September 16th, 2014 (last line edited September 17th, 2014)
The only positive message to be taken from Martin Wolf’s article, published in last Saturday’s Weelend FT, (“What happens after a yes vote will shock the Scots“) is that many English people do feel hurt at the prospect of Scotland becoming an independent country. In Wolf’s words, they ‘resent’ being ‘repudiated’. It is therefore incumbent on everyone on the “Yes” side to make clear to our English colleagues and friends that our desire for independence is in no way based on a repudiation of England, but rather a wish to take control of our own affairs.
It is perhaps because Wolf has not grasped this, and he himself feels personally hurt – although his Scottish wife should be able to reassure him – that in his article he has allowed common sense to desert him and has instead resorted to the use of uncharacteristically extravagant language.
Phrases like “the nightmare could begin”, “years of uncertainty”, and “complex, bitter and prolonged” negotiations are unworthy of him. An exhortation to Scots to move their money south, coming from a respected commentator, is the height of irresponsibility, to put it mildly.
According to Mr Wolf, “the biggest doubts are those hanging over the currency”. Yet he goes on to state terms for a formal currency union that would be acceptable to the remaining UK. These look to me to be quite acceptable to Scotland as well. So where is the currency problem? The only substantive difficulty I can envisage on the rUK side with negotiating a currency union would be over the cost of bailing out the large “Scottish” banks like RBS and HBOS, but if these banks change their registered address from Edinburgh to London, that objection to a currency union disappears, (along with any contingent liability to Scottish taxpayers.)
It shouldn’t take long to negotiate a currency union agreement. But Mr Wolf hints darkly at various appalling things that might happen in the intervening period. In his anxiety to shock us, he seems to have overlooked three important considerations.
First of all, the Scottish currency is the pound sterling, and it will remain so until agreed otherwise. Second, the Bank of England has publicly committed itself to maintaining financial stability until the date of independence. Most important of all, the overarching consideration is that the remaining UK has absolutely no interest in there being any financial instability in Scotland at any time. If there were, rUK could not avoid being damaged itself. So the suggestion that a UK government would allow a ‘credit squeeze to happen’ to punish ‘the Scots’ for voting YES is a fantasy, to borrow a term beloved of the “No” side.
Sadly, Wolf repeats a number of fallacies that have long since been disproved in the debate he has missed. Scottish negotiations to become a member state of the EU will not be blocked by the Spanish government. Scotland cannot be forced to join the exchange rate mechanism. And a sovereign Scotland’s share of North Sea oil reserves will be decided by international law, not by a UK government.
Finally, it seems that Wolf has drawn the wrong conclusion from the eurozone crisis. It is not, as he suggests, “that countries without central banks cannot stabilise the markets for their public debt”. Germany has had no such problem. The lesson is that countries with or without central banks can stabilise the markets for their public debt if they take the actions necessary to put their public finances in order. It is not widely realised that the Irish Government can now borrow on finer terms than the UK government.
If Wolf wants to give himself nightmares he should start thinking about what is going to happen to the cost of servicing the UK national debt when interest rates return to normal.
In Saturday’s Financial Times, Martin Wolf published a column about Scottish independence titled “What happens after a yes vote will shock the Scots. In it Wolf looked at the monetary and economic prospects an independent Scotland would face and predicted it would be forced to don a tight fiscal straitjacket.
In the column, subtitled “However amicably a divorce begins, that is rarely how it ends. Talks will be bitter and prolonged,” the Financial Times’ chief economic commentator wrote: “Scotland can promise that the pound will remain the currency of Scotland. It cannot promise a currency union, however. That takes two parties. Even if the government of the remaining UK is prepared to countenance such a union, there should be a referendum. The only satisfactory terms for the residual UK will be ones that impose very tight limits on the fiscal deficits Scotland can run. It must also insist that financial regulation will be run by the Bank of England, which would nonetheless remain accountable to the UK state alone.
“Scotland can adopt the pound without a currency union, and so without the back-up of the Bank of England. But this, too, is highly problematic. Scotland would need to build a reserve of sterling that can serve as its monetary base – by attracting capital inflows or exporting more than it sells abroad for many years. And it would need more than that.” he also urges cautious Scots, to “move money south”, effectively seeking to trigger so-called capital flight.
Towards the end Wolf said: “The Scots will discover the taste of austerity. Scotland cannot sustain higher taxes than the residual UK; that would drive economic activity away. It will pay a higher interest rate on public debt because its government will be unfamiliar and dependent on unstable oil revenues (almost certainly smaller than Mr Salmond imagines). Fiscal fibs will be exposed.”
Wolf’s was an interesting and well-argued piece. And for believers in Scottish independence who respect the views of Martin Wolf, it was also disturbing. Well now, Professor David Simpson, a former professor of economics at the University of Strathclyde and a former economic adviser to Standard Life, has written a response, published exclusively above.
Professor David Simpson, a former professor of economics at the University of Strathclyde and former economic adviser to Standard Life