence is mounting, from the IMF to the chairman of the White House Council of Economic Advisers, that economies with higher levels of equality experience higher growth.
A particular urgency has been added to this debate by the International Labor Organisation’s prediction last October of a global youth unemployment crisis if action is not taken by governments now on jobs.
An important step in the right direction entails taxing bank bonuses to get up to 10,000 young people in Scotland into work, and temporarily cut VAT to boost the economy and help squeezed households and businesses.
Instead of putting people out of work and borrowing £158 billion more over the parliament as a consequence, the UK government ought to heed economic sense, change course and put jobs first.
On an EU-level, the ratings agency Standard and Poor’s said recently that austerity on its own had been entirely self-defeating in the last year.
Added to this, the IMF in its world economic outlook report is likely to forecast that the Eurozone economy will contract by 0.5 per cent this year, some 1.6 per cent lower than in its September forecast, and the IMF, together with the World Bank, World Trade Organisation and eight other organisations, ahead of the World Economic Forum in Davos this week, are calling on governments to adopt policies better suited to the creation of jobs and economic growth.
IMF managing director Christine Lagarde has reiterated that for some countries, a slower rate of fiscal consolidation should be considered.
The rules for the stability pact being negotiated by the Eurozone governments require deficits no higher than three per cent, national debt never exceeding 60 per cent of GDP, and the structural deficit only exceeding 0.5 per cent of GDP in exceptional circumstances where a severe downturn is being experienced.
Currently, 14 out of 17 Eurozone states would fail the rules on the deficit, 13 out of the 17 on debt, and would face fines from the European Commission if they sought to provide capacity for their economies to grow by easing fiscal policy.
In the context of the current debate on whether Scotland should become a separate state, and leave the UK financial system this is a crucial point.
If Scotland separated from the rest of the UK and wanted to re-join the EU, the EU treaties are clear – even if the SNP are not – on what our currency would be expected to be in the medium-term. Only the UK and Denmark have an opt-out from the Euro by law, and only Sweden has had the option on whether to join the exchange rate mechanism or not.
So leaving the UK would mean a separate Scotland loses that opt-out and would have to commit itself in its application for re-accession to eventual Eurozone membership, just as Croatia has done in its recent accession treaty prior to joining the EU next year. For the SNP, the inconvenient truth is Scotland’s membership of the UK gives us the best of both worlds in Europe: we are in the EU, but not in the Euro.
Preparing the economy for Euro membership would see Scotland have to make deeper spending cuts in line with the Maastricht convergence criteria, at a time when the rate of youth unemployment is nearing one in four in Scotland, up 123 per cent in the last year.
It’s a price Scotland’s young people shouldn’t be expected to pay.
The Maastricht criteria require a candidate country’s deficit to not exceed three per cent and its total debt to not exceed 60 per cent of GDP barring an exceptional crisis, inflation to be no higher than 1.5 per cent above the best three performing EU member states, long-term interest rates no higher than two per cent above the average in the three best performing EU states on inflation, and membership of the exchange rate mechanism for two years prior to admission to the Euro, without any devaluation of its currency.
With UK debt heading towards a peak of 78 per cent during this parliament according to the Office for Budget Responsibility, and the deficit forecast to meet the Maastricht rule only in 2016 on the optimistic forecasts of growth returning to levels of 2.7 per cent in 2014 and three per cent in 2015, it is unlikely that a separate Scotland taking on its share of debt could meet these fiscal rules without further cuts in public expenditure at a time when economic recovery will not be secure.
Even in the period before joining the Euro, continuing to use sterling as a currency creates real risks. There are only two ways to do so – either through a formal currency and monetary union with the UK, or through a sterlingisation mechanism.
If Scotland broke away, the UK could not be forced into a currency or monetary union. It would be a decision of two separate states.
Even the SNP concede that a separate Scotland would have to give up economic sovereignty to the Bank of England, complying with extremely tough fiscal rules imposed by treaty without accountability to the Scottish parliament.
