A man, plan A, a canal – currency union!

Alex Salmond, Glenn Campbell, Alastair Darling, ScotDecides / BBCindyrefA No majority appears the most likely response on 18th September, and a very high turnout. Those are neutral facts.

Alex Salmond won last night’s debate – he was more skilled rhetorically, and has only one weak point that Alastair Darling can use. As Darling had used that weak point well in the previous debate, Salmond had evidently taken counsel with his speechwriters and devised several excellent rhetorical responses to Darling’s factual and accurate criticisms of the SNP’s plans. They both bellowed at each other a lot and I doubt if their shouting-across-each-other attitude convinced anyone. That’s my opinion.

As the audience interrogation exposed, Labour’s failure to oppose the Tory/LibDem destruction of the welfare system and privatisation of the NHS, was their worst weakness in trying to campaign for Better Together.

Why I’m voting No:

Alastair Darling was right about currency union. It’s bad policy.

Scotland's Future And as Alex Salmond has repeatedly made clear, and did explicitly in last night’s debate, calling currency union the “sovereign will of the Scottish people” if Yes gets the majority, we won’t have a choice about this. The policy was outlined in the White Paper, has been promoted as the only option by the First Minister: Yes majority can be lawfully taken by the SNP and the Tory/LibDem government as their mandate to create currency union.

Yes, the Tories have leaked – and occasionally said openly – that they will support currency union: unsurprisingly, as currency union is the best thing for the finance industry that funds them. SNP in government in Scotland, Tories in government in Westminster, Salmond in a position to be able to claim a mandate for currency union, and within the Yes movement, neither organised political opposition to currency union nor open discussion of why it matters that currency union mustn’t be installed: I don’t see how, after 19th September, any political power in the UK – except possibly Labour, and I’d hate to have to count on them in this contingency – could prevent the two parties of government from doing this.

To be clear, the SNP’s plan for currency union, and Alex Salmond has said he has no other, is that Scotland will join Andorra and Monaco to become the third country in Europe with no central bank: Westminster will legislate for Scotland to make use of the Bank of England. Salmond hopes to have one Scottish government appointee on the monetary policy committee. This is not independence: this is devomax. If the SNP and the Tories don’t get to legislate this arrangement of inequality for Scotland at Westminster, Salmond says, he will have Scotland default on its share of the national debt and Scotland will “just use the pound”.

I think this was a canny decision on the part of the SNP. In 2012, it became evident that most people would vote for an undefined devomax rather than independence. The SNP have simply ensured that they can.

Supporters of this plan have defended it in all sorts of absurd ways: from comparing Scotland to Ireland of 90 years ago to the Isle of Man or Harrods today. (In Harrods, you can use all sorts of currencies to shop. Scotland, if the supporter last night hadn’t noticed, is a lot bigger than Harrods, and Harrods is required by the UK government to pay its business rates and taxes in pounds sterling.)

If Yes were to get the majority, and if the SNP were actually supporting independence, then Scotland gets to have its share of the national assets currently with the Bank of England, and would be able to set up its own central bank either with its own currency pegged to the GBP initially or with the euro. Scotland also takes a share of the UK national debt. These shares would be based on GDP/population and are fairly well worked out already in international law. None of this would be particularly easy, but the SNP are proposing that Scotland shouldn’t even start doing it: just let the Tories legislate currency union instead.

Because Alex Salmond doesn’t favour independence, and has made clear that if you vote Yes you are giving your consent to his scheme, in any case none of the preparations for independence will happen right away: if currency union can be stopped, it will be stopped at Westminster in May 2015 after a Labour majority ensures the Tory and SNP plans can’t proceed further.

(If there’s a Tory win in 2015 (even less probable than a Yes majority in 2014) then the Tories can legislate currency union for Scotland: there’d be no way to stop them, and the Scottish government would be abetting them.)

At that point, the SNP still in government, they could of course announce that Scotland will default on our share of the national debt and begin independence “just using the pound” and known internationally as defaulters. No matter how many Nobel-prize winning economists say “sure, let’s do that!” it doesn’t sound like the prudent course to me.

