Accepting democracy

Most remainers have accepted the result of the 2016 referendum. A smaller number are stuck in reinterpretative mode, finding ever more ingenious reasons to argue that the vote to ‘leave’ need not necessarily mean ‘leave’. Some are in a party-political opportunistic mode and a politically well-placed few are in an implacably-determined obstructive mode, discounting the danger to democracy this represents.

However, I think it’s unlikely they'll accept they made the wrong call on this question. Even years of successful trade outside the EU may not sway them.

I understand this since I should have been similarly appalled had the result of the Scottish referendum gone the other way. I should have conceded the right of the majority to take Scotland in the direction they chose. I should not have conceded their right to take me with them. I was born British and I shall die British. Although resident in Scotland, married to a Scot and possessed of a better knowledge of Scotland’s history and economy than most, I shall not give up British nationality and adopt Scottish. Nor can I be compelled to do so, even if my homeland is dragged out from under my feet and I unwillingly become a sojourner in a foreign country.

This implies no disrespect towards those of a contrary opinion. They have their view and I have mine. I trust they will respect my right to my judgement as I respect theirs. A minority won’t, of course. Fortunately, the Good Friday Agreement provides a precedent on the nationality issue.

I suspect many remainers feel similarly about the EU, though some, sadly, have shown disrespect towards Brexit voters they consider less wise than themselves. This is regrettable. Ordinary working people, the folk whence I came, are as competent as bankers and businessmen to judge the EU’s impact on their own lives.

In modern identity politics, fundamental principles of a democratic society such as freedom of speech are well on the way to being lost. We howl down opponents or endeavour to silence them with pejorative labels. We deny platforms to peaceful political nonconformists.

We should hardly be surprised therefore if some are unwilling to concede their fellow citizens the right to disagree on Brexit. From those who do accept that right, however, a little more overt respect for it would help towards the necessary national reconciliation.

A cast-iron mandate

Nicola Sturgeon today claims she has a cast-iron mandate for another Scottish Independence referendum.

That mandate presumably dates from the 2016 Holyrood election, when her government lost overall control and became dependent on The Greens for a majority.

Yes, I know The Greens favour independence, but I'm inclined to wonder whether their voters had it top of their agenda when marking their crosses on the ballot paper. Presumably, if it had been their priority, these voters could just as easily have voted SNP.

Needless to say her mandate does not date from the 2014 referendum, where the nationalists lost by a 10% margin. At that time they claimed referendums were a 'once in a generation' event. It now appears that referendums will only cease once the SNP wins one, or alternatively when they are no longer maintained in power by The Greens.

Looking at the catastrophic mismanagement that ten years of SNP rule has brought to Scotland's economy and basic public services, we can well understand the need for another bout of tribalist shroud-trailing to distract the electorate. Nicola Sturgeon's own popularity is at last begin to flag too.

On the other hand the SNP has still not come up with an alternative plan for a national currency. Surely they won't try and run the busted flush of sharing the pound sterling for a second time?

Moreover the oil price on which the last projected independence budget relied has halved and it is now reckoned that an independent Scotland would have a fiscal crisis worse than that of Greece.

In the Middle Ages it was traditional for the Scots to invade northern England whenever the English were distracted by a European war, but reviving this opportunistic policy during the Brexit negotiations is doubly inappropriate.

Firstly it prevents Scottish voters having a clear idea of what relationship with the EU would be the alternative to independence. It still seems probable that Spanish and Belgian vetoes would be deployed to prevent Scottish membership either as a new member or a rump continuing member, so Scots would be voting for a pig in a poke on both sides of the ballot.

Secondly it complicates the position for UK and EU Brexit negotiators, neither of whom could be clear whether the UK government was negotiating for the whole island.

The truth is that the uncertainty caused by the Damocles sword hanging over the Scottish economy will deter inward investment until the threat of another referendum is removed.

And, perish the thought, should the separatists ever gain their hearts' desire, the outrage they claim to feel over being dragged out of the EU against their will is likely to be as nothing compared to the outrage of half the Scottish population dragged out of the UK against their will.

