Common Weal Head of Policy and Research Dr Craig Dalzell writes an open letter to Scottish finance secretary Derek Mackay in response to his recent endorsement of the Growth Commission report and his motion to the SNP conference.
Dear Derek Mackay
I read your recent article in The National (6th April) with interest. Particularly your endorsement of the motion being put to the SNP conference this month as “your” plan, building on the Growth Commission. This direct endorsement gave me hope that you would have taken the opportunity in your article to tackle the now widespread critiques of that plan.
Your direct endorsement of the Growth Commission proposals also led me to the realisation that, unless things change, you as Finance Secretary will be personally responsible for this plan and its consequences. In this spirit, I would like to address you directly regarding some of the critiques raised.
The big one, as raised by Robin McAlpine in The National last week (30th March), is the problem of what happens to the Scottish economy if we’re Sterlingised – that is, we continue to use the pound without a formal currency union – and the rUK economy tanks.
Without the powers to create (or destroy) money, apply Quantitative Easing, adjust interest rates, adjust exchange rates and, crucially, without the Bank of England having a legal remit over Scotland to do it for us, what powers would a Sterlingised Scotland actually have to shield us from the effects of an rUK crash?
This is not merely a hypothetical. The UK has suffered a recession in every decade of the past the century bar one (the 1940s) and we’re still suffering the “lost decade” from the 2008 Financial Crisis. Let’s be honest, your plan isn’t going to meet the “six tests” within the first Parliamentary term and we all know it so the results of the vote at the end of that term is a foregone one. Following the Growth Commission model of not having a currency for the decade or more that those tests imply presents a major systemic risk to the Scottish economy. You will surely understand that this is not a problem that can be solved by tweaking tax rates.
Currency and economy
Derek, you are quite correct to point out that currency is a servant of the economy but it’s not true to say that the reverse doesn’t also apply. The relationship is one of mutual feedback. The currency shapes what kind of economy is possible. It’s notable that you and the Growth Commission are keen to point out that many of our comparator countries don’t have their own currency. What you seem less keen to point out is that all of them are Eurozone members. None of the comparator countries cited in the Growth Commission report unilaterally use the pound, euro, dollar or another currency. Read section A3.21 of the report if you don’t believe me.
It’s the placing of limits on that range of economic possibility that is proving concerning to many. Under the Growth Commission’s wider economic proposals, there are measures to keep Scotland’s financial regulations tightly tied to the UK’s failed model – not just at the point of independence but as the UK continues to make changes to their regulations afterwards. Scotland’s political input into the Union may be slight at the moment. We may so often be ignored. But at least, on paper, UK-wide regulations are made with Scotland’s say and to cover Scotland’s needs.
Post-independence, your plan makes as much political and economic sense as unilaterally adopting changes to the financial regulations of Singapore. It is a plan built to appease those who would be loaning Scotland the money that we couldn’t print on our own. They will not easily give up such a ‘valued client’ – hence why the “six tests” take the nigh-impossible-to-meet form that they do.
I understand the desire by some to campaign for a “soft independence” model. It’s not my preferred model. It’s not the model favoured by just about any SNP member I’ve ever met. It’s certainly not a model anywhere near compatible with the “Scotland in Europe” policy espoused by the SNP. Put aside the “we’ll be forced into the euro” arguments. We won’t be getting back into the EU at all if we don’t have control of our own currency nor if we follow the rUK’s “Global Britain” financial regulations into an ERG-led tax haven on (non-EU compliant) steroids. Such a “soft independence” was compatible with “Scotland in Europe” in 2014 but that compatibility ended in June 2016. Scotland doesn’t necessarily have to choose between the UK and the EU, but we can no longer have both.
First published on Common Space
Further reading: Amendments on Growth Commission for SNP conference
Sustainable Growth Commission report
Antoine Bisset says
“Scotland doesn’t necessarily have to choose between the UK and the EU, but we can no longer have both.”
Why would we want either?
The EU has failed the UK. Germany and France have prospered, the East European countries have nice new infrastructure and easy access to UK markets. Southern Europe has mass unemployment of young people, including those who have graduated from universities. The EU is not a good thing for us.
The UK has failed Scotland. Any benefits accrued by the UK from the EU or elsewhere are generally filtered out by England.
Look around Scotland. The infrastructure of today might have just about coped in the 1950s, but not now. A quarter of Scots live in poverty. Housing throughout Scotland is mostly horrible. Education is failing, fewer pupils learn French to Higher level now than they did in the 1960s. We have lost much of our industry and the jobs that existed here previously are now done in Finland, Germany and other places.
(Yet despite the fall in the teaching of European languages as a result of not being supported by successive Scottish governments, the SNP enthusiastically supports membership of the EU.)
This suggests to me that if an independent Scotland is going to use a currency other than the Scottish pound, the country would be advised to look elsewhere than the pound sterling and the Euro.
Many countries use the US dollar, generally as a second currency. The Swiss franc is an alternative. If a country is going to use a currency over which it has no control it would seem sensible that the currency chosen should be reasonably stable and be backed up by a consistently sound home economy. The dollar is backed by the industrial and economic might of the USA, while the franc is very safe the hands of the gnomes of Zurich.
florian albert says
Craig Dalzell is correct in arguing that an independent Scottish currency would give a Scottish government freedom of manoeuvre that retaining sterling does not.
However, there is a very real downside to setting up a new currency. It is worth remembering how unwilling the SNP was to go down that road during the 2014 referendum.
A new currency could loose part of its value. If this were to happen, those who have savings that were previously in sterling would suffer real economic loss. To avoid this happening, it is reasonable to assume that a new currency would be pegged at 1 to 1 value with sterling.
Unfortunately, people outside Scotland might not value the new currency as much. At this point, the health of the Scottish economy would be of crucial importance. Scotland’s deficit – as shown in the SNP government’s GERS report – would not encourage confidence.
Borrowing – needed to cover the deficit – could be a major problem. As Greece and others have found out recently, those lending attach strings; more often than not, austerity strings.
Those in the SNP favouring a new currency insist there would not, in fact, be any problem.
It is hard to avoid comparing this group with the optimistic Brexiteers on the right of the Tory Party; a group whose certainties have been deflated by reality.
It is likely that voters will make similar comparisons.
In 2014, every prosperous area of Scotland rejected independence 60 – 40. Craig Dalzell’s proposals will make it easy for them to vote the same way – if Indyref2 ever happens.
Keith Macdonald says
Mr Dalzell treats his fellow nationalists as if they were idiots. They know full well that using the pound sterling, particularly without any agreement with the UK, severely limits Scotland’s economic “independence”. Just like Alex Salmond in 2014 they persist with the use of the pound in spite of the political difficulties that policy entails.
There has to be a good reason. There is. About one third of the output of the Scottish economy (the equivalent of about 600,000 jobs) is sold to the rest of the UK. About 40% of the inputs to the Scottish economy come from the UK.
Any disruption to that trade, such as exchanging currencies, will hit Scotland hard. That harm will be ten times more for Scotland than the UK because that trade has a 10 times bigger share of the Scottish economy. No change in the constitutional relationship will alter these facts.
The brutal truth is that there is no prospect of economic “independence” for Scotland and I am sure Nicola Sturgeon knows it. Once we accept the facts of life we can at last get down to a proper debate on the legal relationship between Scotland and the UK based on the practicalities of jobs and public revenues and not a fantasy about going back three hundred years.