Monday, December 01, 2008

Nyahh! Yez Widny Get Intae Europe!

...is a charge often levied about potential independent Scottish membership of the EU, as is the 'argument' that Scotland somehow wouldn't be capable of Eurozone membership on budgetary grounds.

Nonsense, both. However, my eye is drawn to the section of last week's pre budget report (page 27, table 2.3 as it happens). Here, you can learn that projected UK government borrowing will peak at over 8% of GDP in 2009/10. And there's every prospect it could be higher than that.

Normally, to get these kinds of figures, you have to treat an independent Scotland as being saddled to UK spending commitments and leave out the oil. These UK figures, remember, include 100% of North Sea revenues. Leave them out, as is traditionally the case when calculating the supposed Scottish 'borrowing requirement' so beloved of unionist barrack-room economists, and there isn't a single year from 2003 onwards where the UK would have operated within the 3% deficit limit (see right hand column - positive numbers indicate a deficit).



Of course, allowances can always be made and I've no doubt that just as an independent Scotland would find a path smoothed for her in terms of EU membership, so too would the UK in terms of Eurozone membership. However, as the pound slides towards parity with the Euro, and even with 'the people who matter' apparently in support, the possibility still has to be acknowledged that the UK might not be allowed to join the Euro even if it wanted to.

Fun and games. Anyway, to end on a positive note, with all this government debt, it might be time to buy shares in companies which make scientific calculators. My bog-standard desk one has already run out of zeros trying to keep track.

13 comments:

The Wilted Rose said...

Watch out for a further windfall tax on North Sea oil, more spite from Brown against his own country (and the SNP in particular).

Rab o'Ruglen said...

If the past few months have shown anything it is surely that Britian is just too small an economic base from which to maintain a currency of world-wide trading importance. We are open to the predations of every Tom, Dick and Hedge Fund currency speculator and they are circling the Pound like sharks circling a wounded swimmer.

If we are not to be destroyed completely by the currency fluctuations we are experiencing just now we have no option in the longer term but to join the Euro with its greater mass and stability.

Expect great opposition though from the "Little Englanders" and those with links to the media who think they are sufficiently astute to stay one step ahead of the game. They have no compunction in destroying their own currency for profit.

It would also, I believe, ease the path towards "independence within Europe" for Scotland if we were already in the Eurozone.

Stuart Winton said...

If an independent Scotland joined the eurozone, and thus ceded monetary policy to Frankfurt, how does this square with Alex Salmond advocating fixcal autonomy on the radio last night?

If he thinks it's important to uses fiscal policy to reflate the economy if necessary, why not monetary policy?

As for the borrowing figures, I didn't realise that the oil revenues were so immaterial to the UK Government's finances ;0)

Richard Thomson said...

If an independent Scotland joined the eurozone, and thus ceded monetary policy to Frankfurt, how does this square with Alex Salmond advocating fixcal autonomy on the radio last night?

In exactly the same way as it squares with every other state in the Eurozone, all of whom have infinitely greater control over their fiscal policies than devolved Scotland.

If he thinks it's important to uses fiscal policy to reflate the economy if necessary, why not monetary policy?

Not sure what your point is, since no-one in the SNP leadership is advocating a seperate Scottish pound. It's £stg until and unless people vote to join the Euro.

In any case, was the ECB not using monetary policy to increase liquidity and reducing interest rates last year well before the Bank of England got round to it?

Stuart Winton said...

"In any case, was the ECB not using monetary policy to increase liquidity and reducing interest rates last year well before the Bank of England got round to it?"

Well I think that perhaps underlines my point - the ECB decides monetary policy for eurozone members, not the constituent sovereign states.

The SNP wants fiscal autonomy, yet wants to either retain sterling or join the eurozone, thus doesn't this mean that monetary policy would either stay in London or be ceded to Frankfurt?

Thus surely this position on the two fundamental economic levers is contradictory?

Also, didn't you refer to a 3% limit on annual government defecits, which I assume is a reference to eurozone rules, thus fiscal policy would be limited as well if an independent Scotland adopted the euro?

Richard Thomson said...

Sorry Stuart - I didn't get an email telling me there was a comment to moderate. No discourtesy intended.

"In any case, was the ECB not using monetary policy to increase liquidity and reducing interest rates last year well before the Bank of England got round to it?"

Well I think that perhaps underlines my point - the ECB decides monetary policy for eurozone members, not the constituent sovereign states.