Identity Politics

We are told that in the aftermath of the European Referendum Nicola Sturgeon, the Scottish First Minister, felt deprived of part of her identity. This, it seems, caused her to think about how 'No' voters in Scotland might feel if ever those favouring independence gained a majority.

Perhaps it would be a good idea to think on this again before stirring up another dose of the tribalism that attended the first Scottish Referendum. In many cases this internecine hostility has yet to subside, at least partly because the demagoguery employed by the 'Yes' campaign was so shameless.

A second concern is clearly illustrated by the aftermath of both the Scottish and the EU Referenda; the losers won't give up. Just as nationalists will not accept the decision of the Scottish majority, so Remainers will not accept that the UK is leaving the EU. Some are conducting more or less open guerrilla warfare, for example claiming that parliament (with its large Remain majority) must be able to supervise the withdrawal negotiations or re-interpreting the referendum to claim that the vote did not require the UK to leave the Single Market. Ms Sturgeon claims that the UK majority cannot impose its will on the Scottish majority who voted to remain.

Withdrawal would be far easier and more likely to achieve prosperity if it enjoyed wholehearted public support; anyone can see that. But of course it does not. Remoaners even continue to allege that Leavers were too stupid to understand what they were voting for and hence their votes should not be respected.

I suspect that any majority which might in future be obtained for Scottish independence will never be overwhelming. How would the nationalists respond to almost half the population resisting the result of such a referendum?

I may have lived more than half my life in Scotland but I am British. I shall remain British. My British citizenship is integral to my identity. I shall not be deprived of it by any law passed in Edinburgh.  

Don't Ignore the Price

This letter was published in The Falkirk Herald yesterday.

There are people who desire Scottish independence at any price. That is their right. Those who take a more pragmatic approach should think twice about demanding a second independence referendum in the event of the UK voting to leave the EU.

It may well be that, offered a choice between leaving the EU and remaining, a majority of Scots would vote for Scotland to remain, but that is not on offer. Scotland as such is not a member of the EU and thus cannot remain a member if the UK leaves.

A subsequently independent Scotland would have to negotiate for admission as a new member and our application would be subject to veto by Spain and other existing members worried about their own separatists. The likelihood is we should end up outside both the UK and the EU.

However, suppose that, against the odds, we were to gain admission. The result would be the erection of an EU border between Scotland and England. Since a major reason for the UK's exit would be to cut EU immigration, there could not be freedom of movement across that border.

As an EU member Scotland would not be allowed to negotiate a bilateral trade agreement with the UK. The EU would negotiate for us and whatever deal they negotiated would apply to all EU members. There could be no special deals for Scotland.

EU rules require all new members to join the Eurozone. Even if the UK government were willing to allow a sterling monetary union to continue after independence, it would not be allowed. How many Scots really want to give up the pound and join a currency system that has strangled economic growth, plunged its poorer members into impossible debt and obliged its richer members to bail them out?

Given that the 2013 White Paper Scotland's Future looked forward to an oil price of $113 per barrel and still managed to show a projected fiscal deficit of £4.4 billion in the first year of independence, (in other words around £1,000 per adult member of the population), we may conclude that with oil prices currently in the region of $33 the Scottish fiscal deficit would now be eye-wateringly large. The present UK government's austerity would look like a spending spree by comparison with the cuts that would be required.

Unless the Scottish government reckons its people cannot do sums, the threat of a second independence referendum can be little more than a paper tiger designed to scare up extra votes for staying in the EU.

Sum You Lose

The recent electoral success of the SNP throws the spotlight back on the question of Scottish independence. It seems few people remember that the economic forecasts of the nationalists were discredited within months of last year's referendum. Perhaps therefore a summary of the crucial points might be appropriate.

In December 2013 The SNP published Scotland's Future, a document long on words and short on numbers. Yet amongst the numbers it did contain, one received surprisingly little attention. It was projected that in the first year of independence the Scottish fiscal deficit would be £4.4 billion, or approximately £1,000 for every adult member of the population.

