When the SNP transited smoothly from “we’ll use to the Euro” to “we’ll use the pound” that was a campaign tactic.
I do not believe either the Yes Scotland or the Better Together campaigns have really thought this through: or at least, they are certainly not making a fact-based argument based on having thought this through.
“Hardball” is the macho cliche being applied to the Chancellor’s fiat towards a currency union. Despite its protestations, Mr Darling’s team pursues the kind of negative campaigning that never goes out of style in Westminster. No compunction is involved. The referendum must be won at all costs. But what might that cost be, exactly, if the prize is a united kingdom in the aftermath?
I am not an economist. I am conscious that the longer I think about this and the more I know the more my views tend to change. I am also conscious that while the best economists tend to be extremely good at figuring out why an economic disaster happened, they tend to be less good at predicting how to avoid one for the future. But there are some things that are clearer to me now than they were a few days ago.
Alex Salmond made a big speech in Aberdeen on Monday in which he asserted the SNP’s campaign position, of which the key factual point is here:
However in a recent statistical publication, HMRC estimated Scotland’s share of the Bank Levy (effectively a charge on the balance sheets of banks) to be 7.3 per cent of the UK total – smaller than Scotland’s share of UK GDP – not the near 25 per cent which the Treasury has estimated and on which the Chancellor’s remarks are based.
This Treasury achieved its inflation of the Scottish financial sector by simply allocating London based assets to Scotland. For example the greater part of the banking assets allocated to Scotland is the RBS markets division which is located in the city of London, has always been located in the city of London, is now 80 per cent owned by Her Majesty’s government and in any case will soon be ring fenced by the Vickers reforms!
Worth noting, however, that Scotland’s Future estimates the “Financial and Business” section of the Scottish economy (excluding the oil industry) at 25% of GDP.
Scotland has a big financial services industry. It’s certainly at least 7% of the Scottish GDP, however that’s calculated, and employs a lot of people – especially in Edinburgh and Glasgow. Reputedly, financial services occupy a third of available commercial office space in Edinburgh: and Edinburgh is a European financial centre (granted somewhere close to the bottom of the top fifteen in Europe, unlike London, which is the largest in the world).
There are four clearing banks based in Scotland: the Bank of Scotland and the TSB Bank, which are owned by Lloyds Banking Group, The Royal Bank of Scotland, and the Clydesdale Bank. Lloyds Banking Group and the Royal Bank of Scotland are both owned by UK Financial Investments (UKFI), which is a company set up by the Treasury to manage the banks it has owned since 2008.
The Clydesdale Bank is owned by the National Australia Bank: in the UK they also own the Yorkshire Bank and have one banking licence for both. (Presumably if Scotland became independent they would need to apply for a second banking licence, but otherwise they don’t come into this.)
The financial services industry in Scotland is tied to the financial services industry in the rest of the UK. The Bank of England is the lender of last resort for all.
The Vickers reforms, proposed in 2011 to take place by 2019, are to ringfence personal banking and small-scale commercial lending from the huge and risky investments industry. Will Hutton in the Guardian argued three years ago that the Vickers reforms, if implemented prior to the 2008 crash, could actually have prevented the crash having the same impact in the UK:
The argument that the proposals would not have prevented the banking crisis is no less feeble. In a ringfenced world, because the riskier business would be much more obvious and less cross-subsidised by ordinary depositors and taxpayers, any non-ringfenced bank would have had to pay a great deal more for its huge cash deposits in the inter-bank markets and also hold much more capital to reassure depositors and shareholders. Moreover we would have asked the banks to hold even more capital as the boom came to its peak. Sir Fred Goodwin’s antics at RBS would have been close to impossible.
Vickers has established a crucial principle: banks should not privatise wild profits and socialise losses.
First: Scotland issues its own currency. All businesses operating in Scotland must trade in that currency.
Second: Scotland joins the eurozone when it joins the EU.