But yes, several microstates do “just use” the currency of the larger country they’re dependent on: and crown protectorates like the Isle of Man do, and yes, the British Empire did try to require that its colonies use the pound sterling, as Yes Scotland supporters fondly hark back to when arguing Scotland could use the pound too – or like Panama, which has used the US dollar since it became a state.

(More sensible Yes supporters try to claim the currency union like the eurozone: it’s not. Each country entering the eurozone did so as a nation with sovereign control over currency and its own central bank, which ceded some powers to the European Central Bank. iScotland would never have these sovereign powers in currency union legislated by the Tories: the only resemblance is that, like countries in the Eurozone, it wouldn’t be in the power of Scotland to decide to leave. That would be for the legislators at Westminster and the Bank of England to decide. Other Yes supporters argue that “just using” the pound would be exactly the same as being part of the sterling area from the 1930s-1970s: because nothing whatsoever has changed in the financial world since the sterling area stopped existing forty years ago.)

But let’s talk about Panama.

Panama is the southernmost country of Central America and the whole North American continent. It was for about eighty years part of Columbia. The US wanted to build a canal allowing ship transport to cross the continent without having to circumnavigate the whole of South America: Columbia wasn’t cooperating. A French engineer, Philippe Bunau-Varilla, and an American lawyer, Nelson Cromwell, together arranged for Panama to become an independent country and grant the US sovereign rights “in perpetuity” for the construction of the Panama Canal. Panama attempted to renegotiate this treaty from the 1960s onward, but got nowhere: the US finally gave up their rights in 1999, having no further need of them.

Panama uses the US dollar, as several Yes supporters have pointed out, and it prospers. The Adam Smith Institute points out that Panama banks don’t have a central lender: if they fail, they fail. Wages stay low, the labour market is “elastic” – little job security. Everyone who had their savings or their business in a failing bank loses: ASI think this is an excellent free market plan for Scotland. And of course Panama never had a choice: they were independent by the grace of the United States, their currency was the decision of the United States, and their main national asset and source of government income, the Panama Canal, has all dues paid in US dollars – very convenient for US businesses.

That is the model that Alex Salmond is proposing for iScotland. Why vote for that?

As Adam Tomkins notes here in Currency and Credibility, the Tories – any UK government, but the only party that’s even halfway to considering it is the Conservatives – would not legislate currency union, nor would the Bank of England consent to it, unless “accompanied with fiscal constraints” – that Tomkins thinks the SNP would never agree to. I think he’s wrong (if Yes gets the majority) because I think Alex Salmond has now laid his political career on the line: either he gets currency union, or he goes under. The argument that people make that this is all a complex bluff on Salmond’s part is possible, but not convincing to me.

What neither Alex Salmond nor Alastair Darling – nor anyone else in power of any political flavour – has mentioned is this: if Yes gets the majority, unless currency union is installed, UKFI would have to fission.

UKFI is the Royal Bank of Scotland, Bank of Scotland, Lloyds Group and TSB. If iScotland were to be a genuinely independent country, against the will of the SNP government and the Tory/LibDem government, then this huge banking group would have to divide its assets according to its customer base and split into two – rUKFI and ScotlandFI. That, like financial independence for Scotland, would be the sensible thing to do: it won’t be easy. Because it won’t be easy, good sense would suggest that planning the operation begins as soon as possible: the SNP and the Tories are apparently not wanting to talk about it at all and try to avoid the issue.

With currency union, UKFI can remain intact, and as a banking group whose assets dwarf the Scottish GDP, it would have huge financial clout in Scotland, much greater clout than the government. Scotland would become the tool of the banks and the Westminster government, and no way out. Why would I vote Yes to get that?

No way out? People tell me that “oh, Scotland could just default on the agreement”. Tell that to countries who made the mistake of getting into an agreement with the World Bank or the IMF, or look at the Eurozone treaty. International finance is serious business. A country cannot simply decide they’ll walk out of their agreements.

There are few voices in the Yes movement opposing the SNP’s plans for currency union. There’s no concerted opposition. The hugely ignorant ideas about currency and the economy expressed by Yes supporters in favour of currency union go uncontradicted by a Yes movement more concerned with pushing up their share of the vote than working for a properly independent Scotland.