Remember that figure, it is important. At a time when people were blithely talking about being one of the richest countries in the world, creating a more caring society and setting up an oil fund for the benefit of future generations, the numbers actually showed that Scotland was already living beyond its means and proposed to go even further into debt.

In order to arrive at this deficit figure, they made assumptions about likely sources of government revenue. Large receipts were expected from taxes on Scotland's oil and finance industries, which together form a disproportionately large component of our national income. Assumptions were also made that Scotland would continue to use the pound sterling as its currency and that Scotland would run a Balance of Payments surplus. All four of these assumptions were flawed.

Official statistics were pessimistic about future oil prices, given the threatened slowdown of the Chinese economy and the rapidly expanding supply of cheap shale gas from the USA. Alleging deliberate manipulation of the figures to disparage the potential riches of an independent Scotland, the nationalists substituted their own oil price estimate (of over $110 per barrel). In fact the official statistics turned out to have been over-optimistic. In 2015 oil prices are in the range $50 to $60, around half the nationalist projection. So far from supporting an independent Scotland, the oil industry was soon in need of UK government help.

The UK Chancellor of the Exchequer challenged the assumption that Scotland would continue to use the pound sterling. He expressed himself poorly. What he meant to rule out was a currency union by which the rest of the UK would continue to underwrite Scottish finances. Fresh from the 2008 banking crisis in which UK taxpayers had been required to find £46 billion to bail out Royal Bank of Scotland, that was hardly surprising.

His lack of clarity was misrepresented as a threat. "No-one can stop us using the pound," Alex Salmond declared. This was of course true. Surprisingly he did not go on to explain that no-one could stop us using the dollar or the yen or the Zambian Kwacha either.

An independent country may use any foreign currency it likes, provided it can get hold of enough by means of a trade surplus. Panama, for example, uses the US dollar. All that you have to do is give up any desire to control your own monetary policy. If Scotland were to use the pound without a currency union it would have no choice but to accept UK monetary policy as its own.

It also means the Scottish government could only run a fiscal deficit to the extent that it could cover the revenue shortfall with reserves of sterling.

An odd sort of independence, you might think, that resulted in less economic powers than Scotland already has?

When the currency problem became clear, the large Scottish financial institutions announced plans to move their services to UK customers south of the border. This was not simply a brass plate technicality to comply with EU regulations as nationalists claimed.

Banking profits derive from the difference between the interest rates at which banks can borrow and those at which they can lend. Essentially a bank's lending operations create new money and most of the money supply in a modern economy consists of bank deposits, not cash. In order to perform these money-creating operations, banks must be within the jurisdiction of, and accept regulation by, the central bank responsible for that currency. A bank attempting to create new foreign currency would be acting illegally; it can only operate in a foreign currency to the extent that it possesses reserves of that currency.

The net result of this alleged technicality would therefore be twofold.

      1. Scotland's financial institutions would be responsible to the Bank of England and pay their taxes to the UK Treasury.

      2. Without financial exports it is unlikely that Scotland could run a Balance of Payments surplus. This would eliminate the Scottish government's ability to acquire reserves of sterling and thereby to run a fiscal deficit.

Now please remember the important figure that I quoted at the beginning of this article. By the SNP's own projections, the fiscal deficit in the first year of independence was to be £4.4 billion.

This was before accounting for the fall in the oil price and the loss of the financial services industry. It was before losing control of monetary and overall fiscal powers as a result of sterling becoming a foreign currency. This £4.4 billion deficit was actually a serious underestimate, perhaps not within several orders of magnitude of the reality.

Not only would a future Scottish government be unable to afford the promised fairer society, it would have to borrow improbable sums just to keep public spending at present levels.

Why improbable? Because in order to borrow you must first establish that you are creditworthy. Why might the international financial community suspect that Scotland was not creditworthy? Because the SNP threatened that if they did not get their own way on the currency they would walk away from responsibility for Scotland's share of the UK National Debt.

Let us leave aside whether one could throw over this debt without sacrificing Scotland's claim to a share of the national assets and infrastructure which that debt has financed, much of which is not located in Scotland and nearly all of which would need to be replaced by an independent country starting from scratch.