One of the lessons of the current Eurozone crisis is that a currency and monetary union without proper co-ordination of policy on taxes and expenditure can inhibit the creation of jobs and growth. But what price for a currency union would be required by the financial markets?
There is every prospect that even fiercer austerity measures would be sought, to demonstrate the smaller part of any currency union’s commitment to fiscal rigour given the unlikely prospect of fiscal transfers from the larger unit of the currency union to the smaller unit, at a huge cost to a much-needed improvement in levels of jobs and growth north of the border.
The SNP are now in the incredible position of seeking to use a currency over which Scotland would have just given up all political, monetary and fiscal control. The SNP must explain urgently how breaking up the UK financial system, only to form new fiscal and political institutions necessary under monetary union is in the interests of businesses or workers here.
The simple truth is that it isn’t.
Were the UK to decline to form a currency and monetary union with a separate Scotland, the SNP’s only option would be a sterlingisation mechanism, where the Bank of England would set interest rates in the interests of England, Wales and Northern Ireland only and, crucially, any Scottish Central Bank would not be the lender of last resort nor the issuer of currency.
Important studies from the IMF show that such a policy puts the financial system under severe stress, leaving it open to the possibility of a systemic shock should investors from across the border wish to relocate their assets.
The largest countries which use a version of this mechanism to use the US dollar are Panama, Ecuador, and El Salvador. Oil-producing Ecuador needed to establish a stabilization fund to reassure investors. Panama has no central bank.
Banks would be required to adopt higher capital buffers to provide necessary liquidity to reassure investors. The IMF also says that deregulation of labour markets is required to reassure the markets in states using this currency mechanism.
The SNP must now come clean as to the effects sterlingisation would have – in order to provide liquidity support, higher capital buffers for banks based in Scotland than under the Vickers proposals being adopted in the UK by 2019 at the latest, with the result being fewer assets available to lend to businesses to kick-start growth in Scotland.
The final report of the Vickers Commission found that the total level of support provided by the UK to its banking sector, including the two major Scottish-based banks, was £1.2 trillion.
This would not be available to a separate Scottish state, where bank liabilities could exceed 800 per cent of GDP. That is the life now facing Iceland and Ireland, the not-so-quickly forgotten arc of prosperity which, in the face of financial pressure, was unable to stand effectively.
Those who say this argument is talking Scotland down miss the point and do a disservice to the national debate. This is a real and tangible example of why it is in Scotland’s interests to share risks and resources across the UK.
Business in Scotland knows how severe the effects the last restriction on credit was for Scotland’s economy – the last thing the Scottish economy needs now are proposals which fail to secure financial stability which is the bedrock for securing jobs and growth in any country.
The SNP’s search for an economic paradigm is legendary – the Asian tiger economies of the Far East, New Zealand, the arc of prosperity, the Scandinavian model – every few months brings a new model of how they want the Scottish economy to look. But nowhere do they explain what the problem is to which separation is the answer.
They must now explain how, in the absence of plans for a currency union with the UK, sterlingisation on the Central American model could create a stable framework for a separate state with massive bank liabilities on its national accounts from RBS.
The mess the SNP are in over finances and the currency shows Scotland would better realise the economic potential of its natural resources, and the skills of its people within the United Kingdom, rather than risk businesses, jobs and growth under ill-conceived economic plans for separation.
Scotland’s economic destiny is at the core of the national debate which we will have until it is settled in a clear, decisive referendum.
• Questions multiply over financial status of an independent Scotland – Alex Hern, January 20th 2012
• Win or lose, Scottish independence referendum heralds a revolution in UK politics – Ed Jacobs, January 16th 2012
• The Week Outside Westminster – Sending Osborne to save the Union – Ed Jacobs, January 14th 2012
• Devo-max isn’t a solution, it’s a whole new can of worms – Matt Gwilliam, January 11th 2012
• SNP: Cam’s “economic uncertainty” argument is nonsense; we’ll stick to our timetable –Humza Yousaf MSP, January 9th 2012