Eh? What's the difference between a Eurozone member and a constituent sovereign state of the Eurozone? It doesn't need to be said that the ECB sets rates for Euro members and not for others in the EU which have retained their own currencies, even though there will be close correlation.

Your point as I interpreted it, and apologies if I've got this wrong, was that by trading the BoE for the ECB, that somehow, Scotland would have less economic room for manoeuvre than it does at the moment. Clearly, that is rubbish. Maybe you could have another go, which I promise to moderate more promptly this time :-)

The SNP wants fiscal autonomy, yet wants to either retain sterling or join the eurozone, thus doesn't this mean that monetary policy would either stay in London or be ceded to Frankfurt?

Yes. No-one's arguing for the creation of a new Scottish currency.

Thus surely this position on the two fundamental economic levers is contradictory?

No - you're not seriously trying to argue that there's a contradiction in German or Irish policy because they have the power to set their own taxation and government spending levels within the limits of the Eurozone, are you? If not, then why would an independent Scotland be any different?

Also, didn't you refer to a 3% limit on annual government defecits, which I assume is a reference to eurozone rules, thus fiscal policy would be limited as well if an independent Scotland adopted the euro?

If you want to be in the Eurozone, you have to accept the constraints that go with it. Even with that, an independent Scotland would still have infinitely more freedom on fiscal policy than she has at present.

Stuart Winton said...

What I meant about the ECB deciding monetary policy rather than the constituent sovereign states (of the eurozone) was that to that extent the latter can't decide policy appropriate to the economic circumstances of the time - it's decided for them and thus interest rates may not be appropriate for each state's economy at any particular time.

Which comes back to my initial point - if Alex Salmond and yourself think it's important to have full autonomy with regard to fiscal policy (for example, whether to use it to reflate the economy if deemed necessary) then why isn't it equally desirable to have autonomy vis-a-vis the other fundamental economic lever, namely monetary policy?

Richard Thomson said...

Right - I'm with you.

What I meant about the ECB deciding monetary policy rather than the constituent sovereign states (of the eurozone) was that to that extent the latter can't decide policy appropriate to the economic circumstances of the time - it's decided for them and thus interest rates may not be appropriate for each state's economy at any particular time.

I agree with you. However, with control of fiscal policy, you can also mitigate against this.

Which comes back to my initial point - if Alex Salmond and yourself think it's important to have full autonomy with regard to fiscal policy (for example, whether to use it to reflate the economy if deemed necessary) then why isn't it equally desirable to have autonomy vis-a-vis the other fundamental economic lever, namely monetary policy?

I'll speak for myself here rather than Alex Salmond and give you these 2 reasons:

i) To have that freedom of action, it would require an independent Scottish currency. For a number of reasons, that's no longer something I support.

ii) Even with that notional independence, a Scottish Central Bank would have limited room for manoeuvre on setting the actual rate. This is also the case for Sterling vis a vis the Dollar and Euro, and was also the case for Sterling when the Deutchmark was the dominant European currency.

As far as I'm concerned, the more freedom you have to set your economic policy, the better. Unless by getting that greater freedom, you end up having to make some unacceptable trade-offs. Ultimately, Scotland with the freedom to operate its own tax and benefits system but accepting the strictures of the Euro would be in my view a much preferable situation to be in to that which we have at present.

[Word Verification - durmerde. French speakers make of that what you will!]

Stuart Winton said...

Thanks for that, but I'm not wholly convinced you've explained the contradiction, but it seems pointless pursuing this further, at the moment at least, so if there's anyone else still reading they can draw their own conclusions, because we're clearly unlikely to change each other's minds!

However, I disagree with your point about a Bank of Scotland having limited room for manoeuvre because of the stronger currencies. What you seem to be saying is that a Scottish currency would have to align itself to the euro/dollar/sterling?

Of course, as Yvette Cooper recently made clear in relation to sterling, that's just one policy option, and one that Labour isn't following at the moment, rightly or wrongly.

If what you say is correct then a Scottish currency would be part of a de facto single currency, thus in essence it comes back to the arguments for or against joining the euro.

Of course, that course of action has got the UK economy into trouble before; when Nigel Lawson tried to shadow the Deutschmark, and later with the ERM debacle, interest rates ended up at a totally unsuitable level for the UK economy, and both strategies were ignominiously abandoned.

And that's presumably why Labour currently think it's a better option to use interest rates to combat inflation rather than use them to support sterling and peg it to the dollar and/or the euro - interest rates would have to be raised at present to support the pound, which would clearly be extremely bad for the economy, particularly since the BofE is likely to follow the US Fed's lead and cut interest rates almost to zero to combat the slump.