Let us also leave aside the fact that a country involved in a major financial dispute with an existing EU member would struggle to find an easy path to re-joining the EU.

Just consider this single point. What international lenders would offer reasonably priced funds to a new government whose first independent monetary act had been to deny any responsibility for debts accumulated jointly under the previous political union?

I am an economist. But of course I am also human. I might be wrong. To persuade me that I am, would enthusiasts for independence please not shout at me. Just show me your numbers.

And before you do, please check that they add up.

Beware of Economic Gales

Winter gales are nothing new on Sliabh Mannan. On those parts of the moor where the soil is heavy clay, tree roots tend to spread along the surface rather than penetrate downwards. It is never a great surprise when I go out to walk my dog after a gale to find some woodland giant blown over intact, with its root system now forming a vertical wall at the windward end.

Having no great depth of root might be seen as a metaphor for the Scottish economy. We are heavily dependent upon a fairly restricted range of industries, notably oil and finance. When times are good for these industries they can be very good. Basking in the glow of high employment and government revenues from profits taxes, it is tempting for non-economists to be seduced by propaganda assuring them that Scotland is one of the richest countries in the world and could be a Utopian society if only we were independent.

Following the financial crash of 2008 we now see the oil price crash of 2014-15 and the announcement of redundancies in the oil industry. Nevertheless the Scottish government continues to demand a form of Devo-Max under which we should become dependent upon our own highly volatile taxation resources rather than insulated from economic gales by a continuation of the present UK funding arrangements.

It seems to me that members of the Scottish government would benefit from taking a trip out to Sliabh Mannan and learning the lesson of our fallen trees.

The Economic Consequences of A 'Neverendum'

Just a few months ago we were assured that the Scottish Referendum would settle the independence question for a generation. Now it seems that far from accepting the result of the vote, Yes campaigners cannot wait to try again. There are three reasons why this 'neverendum' is a bad idea.

1. Firstly, according to SNP budget plans for the first three years of independence the oil price was to be $110 per barrel. In fact the oil price is about $60 and expected government revenues would be a quarter of what was so recently predicted. We already faced an annual budget deficit and the requirement to try and borrow from the markets at the same time as we were throwing over responsibility for our share of UK National Debt in a fit of pique over not being admitted to a sterling currency union. The No vote turns out to have rescued us from immediate bankruptcy as a country. Hasn't anyone noticed?

2. The major Scottish financial institutions have all made contingency plans to decamp to London. They announced this during the Referendum campaign. Now that the idea is out in the open and it hasn't had the negative commercial impact that might have been expected, it will be much easier to contemplate actually doing it. Loss of such a large industry would inflict huge damage on the Scottish economy.

3. Evidence suggests that inward investment decisions that had been postponed awaiting a resolution of uncertainty caused by the Referendum have been postponed again since the uncertainty is still not resolved. This is great news for parts of Northumbria and Cumbria that can expect investment intended to supply Scottish markets as well as their own. It is less obvious why politicians with Scotland's best interests at heart should wish to prolong this damaging uncertainty indefinitely.

It would be a good idea if Scottish politicians remembered that in the middle of all this constitutional argy-bargy there is a little matter of running the country to be considered.

We have all lost

How very thin the crust of civilisation is. There we were, patronising the mediaevalism of other cultures, confident that we had progressed beyond all that nonsense.

Then along comes another false messiah, denying every inconvenient fact and promising a naively simplistic road to (earthly) paradise. Lo and behold, masses of our fellow citizens (on both sides) promptly revert to tribalism. The English backlash is no prettier than the Anglophobia that provoked it.

Perhaps someone will remind me when was the last time an arbitrary line drawn on a map, leaving minorities numbering hundreds of thousands on each 'wrong' side, helped solve rather than create problems?

Or the last time that emphasising what divides people rather than what unites them led to peace and prosperity?

Whoever wins on Thursday, we have all lost already.

Goodbye Primrose Path

If you see a friend walking towards the edge of a cliff whilst playing a game of blind man's buff, what do you do? Call out a warning, I expect.

You might well be surprised and upset when your friend shouts back, "Scaremonger!" and continues to walk forward.

