PINSTRIPE
I am, for the first time in my life, rather ashamed to be Scottish. Nicola Sturgeon’s attempt to have a referendum at the point when we have the least information on which to make an informed judgement is naked opportunism. Worse is that she makes every effort to paint Scotland as a victim being bullied by the nasty British Government. This endless posturing and spinning, so clearly designed to set Scots against Britain, is embarrassing and sad. The English are our friends and only recently Scotland voted to remain part of Britain, our First Minister should remember that.
What the First Minister has now done is exactly what Scotland’s economy didn’t need which is to create more uncertainty. This will hurt Scotland. Investment decisions delayed, businesses more cautious, attraction to inward investment reduced, growth lower, jobs not created and the services we want harder to pay for.
As part of the UK , financial transfers to Scotland help pay for the things we want. If we become independent those transfers will no longer be made.
The underlying problem is the large annual deficit which Scotland runs. The translation mechanism which means that this problem would actually impact on people’s lives if we were independent - cuts to the NHS, fewer teachers, less money for infrastructure, higher taxes, is the currency.
The optimal position for a currency is where there is political union, a single market, fiscal transfers within the currency area as well as a single monetary authority and lender of last resort. The US has this, the UK has this, the EU does not. In the long run the Euro will either break apart or the Euro countries will have to move towards full political union. The EU political elite know this but they dare not tell their electorates.
An independent Scotland, applying to become a member of the EU, would almost certainly get in but would just as certainly have to sign up to the Euro, even if the joining date is deferred. What is different now compared to when the “once in a generation” 2014 independence referendum was held, is that the UK is leaving the EU. It is simply inconceivable that the EU would allow an independent Scotland to join the EU and keep the currency of another country which is outside the EU. No other country in the EU has this. If Scotland joins the EU it is on a one way trip to the Euro and more control from Berlin and Brussels, the destination is clear even if the journey time is not.
The nationalists will tell us that we can have our own currency and tie that to the pound. Until we eventually had to join the Euro that might be true but there is a giant flaw at the heart of this option. No open economy , however powerful , can control both its interest rate and its exchange rate over a long period. Scotland’s deficit means we need to borrow. If we had our own currency we would have to be prepared to do two things. First, to reduce our level of annual budget deficit to what international investors regarded as sustainable - this will require spending cuts and tax rises on a scale which would make the Tory austerity years seem like a golden age. Second, we would have to be prepared to raise our interest rate to whatever level it takes to defend our currency exchange rate and enable us to borrow money. The official interest rate in Iceland is currently about 5%, in 2009 it was 18%. Sounds like fun?
Pinstripe is a senior member of Scotland's financial services community
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