There was an error in this gadget

Friday, 3 February 2012

Is The SNP Beginning To See Sense On Currency?

John Swinney's latest comment on the currency that Scotland should use after a "Yes" vote in the referendum brings some clarity at last. He said, "I can't forsee a set of circumstances that will see the economic conditions being correct for the Euro for some considerable time. It would be difficult to define that (suggested for the next decade) but it feels neither to me like the short term or the medium term." He then went on, "I don't think you can get to the position of fiscal union in the EU and I don't think it would be desireable". That is encouraging to my nationalist ears but desireable or not, it is the way the EU is heading, if it wants to make the euro work.

All that is needed now is for the official SNP to explain why they think it is such a good idea to retain sterling, thereby ensuring that the Scottish economy would continue to be controlled by London, something which has not proved to be to our advantage in the past. George Kerevan wrote a decent piece in The Scotsman today, in which he outlines some of the advantages, highlighting how the Irish Free State continued to use sterling in 1922. As a party member, mindful of party policy and the importance of party discipline at this stage of the campaign, Kerevan has ignored the fact that Scotland today, is an entirely different country to the Free State in 1922, with a considerable number of economic advantages Ireland did not have. The presence of oil will be increasingly underplayed by the Unionists, the closer we get to the date of the referendum and we should not be surprised to read the headlines in the Daily Mail the day before polling, "North Sea Oil has Dried Up!"

If the SNP has become disillusioned by the euro, it looks as if they intend to keep sterling permanently, as they have made no mention at all, of a Scottish currency. Of course, that situation could be altered by the fact the SNP will not always be the government of an independent Scotland and, the party under different leadership, could change its policy; but we are faced at the moment with the choice of a party which would in all likelihood form the first government of an independent Scotland and their policy is to retain sterling in perpetuity. The policy mix followed by a Scottish government will be as important as the resources available and that policy mix will be constrained to a far greater extent if the Bank of England controls monetary policy. Interest rates will be set with the economic conditions and interests of England in mind, rather than those of Scotland. As fiscal policy should complement monetary policy, the Scottish government will be forced to tailor fiscal policy to suit the monetary policy with which they will be presented by the Westminster government. John Swinney has stated he would enter into a "dialogue" with the Bank of England about Scottish spending plans before pressing ahead  with them, in order to provide assurance they would not get out of control.

Under that scenario, investment in Scotland will be determined by English economic conditions by and large. Thus Scotland would be denied the freedom that its own currency would provide. To allay fears of instability or the currency becoming too high relative to those of our main trading partners at the time of independence, the Scottish currency could be "pegged" to sterling or, if it was thought to more advantageous, to the euro. For almost a decade until 2006, the Chinese pegged the renminbi to the US dollar, but as China enjoyed an absolute advantage over the USA in terms of the costs of production, this allowed China to undercut US producers and flood the US domestic market with cheaper goods. Under pressure from the US, the EU and other trading partners China finally agreed to cut the tie to the US dollar and switched to a "managed float" against a basket of currencies of her main trading partners, effectively revaluing the Chinese currency.

The economic position of the most recent members of the EU from Eastern Europe has changed over time as they manipulated their currencies to suit their own circumstances. Hungarian debt has been downgraded to "junk" status, despite being bound by the excess deficit agreement of the EU. Hungary devalued her currency by 25% in 2009 but managed to keep inflation to 3%, otherwise her economic situation could have been much worse. After adopting a capitalist economy in 1991, Estonia soon became the "Baltic Tiger", adopting a flat tax system, introducing reductions from a rate of 26% in 1994 to 21% in 2008, finally freezing it at that rate in 2009. Unfortunately, the economic expansion was allowed to get out of control, creating rampant inflation and a property bubble, which led to unemployment rising from 3.9% in 2008, after the financial crisis, to 15.6% in 2009 when the situation was finally addressed. Estonia's entry to the euro was delayed until 2011because of the inflationary pressure which had been caused. Poland's entry to the euro, if it happens at all, is unlikely before 2019 because the country has already found just how important it has been, having their own currency in order to help to avoid external shocks. Poland was able to avoid recession, its ratio of debt to GDP is only 50% and over 60% of the population is against joining the single currency.

The different economic conditions of each of the new entrants to the EU made it imperative that the one-size-fits-all regime of the euro was avoided. Having their own currncies allowed them to taylor their economic policies to suit their individual economic conditions. Not all of them were equally successful in addressing and dealing with those economic conditions and none of them can be taken as a "perfect" example for an independent Scotland. However, what is clear is that flexibility or the freedom to adjust policy to changing circumstances, will be vital if independence is to succeed. Allowing the main levers of economic management to be in the hands of an organisation which is furth of Scotland and which will have no obligation to even consider Scotland, is hardly going to allow that to happen.    

No comments:

Post a Comment