"No really, there's a cliff!" you call.

"Disgraceful negativism!" he replies, sticking his fingers in his ears and starting to hum "La,la,la - can't hear you!"

Separatists amongst Scots seem to believe that as long as you dress up market forces as pantomime villains and hang a sign round their necks labelling them 'English Tory Scares' you may safely ignore them. Economic laws do not apply in the land of Braveheart.

But isn't it really going a bit far to respond to relocation decisions from major financial institutions by continuing to shout 'Scaremonger'?

Just what counts as economic evidence if capital flight does not?

People who don't trust what might happen at the ballot box are voting with their wallets.

It might be a good time to remove the blindfold and take a look ahead.

Scottish Monetary Policy

If Scotland continues to use sterling despite no longer being part of a currency union, we will have no choice but to accept whatever monetary policy the UK decides upon.  There are 58 million in the UK and 5 million of us.  They will have no more reason to take account of a foreign Scotland when determining their monetary policy than the USA has to take account of Panama when determining theirs.

Deduct the forty odd Scottish Labour seats and the chances are that the next UK government is Conservative.  They will implement Conservative monetary policy in the UK and that policy will apply in Scotland because Scotland will not have its own monetary policy.

Perversely this means that, so long as Salmond’s Currency Plan B remains the use of sterling without agreement,  voting 'yes' in the referendum results in the imposition of a Tory government's monetary policy in Scotland.

Perhaps this is what he means when he promises that Scotland will get what it votes for.

No-one can stop us!

"No-one can stop us using the pound!"

That is true. No-one could stop us using the dollar or the yen either, if we chose to do so. It just wouldn't be smart. Neither would using the pound outside the UK currency union.

No-one can stop Panama and Ecuador using the dollar, so they do use it. But the dollar is a foreign currency, controlled by a foreign country. These two Latin American countries allow the USA to enforce fiscal and monetary discipline upon them because they can't easily do it themselves. They have to generate trade surpluses in order to accumulate domestic spending power. Their governments are not masters of their own economies.

So if Scotland wants to wrest control of monetary policy away from London only to hand it straight back again, this time with no influence over it whatsoever, then yes, no-one can stop us.

On the other hand, good luck generating the trade surplus needed to pay for the promised fairer society after the financial services industry has been forced to move south of the border in order to stay in the same jurisdiction as its lender of last resort. Most Scottish financial products are exported to the UK.

Good luck obtaining a fair share of The Bank of England's foreign currency reserves after you've refused to take a fair share of the UK national debt.

Good luck finding people to purchase Scottish government bonds when you've shown yourself likely to default whenever you don't get what you want.

But we can always console ourselves with the thought that no-one could stop us!

Scottish Referendum:Currency Plan B (for Broke?)

This is the text of my letter,  published in The Falkirk Herald last Thursday:

"It's Scotland's pound and we're keeping it," they say. We are still being treated like children who do not understand economics.

The pound is the currency of the union. It is not Scotland's pound, nor is it England's, Wales' or Northern Ireland's pound. Scotland proposes leaving the union. You cannot divorce and expect to retain the joint account. When you're single again you must establish your own account and pay your own way.

It's no good repeatedly telling your ex-partners that it's somehow in their interest to continue underwriting your debts; after the 2008 crisis they won't believe you.

If Scotland used the pound unilaterally we would have to accumulate pounds by trade, since our government could not create for itself an increased supply of a foreign currency. Failure to generate a trade surplus would thus preclude the blithely promised fairer society. You might want it, but you can't have it if you can't pay for it.

Without a central bank, borrowing would become more expensive, especially if the Scottish government followed through on its reckless threat to throw over responsibility for its share of the UK National Debt. Remember a Scottish Chancellor under a Scottish Prime Minister recently increased that debt to rescue The Royal Bank of Scotland. No-one lends cheaply to those perceived as defaulters.

Loss of financial sector jobs could easily run into tens of thousands, reducing tax revenues, increasing the Scottish government's need to borrow and raising interest rates still further.