[Update, 7th September 2015: A year later, it’s finally revealed that a majority on the board of Yes Scotland knew that there had to be an alternative plan to Scotland using rUK currency: but none of them spoke out then.]

While I do see possibilities for opposition if Yes gets the majority, the only sure way to stop this horrible folly is to vote No.

So that’s what I’m doing.

Updated to add the link to and quote from Adam Tomkins.
Defaulting on the debt

26 Comments

Filed under Currency, Economics, Indyref White Paper, Politics, Scottish Politics

26 responses to “A man, plan A, a canal – currency union!

  1. “Salmond says, he will have Scotland default on its share of the national debt”

    He said no such thing. He said Scotland would not assume a share of UK debt. You cannot default on a debt you have never assumed. THAT is why the markets force HMG to declare it was the sole holder of ALL sovereign UK debt, back in January.

    If Scotland is to be denied its share of UK asset for which Scots paid in treasure and blood, why on earth would Scotland assume a share of the liabilities of the UK? That is not a rhetorical question.

    • He said no such thing. He said Scotland would not assume a share of UK debt.

      Yes. That would make Scotland a defaulter, no matter what language Salmond tried to use to evade the fact.

      If Scotland is to be denied its share of UK asset for which Scots paid in treasure and blood, why on earth would Scotland assume a share of the liabilities of the UK?

      No one is saying Scotland should be denied its share of the UK assets. No one at all. Though obviously if Salmond tries to default on the Scottish share of the UK debt, that will come up, too. Would you care to re-read my blogpost and respond to what it actually said, instead of what the SNP is telling you?

      In case you have trouble finding the specific paragraph:

      “If Yes were to get the majority, and if the SNP were actually supporting independence, then Scotland gets to have its share of the national assets currently with the Bank of England, and would be able to set up its own central bank either with its own currency pegged to the GBP initially or with the euro. Scotland also takes a share of the UK national debt. These shares would be based on GDP/population and are fairly well worked out already in international law. None of this would be particularly easy, but the SNP are proposing that Scotland shouldn’t even start doing it: just let the Tories legislate currency union instead.”

      • “Yes. That would make Scotland a defaulter, no matter what language Salmond tried to use to evade the fact.”

        Demonstrably untrue. Scotland has no sovereign debt. There are no paper IOUs in its name, no T-bills issued. Again, HMG has given a binding undertaking that in ALL circumstances post indy, rUK/iEngland will be the sole holder of that debt.

        That undertaking given in January to calm the markets is dispositive. Your contention that Scotland will be in default is false. Simply reassert that falsehood won’t make it anymore true.

        The Scottish Government position is that if it is not to have its share of UK assets to INCLUDE the continued use of OUR pound in currency union, then Scotland will not assume a share of the UK’s liabilities. That is an eminently reasonable position and one that clearly benefits rUK/iEngland as well as Scotland.

        “No one is saying Scotland should be denied its share of the UK assets. No one at all”

        Uh, did you read or listen to the infamous Sermon on the Pound, or the near daily repetitions of the “Scotland will not be allowed to keep the pound”? Again, your assertion above is demonstrably false.

        “…[R]e-read my blogpost and respond to what it actually said, instead of what the SNP is telling you?”

        Yes well, personal abuse will do naught to further the debate. Could I gently offer that better use the time would be to reconsider your position and amend it in light of the flaws illuminated above?

        • Scotland has no sovereign debt.

          If Scotland becomes independent, it inherits its share in UK’s national debt.

          That you’re ignorant of this seems fairly typical of the level of knowledge of YesScotlanders trying to defend currency union, but I’m afraid it makes it impossible to continue discussing with you, especially as you think an invitation to “re-read my blog” constitutes personal abuse.

          • Simply false. I would ask you to provide citation rather than assert assertion. Now you can shut me up here, but that will not change the facts. Again, provide original source citation to back your risible claim that Scotland, deemed to be a NEW country by HMG and not a successor state, will inherit any debt.

            To help you, you’ll find a link to an article on the issue of Scotland’s standing as a new or successor state and iEngland’s claim that it will be the CONTINUATOR STATE. Succinctly, if rUK/iEngland is the continuator state, then iScotland can ONLY be a new state (and that is HMG’s position). If iScotland is a successor state then iEngland must also be a successor state.

