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Thursday, February 13, 2014

Osborne's 4 Conditions Represent Economic Reality - The SNP Must Decide What They Are Willing To Pay For

Dealing with the First Minister's claims that Scotland can share sterling with the UK despite separation, Mr Osborne said that "people need to know that is not going to happen".

He outlined the four criteria that would be needed to make a currency union work, based on analysis published today by the Treasury, and said neither the Scottish or British public would accept the reality of such an arrangement.
The four necessary criteria were (1)banking union, (2)great fiscal risk sharing, (3)the same monetary policy and a (4)union that could prove its permanence.

   While this is being reported here as a vindictive threat that fact is that economically he is quite right. A common currency would mean England was liable if Scotland couldn't pay (technically Scotland too in the opposite circumstances but it would we couldn't pay.

    Those 4 conditions are perfectly reasonable, considering their liability, and it is unlikely that even if they offered such a union future English governments would get elected if they promised to maintain it.

   There is always the option that the SNP could publicly accept that these conditions are inevitable and seek to prove they could meet them.

   (1) would mean the Bank of England running Scots fiscal regulation - this is not a bad idea and Scotland's banks might well prefer this to being subject to SNP fashions. It would certainly help keep Scotland's reputation as a financial centre and for this industry reputation is everything.

  (2) How does Scotland prove we are taking on as much risk AND in a position to pay it. The only way I can think of would be by mortgaging North Sea Oil as a common property. Anybody think the SNP will do that.

  (3) That means virtually all financial policy would be subject to a Westminster veto. That all Scottish borrowing be subject to London agreement. This largely makes us more dependent than we are now since now we at least have the Scotland Act to say what we control.

     Indeed there is an extra problem. 18% of our gdp is oil - but its price goes up and down like a yo-yo and, because Scottish oil is relatively expensive to get out, the profit on it is even more variable. That means if the Scottish government is to spend consistently sometimes it will be borrowing extensively and sometimes it will be in large surplus (at least in theory because I'm not sure I trust any of them not to find something to blow the surplus on.

   (4) This is a tough one, at least for an SNP government. A few years ago they were going to sign Scotland up to the Euro - but that went down the tubes for reasons which make it obvious why currency unions take more than hope. Worse, and I am surprised nobody has made an issue of it, the SNP have already made noises about repudiating Scotland's share of the national debt. Worse, our future Chancellor, John Swinney, has said it. It is a general rule that Chancellors do not threaten defaults - it gives potential lenders a bad impression. Any Scottish government led by the SNP has already given away a lot of financial credibility simply by making that threat. And has give away much of the credibility of being committed to a long term currency union.


Plans B

Nothing prevents the current UK money continuing to circulate in Scotland. As a number of countries use the US $. No London government could, or would want to prevent that. Holyrood could also print its own currency - making sure it is only a fairly small share of the currency in circulation. That would work - it would mean that our trade was still largely in UK £s so no extra transaction costs.

    So long as Holyrood was financially sensible they would be able to have a Scottish £ in circulation that matched the UK one.

   But then almost any financially sensible policy will work. It is only if Holyrood borrow more per head than the UK, print more and spend more and/or grow the economy more slowly that there will be any financial problem. But spending more while cutting taxes is exactly what they want independence to do. Well no, a financially destructive policy destroys - and will do so wherever the seat of government is.

   Independence does not make an SNP government independent of reality. In fact it makes us much more closely connected to reality, without a big neighbour to provide a cushion. With independence comes responsibility for our own future. The SNP's entire history has been of  blaming the English for everything and threatening to throw our toys out of the pram if they don't get more money from Westminster.

    That probably stops, one way or the other, with this referendum.

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