Using sterling without agreement has costs. It's not just a matter of thumbing our noses at the rest of the UK and saying we'll do as we like.

Scotland and self-determination

If you confuse nationalism with patriotism, you are also likely to confuse self-determination with separation. Scotland was not conquered; a bankrupt country chose voluntary union because it desperately needed access to the financial resources of its more prosperous neighbour.

Those resources again rescued the country from bankruptcy as recently as 2008, when the UK raised £46 billion to save RBS.

That UK government was led by a Scottish Prime Minister and a Scottish Chancellor. Far from failing Scotland, it enlarged the national debt on Scotland's behalf. SNP leaders now threaten not to pay our share.

The sum needed to bail out a single Scottish bank contrasts with the half billion a year transaction costs the UK may suffer should it decline to share its currency.

It seems that, unlike the separatists, the UK government can do sums.

Scottish Independence - Shouting is not Truth

In economic forecasting, it is standard practice to project a range of possible outcomes, from the best to the worst case with the most likely somewhere in between.

In the independence debate, the separatists have consistently claimed that the best case scenario is what will actually happen. They portray this as 'making a positive case'.

Should any opponent point out that the most likely outcome is actually considerably worse than than this, he is accused of 'negative campaigning', whilst anyone who has the temerity to suggest that the worst case is every bit as likely as the best case is guilty of 'disgraceful scaremongering'.

The tone of the debate would be improved if everyone accepted that in the real world things do not always go as we wish them to go and other people do not necessarily agree with our view of what is in their best interests. Any sensible person hopes for the best but prepares for the worst.

It is a statement of the obvious that the single minded pursuit of a new prize may very well lose us prizes that we have already won.

Divided we fall

Given the unpalatable nature of reality, separatists tend to deny economics and appeal to raw emotion. This tactic is effective but divisive.

The bullying conspiracy against Scotland that has been conjured up in the popular imagination loses no potency by virtue of being nothing but market forces dressed up as a pantomime villain. Tribalism is immune to reason.

Since a large minority will remain passionately opposed to either outcome of this referendum, divisions will be slow to heal. In a future crisis we shall be tempted not to pull together but to blame our neighbours who foolishly voted the wrong way.

We should have learned from history that a common legacy of unrealistic expectations is social conflict and a search for scapegoats. Inside or outside the UK we are going to suffer for the disunity that has been so recklessly fomented.

Scottish Independence - A Dialogue of the Deaf

Recent triumphalism from separatists claiming to be winning the argument is frustrating to people actually trying to think through the problems of independence. Rational discussion has not even begun. To date the so-called debate has been an emotional pantomime in which every claimed disadvantage is met by cries of "Oh no it isn't!" and little else.

To stress the risk of losing what we already have is not negativism. We have obtained certain advantages through the union. It is for separatists to explain either why we shall not be putting these advantages at risk or why it is worth it. Yet all we hear is flat denial of troubling claims such as those made by:

1. The Chancellor of the Exchequer, the Chief Secretary to the Treasury and the economic spokesman of the Labour party, who say that there will be no sterling currency union because it isn't in the UK's interest;

2. The Governor of the Bank of England who says that a sterling zone would require some ceding of national sovereignty in order to avoid the sort of financial instability that has hurt the Eurozone;

3. The Prime Minister of Spain and the President of the EU Commission who say that Scotland will not be an automatic member of the EU and will have to apply;

4. Economists who suggest that a refusal by Scotland to accept its share of the National Debt would lead to downgrading of our credit rating and a rise in our interest and mortgage rates;

5. The Institute for Fiscal Studies which says that oil revenues have been overestimated and Scotland cannot afford even current levels of public spending;

6. Financial institutions which have indicated that they may have to move south because regulations require their headquarters to be in the same jurisdiction as their largest market;

7. The Defence Secretary who says there is no guarantee that future UK contracts for warships etc. will be placed with a foreign country;

8. The former Secretary General of NATO who doubts that Scotland will be enthusiastically welcomed into the organisation whilst evicting Trident, an important part of NATO's defence strategy;

9. The Institute of Chartered Accountants in Scotland which has warned of major uncertainties for pensions after independence;

10. The Home Secretary who says there will have to be border controls and passport checks because continued free travel is incompatible with Scotland encouraging immigration whilst the UK discourages it.