            Only if Scotland and England are BOTH successor states will Scotland inherit any debt BECAUSE as a successor state it also inherits the assets of a defunct UK.

            I have spelled it out in considerable detail for you here http://bellacaledonia.org.uk/2014/02/25/the-fiction-of-the-continuing-state/

          • You’re entitled to your beliefs.

            I suppose if Yes did get the majority, it would be interesting to find out how (or if) the cascade of misinformation spread by the SNP to promote currency union would be washed away by the political reality, but seriously, it seems to have reached Fox News levels of misunderstanding and I am just as glad it appears unlikely that it will ever happen.

  2. Ronnie Smith

    Exactly what I have been saying and agree with you totally Jane, except that I would vote Yes if I could. Currency union ensures that the real Left will continue in opposition and I’d still rather be in opposition in Scotland than in the UK. Currency union ensures no fundamental change in Scotland but it is a more favorable battlefield.

    • If Yes does get the majority, Alex Salmond has explicitly claimed a mandate to enforce currency union in the lifetime of the current Scottish government, and (though I’m not a lawyer) it seems to me that this would be lawful – he has made very clear what people will be voting for – currency union – and explicitly said that a Yes vote gives him “the sovereign will of the Scottish people”.

      There is no concerted opposition to this from the Yes movement. Even the Scottish Greens are focusing more on the 2016 election than opposing SNP plans post-18th til March 2016.

      So it remains to be seen if the Tories can get currency union legislated at Westminster, or if Labour opposition can block it. And there, we simply don’t have a level playing field.

  3. keaton

    To be clear, the SNP’s plan for currency union, and Alex Salmond has said he has no other, is that Scotland will join Andorra and Monaco to become the third country in Europe with no central bank

    That sounds more like the definition of “Sterlingisation”, not currency union. By your definition, no country in the Eurozone has a central bank.

    I’m sympathetic to dubiety about the merits of a CU, and whether it really constitutes “independence”. But it at least seems no worse than the current arrangement. The influence that sending MPs to parliament provides us is negligible: everyone knows that Scotland has no choice but to vote Labour at Westminster elections in order to prevent a Tory government. Labour knows Scotland is in the bag, and the Tories know it’s a write-off, so we lack any leverage over either party.

    • By your definition, no country in the Eurozone has a central bank.

      Nope, all countries in the Eurozone each have their own central bank. Countries without a central bank can’t join either the EU (Scotland couldn’t except as rUK’s subordinate partner in currency union) or the Eurozone.

      But it at least seems no worse than the current arrangement.

      That’s really the best Yesscotlanders seem to be able to say. Why vote Yes for “no real change”?

      • keaton

        No real change on the currency, and shift responsibility for a host of other issues to an institution where those striving for power retain a healthy fear of the electorate. Sounds like a net gain to me, and the only price is having to give up our MPs and Lords.

        • In currency union final say on the economy & on Scottish government borrowing remains with the Bank of England aka the Chancellor of the Exchequer. if you think that’s an institution ” where those striving for power retain a healthy fear of the electorate” I have a bridge over the Firth of Forth I’d like to sell you.

          • keaton

            Do you support any kind of devolution at all, or would things be just the same if we reverted to direct control from the Scotland Office? In either case, the final say over the economy lies with the Exchequer, so what’s the point of even having a Scottish Parliament?

          • Do you support any kind of devolution at all

            Do you?

  4. Ian

    Jane, you’re clearly sensitive about people fact-checking you but just to clarify, “UKFI is the Royal Bank of Scotland, Bank of Scotland, Lloyds Group and TSB.” above is a false statement.

    UKFI is a Limited Company that holds the government’s shareholdings in RBS and Lloyds Banking Group. (As well as UK Asset Resolution Ltd). http://www.ukfi.co.uk/

    The future of the banks is a valid topic for discussion and debate but I’d respectfully question whether a blog piece containing, and relying upon for a large chunk of its narrative, such a basic error is the appropriate forum for such a discussion.