That shows the possible dangers of a putative Scottish currency being pegged to other currencies.

A Scottish currency would to an extent be pointless if it merely shadowed the euro, while to enjoy the advantages of having our own currency would necessitate a greater freedom of action that you posit.

Richard Thomson said...

With the best will in the world, I can hardly explain a contradiction that isn’t there.

You might argue that there’s an inconsistency because I support independence but not the theoretical maximus position of a SCO£, but then you could apply that logic to just about every pooling of sovereignty in history. In any case, I hardly think that the Dutch or Austrians are overly racked with existential angst and self-doubt because they have the ability to set fiscal but not monetary policy! :-)

For me, it’s simple. Devolved Scotland – minimal fiscal powers based on block grant and ability to vary basic rate of tax by 3p; little influence over monetary policy. Independent Scotland, whether in Sterling or Eurozone – still little influence over monetary policy, but full range of fiscal powers including ability to alter tax rates, thresholds, ability to establish or abolish taxes, borrowing (subject to Eurozone limits). There are still constraints, but far fewer than exist under the status quo.

I didn’t say that a SCO£ would need to be pegged, but it would still operate within certain practical parameters. While having a Scottish currency would, in theory, give full control over monetary policy, all currencies take time to establish credibility – establishing a SCO£ and having to deal with the activities of speculators and the feed-through to the value of the currency from the price of oil is not an enticing prospect for me at a time when attentions should be on other aspects of state-building. Under certain circumstances, paradoxically, an independent currency could leave a Scottish Government with less freedom of economic movement than Eurozone membership.

That’s why I think we should retain the GBP currency union, with Scotland and rUK, whether independent or not, (hopefully) going into the Euro simultaneously.

Stuart Winton said...

But don't we hear SNP politicians complaining about interest rates being decided in London and that they're often - if not always - inappropriate for Scotland?

Thus, a fortiori, interest rates being decided in Frankfurt would be worse?

And since you seem to be positing a risk inherent in a Scottish currency, doesn't this echo a fundamental argument against independence per se?

As for the lack of 'existential angst' over the issue, that's precisely the kind of thing I can't understand - ther seems to be plenty of existential angst about things like the flying of the saltire vis-a-vis the union flag, Team GB and .sco, but not, it would seem, about ceding control of a fundamental plank of macroeconomic policy to the ECB.

Richard Thomson said...

But don't we hear SNP politicians complaining about interest rates being decided in London and that they're often - if not always - inappropriate for Scotland?

They've certainly complained that interest rates in the UK were higher than Scotland needed, and that the rate applicable in the Eurozone, at least until the most recent round of cuts, had been more suitable.

Thus, a fortiori, interest rates being decided in Frankfurt would be worse?

Why? Because of geographical distance? Because of size? It certainly can't be on the basis of the level the rates themselves have been set at since inception...

And since you seem to be positing a risk inherent in a Scottish currency, doesn't this echo a fundamental argument against independence per se?

I argued that setting up a currency, even one which had the political support of the Euro, carried risks. I don't see how that affects the desirability or otherwise of Scottish independence one whit.

As for the lack of 'existential angst' over the issue, that's precisely the kind of thing I can't understand - ther seems to be plenty of existential angst about things like the flying of the saltire vis-a-vis the union flag, Team GB and .sco, but not, it would seem, about ceding control of a fundamental plank of macroeconomic policy to the ECB.

I really don't get where you're coming from here, Stuart.

I don't particularly care about flags much myself, though plenty other people on both sides of the debate seem to get very worked up about the whole thing. I'd prefer to see a Team Scotland at the Olympics, and think that .sco would be a useful marketing tool. None of these positions exclude the perfectly logical position of supporting an independent Scotland participating in a currency union.

As I'll now say for the 3rd or 4th time, I don't think any Eurozone member considers its political autonomy to be a 'contradiction' as a result of having ceded control of monetary policy to Frankfurt. Aspiring to similar status from Scotland's present position, similarly, is no contradiction.

Stuart Winton said...

Sorry for delay in replying, but I could see this going on and on and since I suspect we're the only two reading this and cleary unlikely to change our positions then it seems a bit pointless continuing.

I might do a slighlty longer post on my own blog at a quieter time, and at least then it might be read by more than two people.

Or, indeed, maybe just the one ;0)