These are just ten examples of warnings to which the standard response has been denial and accusations of bluff or bullying but not facts.

Let evidence now be brought forward. Let us hear detailed reasons why all these well-informed people are wrong. Until such time we may reasonably doubt that a rational, unemotional argument for independence has even been made, let alone won.

Currency unions are like joint accounts

I really did not intend to devote so much space on my blog to the economics of Scottish independence.  I feel obliged to do so because political spin doctors have been engaging overdrive in an apparent attempt to obscure the issues and reduce popular understanding. I have no problem with people making an informed choice.  I do have a problem with people being misled.

In my letter published in yesterday's Falkirk Herald I used the same metaphor that I have previously used on this blog.  When I compare a currency union to the joint bank account of a married couple, I do not of course mean to suggest that they are the same thing, merely that they have a number of helpful similarities.

Not many non-economists have a clear grasp of the nature of currency unions.  Indeed the history of the Eurozone suggests that either a fairly substantial number of economists did not understand these principles either, or that political confidence overwhelmed economic objections.  The disparate economies that were enclosed in the straitjacket of the common currency were simply not sufficiently closely aligned.  A certain number of conjuring tricks were employed to make the figures look reasonably convergent in the qualifying year, but everyone should have realised that the important issue was not the statistics but the underlying reality.

A decade of growth camouflaged the problem; it did not make it go away.  The long rolling series of near defaults was always going to happen. The fact is, that  two divergent macroeconomic policies cannot be accommodated within a single currency zone.

Non-economists will, I hope, find the problem simplified by my analogy.  Like our divorcing couple separating their bank accounts in order to prevent one party from spending the other's money, two countries each need their own currency in order to operate any approximation to an independent monetary policy.  The Eurozone went for the joint account first and  loveless political marriage seems bound to follow if they will not reconsider their mistake.

Scotland is a tenth of the size of the UK and any currency union between the two would never result in her being able to underwrite UK debts.  The UK would have no partners in underwriting Scotland.  In return for taking on unlimited liability the UK is offered freedom from exchange costs that at most would amount to a little more than 1% of what it cost the UK to bail out RBS alone.  Can anyone seriously claim that represents a good deal for the UK?

There is no economic justification for divorcing London in order to marry Berlin.  The Eurozone is going to tighten its political integration.  Unofficial use of sterling can only be a short term stratagem since it would deprive Scotland of any effective monetary policy at all. 

Independence means a new Scottish currency.  There.  It wasn't so hard to say it after all.

Read My Lips ...

I vaguely remember learning about the South Sea Bubble of the 18th century. Apparently back then there was such enthusiasm for floating new joint stock companies that people would even buy shares in 'a company to do something, nobody to know what.'

We are far less gullible today. I mean, no-one would vote for 'a country to have a currency, nobody to know what,' or 'a country to be in the EU, nobody to know how,' would they?

In the news this week:

• The Yes campaign's response to the refusal by all three UK parties and the UK Treasury to contemplate a currency union with Scotland is not to devise an alternative currency scheme. Instead they claim that nobody except the Yes campaign can do sums properly.

• They also point out that we may be dragged out of the European Union against our will by the 2017 in/out referendum. Safer to vote for independence and be sure, eh?

Since you couldn't make it up, it's just as well we don't have to.

Scotland's Currency Options

There has been much talk of the four currency options for an independent Scotland. Much that I have seen suggests that not everyone understands what the options are, let alone what advantages and disadvantages each has. Perhaps, leaving aside political issues for the moment, I might be allowed to outline them.

1. A sterling currency union means that both the UK and Scotland continue to use the pound by agreement. Between two economies of such unequal size as Scotland and the UK such an arrangement has little to recommend it except familiarity, (which was not enough to preserve the currency union of The Czech Republic and Slovakia after their political split.)