Both of the above options mean that Scotland needs a Mint and its own National Bank of Scotland and lender of last resort: Scotland would get a negotiated share of the sterling that is presently held by the Bank of England to provide the basis of the National Bank of Scotland.
Both of the above have advantages and disadvantages, and primarily that it would clearly advantage the Royal Bank of Scotland at least to re-incorporate as a London bank, because the majority of its trade is outside Scotland. UKFI would have most input into that, and the Scottish Parliament has no influence at UKFI.
Third: Scotland continues to use sterling as its currency without the consent of rUK. This is perfectly possible as a temporary expedient, but would clearly not be a proper long-term solution: Scotland is too big a country and has too big a financial system to go on in that way.
Finally, the SNP’s choice: Scotland and rUK become Sterlingzone. Currency-related decisions made and backed by the Bank of England, over which the Scottish government has no more control than it has today. Scots continue to use the usual currency. The financial services industry continues to operate using sterling, but a large part of it is now situated in a separate country.
The advantage of this to an unscrupulous financial services industry, given that independence is – in the SNP timetable – due to happen before the Vickers reforms are implemented, are potentially huge. The corresponding disaster – all advantages to an unscrupulous financial services industry are disastrous – is also potentially huge.
The small group of people whose job it would be to try to divide the holdings of the Lloyds Banking Group and the Royal Bank of Scotland Group so that Scotland did not end up with a banking industry that dwarfed its GDP, are the board of UKFI: the Executive Chairman, James Leigh-Pemberton, Peter Gibbs, Kirstin Baker, Michael Kirkwood, Philip Remnant, and Lucinda Riches. The board is accountable to its shareholder – effectively, to George Osborne, and via him, the Westminster Parliament. It’s important to note: the shareholders in a company do not run the company: the shareholders appoint the Board to run the company, who are obliged to make decisions to benefit the shareholders.
Until or unless the Scottish Parliament negotiates a share in UKFI, the board of UKFI – the owners of the Bank of Scotland, the Royal Bank of Scotland, and the TSB – are all obliged to make decisions about those banks that benefit the Westminster Parliament’s governance. If the SNP, negotiating independence, split the shares so that the new Scottish Treasury became a minority shareholder in UKFI, then tbe Scottish Parliament would have a minority shareholder’s input into the appointment of the board of UKFI.
The Bank of England is the lender of last resort in the UK. If Scotland becomes an independent country but is in a currency union and a shared financial services industry, in effect the Bank of England becomes the lender of last resort to a financial services industry outside the UK. You don’t have to be all that much of a pessimist to see that considered as a permanent arrangement, this could be a fearfully bad idea. Scotland has a stable economy: it is not now nor in the next few years at any risk of going down the plughole. But the government of a country makes economic decisions about a country: in the system proposed by the SNP, the economic decisions would be made by the government of Scotland, but the ultimate financial risks would be borne by the Bank of England. This is not an acceptable system: the basic safeguard of any financial system is that the risks of any economic decision are borne by the entity that makes the decisions.
I’m very much indebted to Frances Coppola, who wrote two excellent blogposts recently: Scotland and the Banks and Self-Determination. Strongly recommend both. She makes the point that a currency union – the Sterlingzone – has to be shown to be to the benefit of rUK: it’s not something that can be imposed by fiat because the SNP want it, or even because Scotland votes for it. Also to Daniel Donaldson, who challenged my thinking in several interesting discussions on Facebook.
But to my mind, not only would Sterlingzone not necessarily benefit rUK, the SNP haven’t made the case that it would benefit Scotland – only that it would certainly be to the advantage of the Scottish financial industry. Which, no matter how many people it employs and how much office space it pays rent for, is not the same as benefiting us.
If Scotland voted Yes, we do not want to become a country that is run for the benefit of the financial services industry it hosts. I may be an undecided voter, but that much I’m sure of.
Update, Monday 24th February
Again, I can understand Scots grievances. But if they really want to do this, they had better get real about money.