    • Ian, assuming you’re the same person who seemed to be making a facile comment on Twitter, it shows the benefit of blog comments over Twitter. I understand what you’re saying – you object to the form in which I reference UKFI – but I’m certainly not following why you think that means UKFI can remain a single entity after independence (assuming currency union fails). That is (one of) the points of this blogpost.

      • I’m afraid I’m with Ian here. UKFI doesn’t have customers so it can’t split according to where its customer base is geographically. RBS and HBoS (which is part of Lloyds Banking Group) are two separate companies. UKFI owns shares in both companies. What will happen to both banking groups post independence is unclear. In general, a bank has to be headquartered where the majority of its customers are so both will probably have to move headquarters to London. UKFI will remain owned by the rUK government but should RBS and HBoS remain registered in Scotland then all that will happen is that its shareholdings will be in foreign banks rather than UK banks. There is no reason why it would have to split into two entities. Now it’s unlikely that the rUK government will want to continue that arrangement in which case it will most likely sell its shareholdings. Possibly they could be sold to a similar institution owned by the Scottish government but the chances are that they’d be sold for a low price on the open market.

      • Ian

        I’m struggling to comprehend what you’re getting at here, UKFI isn’t a “single entity” at present in the way you describe above, so there’s no question of it ‘remaining’ as such. Is your question:

        1) Can UKFI Ltd continue to hold shares in RBS and LBG after independence? (Answer: Yes)

        2) Can the banks continue to exist in their present form without a currency union? (Answer: They probably wouldn’t, but banks having operations across multiple jurisdictions and currencies isn’t unusual – cf Santander, HSBC. The registered head offices would probably be changed to London rather than Edinburgh but this isn’t as big a deal as No supporters would have you believe.)

        I think you’ve made a mistake about the nature of UKFI and, unfortunately, built a narrative upon it. I don’t wish to repeat myself but it seems worth adding emphasis to the point, there is, at present, no single entity existing as UKFI in the form you have described and critiqued above.

        • You make a good point that UKFI doesn’t have customers, the banks it owns does.

          I’m unclear why you think that United Kingdom’s Financial Investments isn’t a single entity, or why you think it would remain intact after independence.

          • Ian

            UKFI Ltd is a single entity, being a company which owns circa 80% of RBS and just under 25% of LBG plc. (Figures off the top of my head but they’re broadly correct).

            It is NOT “the Royal Bank of Scotland, Bank of Scotland, Lloyds Group and TSB” as you assert above. That is the error I am correcting.

            You have formulated an argument based on a fiction that “the Royal Bank of Scotland, Bank of Scotland, Lloyds Group and TSB” exist and operate as a single entity – they do not.

            It should also be plainly clear that UKFI cannot be said to own any bank other than RBS. While a substantial shareholder in LBG, its <25% share does not give it control over any of the company's operations. UKFI's stated intention is to sell these shares in due course at a profit to the taxpayer.

            So, very briefly, UKFI Ltd is a company which holds shares in other companies. There is no legal impediment to it continuing to do so after a Yes vote.

            Incidentally, the (total – not UKFI Ltd's share thereof) net assets of RBS and LBG in their latest published results are £59bn and £39bn respectively. (2013) Scottish GDP in the first Quarter of 2014 alone was £130bn (onshore only)/£148bn (inc. offshore). (Published Scottish Government figures). I'm therefore curious what research you did before writing that UKFI is "a banking group whose assets dwarf the Scottish GDP"

  5. keaton

    ctd from above:

    Do I support any kind of devolution at all? Yes. Don’t think I’ve said anything that could’ve given any doubt about that. The ideal option wasn’t on the table in 1997 and isn’t this time, but I voted then for the best one that was, and will do so again next month.

    Now I hope you might answer. You’ve said there’s no point transferring welfare, foreign affairs etc to the Scottish Parliament if the Exchequer retains control of the currency. So I’m interested to know whether you believe the devolution of health, education and so on was equally pointless.

    • Fairly obvious, surely?

      In 1997, what we voted for was a Scottish Parliament with clearly defined spending and fundraising powers, and that – in 1999 – is what we got. Scotland gets the block grant: within the block grant, the Scottish government can spend the funds on health, education, and so on. That’s not pointless.