• It is not possible for a single central bank to operate two monetary policies. Market forces would oblige the central bank to pursue the monetary interests of the larger partner, even if political factors did not.
• Likewise neither partner could pursue an independent fiscal policy, because each government's borrowing would increase the common money supply. Agreement would be required.
• The UK would therefore have to cede a degree of its own monetary independence to Scotland. It has previously resisted doing this for the Eurozone, which is a much bigger market.
• An additional disadvantage would be each partner taking on an obligation to underwrite the finances of the other without the multinational burden sharing that is possible within the Eurozone.
• This is the option that the UK has ruled out. There are good economic reasons for ruling it out and no advantages for the UK that would come near to compensating for the loss of independence.

2. Informal use of sterling by Scotland means Scotland continuing to use the pound without the UK's agreement. This is the kind of arrangement used by Ecuador and Panama in respect of the dollar. It could not be prevented by the UK. It would avoid the introduction of exchange costs for trade within Britain, but is far from meaning that nothing would really change. Effectively it would take most of the so-called 'levers' of economic influence out of the hands of the Scottish government.

• It would not allow Scotland to create its own money supply.
• It would prevent a Scottish central bank from operating a meaningful monetary policy.
• Although this would also remove the need for UK government agreement of Scotland's fiscal policy, the same sort of constraints would be imposed instead by the need to obtain sterling through trade etc.
• It would remove the guarantee provided by the UK underwriting Scottish finances. This would imply a higher government borrowing rate for Scotland.

Thus neither formal nor informal currency sharing would allow a great deal of economic flexibility to the Scottish government.

Both formal and informal currency sharing would remove from the Scottish government's economic armoury the possibility of adjusting its exchange rate with the UK in order to absorb any imbalances that might develop.

3. A new Scottish currency is the only other option likely to be immediately available to an independent Scotland.

• This has a lot of short term costs and risks, including the introduction of exchange costs with the UK.
• However a more serious problem would be the need for the new currency to be underwritten by a Scottish government with no track record of debt management and which has incautiously flirted several times with the option of not taking on its share of UK National Debt. Possible lenders will remember perfectly well that a lot of the UK debt was incurred in bailing out Scottish banks and threats to walk away from responsibility for that debt can only raise the cost of borrowing by an independent Scotland.
• It might take some time to reassure foreign exchange markets that the new currency was 'hard', (i.e. it can be trusted to hold its value.)
• The new currency would also be a 'petrocurrency', (i.e. volatile and vulnerable to oil shocks.)

4. Joining the Eurozone is not a immediate option, because the entry conditions require two years' stable management of the domestic currency, a qualification which a Scottish government would lack. There may or may not be separate problems associated with Scotland's admission to the EU itself.

• It needs to be borne in mind that the Eurozone is just another currency union and that Scotland would be even less influential within this much larger zone than it would be in a sterling zone.
• Effectively monetary policy would be determined centrally and fiscal policy would be subject to the EU's Stability Pact.
• Even this has not been enough to preserve stability in the Eurozone of late and it seems likely that more political integration within the zone will be required in order to cement the stabilisation of the Euro as a currency.

Those, very briefly are the options. None of them are as advantageous as the present arrangement, but of course the present arrangement cannot be combined with independence.

Bailing Out Other Countries

Some people perceive double standards between the UK's bailout of Ireland in 2010 and its disinclination to accept a sterling currency union that would include an obligation to bail out an independent Scotland.

The economic logic is actually straightforward. Ireland belongs to the Eurozone. In 2010 the UK contributed about £7b of an EU rescue package of around £85b, in the process extracting the concession that it would not have to bail out Eurozone members again.

In a prospective sterling currency union of two, the whole of the burden of bailing out one partner would fall upon the other. There would be no obligation on EU members to contribute, any more than they contributed to the £46b UK bailout of RBS.

There is one other big reason for the UK not wanting to share sterling. The Bank of England cannot operate two monetary policies. For example, it could not simultaneously create a stimulus in Scotland and apply restraint in England. Money would simply flow between the two.

It is Scotland that is proposing to leave the UK, not vice versa. There are ten times as many UK Citizens outside Scotland as inside. There is no reason for them to let us take away with us a piece of their economic independence.