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Monday, 12 March 2012

More Of The Same?

My frequent return to the topic of an independent Scotland's currency, is invariably prompted by the attempts by the SNP to persuade the people of Scotland that retaining sterling would have no adverse effects on either Scotland's economy, or our independence of action, as we are forced to address whatever economic circumstances we face. Within the space of approximately seven days, the First Minister Alex Salmond, has been questioned by both Andrew Neil and Isobel Fraser of the BBC about the inconsistencies in the party's policy on the currency. On each occasion, the First Minister has insisted, that not only would a currency union with sterling, with the Bank of England as the bank of last resort, have no impact on our fiscal policy but that control of fiscal policy, "really is independence in the modern world." In a previous world, Alex Salmond was a professional economist with the RBS, therefore I find it difficult to accept that he actualy believes that. If he does, his naivete is quite astonishing and, if he doesn't, he is deliberately trying to mislead the Scottish people. What I find equally mystifying is that none of his advisers take him aside and have a wee word in his ear.

In each interview, he has attempted to explain the current failure of the euro zone in terms of the attempts by the ECB to devise a system of interest rates which would accommodate "productivity rates as diverse as those in the German Rhur and the Southern tip of Greece". He then claimed that productivity rates in the UK are so similar, that a currrency union which included the countries of the British Isles would pose absolutely no problems for an independent Scotland. Both statements beg a number of questions but they are not the only statements by Mr Salmond that have played fast and loose with the facts. Unfortunately neither Andrew Neil nor Isobel Fraser saw fit to ask any of the more obvious questions that were begging to be asked. Mr Salmond has used the line for some time now, that control of fiscal policy is what matters "in the modern world"; suggesting that it matters little which central bank controls Scotland's monetary policy. He has also claimed on one occasion, that "67 countries in the rest of the world have currency unions "more or less the same" as the one he is proposing with sterling, although he had to rectify that statement within 48 hours.

If we look at the policy positions adopted by the SNP over the years, the inconsistencies become very obvious. For many years the SNP argued that London's control of Scotland's monetary policy rarely worked to Scotland's advantage, insisting an indpendent Scotland must "have control of its own money and interest rates". It then switched to supporting the Exchange Rate Mechanism (ERM) although that was simply a tighter version of the old Bretton Woods Agreement and did not involve surrendering control of the currency. However, on the setting up of the euro, the party quickly changed policy to support joining the new currency, despite the obvious contradictions. If London control of the Scottish interest rates was unsuitable, when only three countries and a province were involved, how could it be argued that interest rates set by the European Central Bank (ECB), would possibly be suitable, particularly when it had to consider 17 different and diverse economies? The SNP's rather tame explanation was that "we would have a seat at the top table". Salmond's explanation for the failure of the euro viz. the different productivity rates between the German Rhur and the Southern tip of Greece (nonsense) were just as obvious when the euro was set up in 1999 as they are now. Why did he and the SNP not notice that fact in 1999, or did they simply not understand the implications? Plenty of others did and were not slow to tell the party. Alternatively,  is Salmond's current explanation just another attempt to fob off his questioners?

If similar productivity levels will ensure the success of a currency union with sterling, what is Salmond's explanation for the unsuitability of monetary policy in Scotland for much of the post war period and why was the SNP traditonally so hostile to London's control, but were quite happy to accept Brussel's control despite the productivity levels being so diverse? The only reasonable conclusion is that the change in policy was dictated by political rather than economic considerations - Brussels was not London. Otherwise, his explanations just do not stand up to examination because they do not make sense. There are 192 nations as members of the United Nations, many of them established since the end of the Second World War and the fall of the Soviet Union. If, as Salmond has claimed, "control of fiscal policy is really independence in the modern world," why are there only 67 countries out of 192 in some form of currency union, and some of those unions are of an "informal" nature? Why do small countries like Norway, Switzerland and New Zealand persevere with their own currencies, if the same or similar results could be achieved by joining the euro or, in the case of New Zealand, having a currency union with Australia, a much larger country?

Salmond continues to insist that the Bank of England is independent of the Treasury, that it would not control Scotland's fiscal policy and, that any agreement to which Scotland would have to adhere would be no more restrictive than a responsible country would impose in any case. The Bank of England's "independence" can be overstated as the government sets inflation targets and, if those targets are not met, the Bank is compelled to provide the government with an explanation. The Bank of England is a creature of the UK government, with its various powers and responsibilities within the gift of government as evidenced by the granting of its "independence" and removal of its control of the banks by Gordon Brown, control which is shortly to be returned by David Cameron.

As I have pointed out several times on this blog, the euro is driven by politics rather than economics and when we see what has happened in Greece, in terms of the cuts which have been imposed and in Italy, which, along with Greece has had its very government imposed, it must be obvious to any observer that there is no limit - at least none that has been reached - to the level of austerity measures which transgressing members will be required to bear in order to prop up a currency union which has already failed. The history of the currency union in the EU is one of failure, with the euro being simply the last in a line of failures. When the Bretton Woods agreement, set up after the War, failed and the major countries switched to floating exchange rates in 1971, the Common Market, as it was then, established the "Snake in the Tunnel" as its first attempt to keep the fluctuations of the various currencies within a band of 2.5% either side of par. That lasted only two years until 1973, when the US dollar was allowed to float freely. The European Monetary Zone (EMS) foloowed but that had also collapsed by 1977, by which time the D Mark had become the dominant currency, with only the Belgian and Luxembourg francs remaining tied. Then there was the ill-fated Exchange Rate Mechanism (ERM) from which the UK was forced to withdraw in September 1992, followed a day later by Italy, a fact which is rarely if ever even noticed, although the entire system of the ERM collapsed when the currencies were allowed to float 15% either side of par only 18 months later.

The Stability & Growth Pact was set up in order to avoid the kind of debacle which has brought the euro to its knees. The Germans insisted it be established because it did not trust its southern European member colleagues to be as fiscally prudent as it was and it contained the provisions which Salmond has suggested any responsible country would wish to follow. He is perfectly correct and, in ideal situations the vast majority of countries would be quite happy to comply, but how often is any country faced with ideal economic conditions? The Pact required countries to have annual budget deficits of no more than 3% of GDP, with National Debt no more than 60% of GDP but there is not a single member state is anywhere near complying to that extent. It is now well known that countries such as Greece, Italy, Spain and Portugal could not meet those requirements when they joined but neither could Belgium and the Netherlands. Both Germany and France have run substantial deficits for years and we all know the critical situation faced by Greece et al. In other words, politics has always determined both the nature and direction of the euro and it will continue to do so.

In his research paper "Deja V-Euro - The history of Previous Currency Unions" Sam Vaknin records the failure of currency unions throughout history, pointing out that 120 years ago, Walter Bagehot predicted, "Before long, all Europe, save England, will have one money" at a time when there was heated deabte about whether there should be a single European currency. There is a long history of discussions, debates, attempts to establish and even short term successes in establishing currency unions. The very few which have survived always entail the complete surrender of monetary policy and, according to Vaknin, "a sizeable chunk of national sovereignty". In my many spats with the cybernats and my debates with SNP members on the question of the euro and the suitability of maintaining sterling, invariably I have been asked, "Are you saying that Germany and France are not independent?" That is exactly what I was saying - twenty years ago, but it has needed the current crises to concentrate minds on just how much sovereignty is surrendered in a currency union such as the euro and, the one proposed by the SNP with Sterling. Is it going to take another crisis before the party finally admits the reality, makes some effort to look further ahead than the next council elections and asks the most obvious question of all - why is the SNP so opposed to Scotland having its own currency?

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