      Now what the SNP has said it intends for independence, if Yes gets the majority, is to reverse that: instead of Scotland having autonomy to spend the block grant on devolved matters, Scotland’s entire budget will be subject to fiscal control from the Bank of England.

      I see no point to that, so next month I’ll be voting for the best option there is: No.

  6. Awfully long winded way of saying no, still I suppose it helps to keep busy.

  7. Hi there, Jane. We had an amicable discussion on Facebook and I want to jump in briefly here. Hope you won’t mind. You say an independent Scotland would be subject to FISCAL control from the Bank of England if there is a currency union (which, if you call, I have concerns about too). This is not quite right. Scotland would have full control over its fiscal policy. What you are thinking of is monetary policy which is not the same. It is monetary policy that would be controlled by the Bank of England, in the same way the European Central Bank controls monetary policy for Germany, France etc.

    Secondly, and more crucially, I find the argument about monetary policy intellectually dishonest. Why? I think it is dishonest because IF we get our own currency, we only control monetary policy if it is a free-floating currency. If we decide that our new currency should be pegged to, say, Sterling or the Euro or the Dollar, then the monetary policies (interest rates etc) will be determined by the bank that issues the currency which we have pegged ourselves to. I know you’ve long argued for a new currency but I’d like you to be aware of and acknowledge that if any future Scottish Govt decides to peg our own currency to another one, we’ll end up in the same situation of having monetary policy decided by a bank in another country which is exactly what you want to avoid right now. Is monetary policy so crucial that it outweighs the protection of the Scottish NHS from long-term privatisation, the diversion of Scottish money away from Trident into more beneficial areas, the full receipt of all oil revenues, and greater democracy and accountability? I’ll stress again: I want our own currency too but we need to be clear that it does not inherently guarantee our own unique monetary policy. It would ONLY do so if our Pound or whatever we call it, would be a free-floating currency.

    Let’s put it this way: a No vote gives you no chance at all of having a new currency in the long term. A Yes vote makes it possible in the long run but you would only get what you personally want if the parties then in the power make the new Pound a free-floating currency. Please reconsider your stance. Regards, Tim.

    • Hi Tim,

      Thanks for your long comment. I’ve since written another blogpost on currency union and democracy – in short, no, I’m still a Vote No.

      This is not quite right. Scotland would have full control over its fiscal policy. What you are thinking of is monetary policy which is not the same. It is monetary policy that would be controlled by the Bank of England, in the same way the European Central Bank controls monetary policy for Germany, France etc.

      And controls fiscal policy in Greece, for example. You may hope that Scotland, a virtually-powerless appendage to rUK, without voting rights in the EU or at Westminster, would be treated so justly in monetary policy at the Bank of England that the Scottish economy would flourish, but I doubt it.

      You also appear to be confused about the crucial difference between a sovereign government pegging their currency to another country’s currency, and a currency union, where the “sovereign” government has no power to make these decisions at all.

      If iScotland had its own currency, that would give the Scottish government the power to peg Scottish currency to rUK’s currency – indefinitely, if that suited. But it would always be in the power of the Scottish government and Scottish central bank to change that decision if it became disadvantageous to iScotland. In currency union, all such decisions are made at Westminster/at the Bank of England, without any input from the Scottish electorate allowed – less democratic input than we have at the present time.

      Is monetary policy so crucial that it outweighs the protection of the Scottish NHS from long-term privatisation, the diversion of Scottish money away from Trident into more beneficial areas, the full receipt of all oil revenues, and greater democracy and accountability?

      What makes you think that Westminster would legislate currency union so as to allow Scotland this kind of economic freedom? By definition, currency union is a move away from greater democracy and accountability.

      This proposal by the SNP, to lock iScotland into dollarisation of the Scottish economy and to hand over major and basic decisions about the Scottish economy to Westminster/BoE, while abandoning any right of voter input to Westminster or the European Parliament, is a rotten proposal for independence. If No gets the majority, as I hope it will next Thursday, this doesn’t mean that people who genuinely want independence can’t work to put forward a better proposal, one which doesn’t perpetually lock iScotland into a neo-colonial relationship with rUK.

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