By Mark McNaught
After 2 years of largely ignoring or laughing off the referendum, the City of London is finally waking up to the fact that the Scots will vote for independence. After all, who wouldn’t choose economic freedom? As with all things financial, they have no misty-eyed illusions of Scottish or British nationalism. They are looking at a bottom line, and Westminster’s bottom has suffered self-inflicted sodomy.
As the following comments make clear, the pound has recently sunk to a low against the dollar based largely on fears of the breakup of the sterling union, not over Scottish independence in itself. According to Reuters, Goldman Sachs economist Kevin Daly held that:
“The UK government’s position is that an independent Scotland would not be able to retain sterling as its currency. Pro-independence campaigners argue that, in the event of a ‘Yes’ vote, the UK government would quickly change its stance because retaining a monetary union would be ‘overwhelmingly’ in its interests.”
“However, in our view, the threat to disband the sterling monetary union with Scotland is credible”
“One of the main lessons from the euro area crisis is that a reasonably high degree of fiscal and/or financial integration is necessary, as a means of effective risk sharing, for a monetary union to work. Without political and fiscal integration, it is difficult to see the rest of the UK agreeing to provide a monetary and financial backstop to Scotland.”
What is also clear is that contrary to what Unionists sadistically hope, any damage inflicted could never be isolated to Scotland. A Westminster-engineered breakup of the sterling union would be the breakup of the pound on the international markets, lobbing off 9% of the population and untold billions in oil revenue from the balance of payments, and assuming at least 9% more debt per capita.
It is worth reflecting on how monumentally idiotic the currency threat was in the first place. When the story of Scottish independence is written, the folly of threatening to deprive Scots of their own currency will stand out as a deep self-inflicted wound, possibly sealing the demise of the UK. They were willing to risk the reputation of Sterling and UK creditworthiness, such as it is, to cower Scots into voting no. This plan spectacularly backfired.
Word has it that Alistair Darling was instrumental in getting the parties to agree to the threat. That would make twice in the last 7 years that he has been at least partially responsible for tanking the UK economy, and he’s not even in government this time. Why on earth did Balls, Alexander, and Osborne listen to him?
It also demonstrated the reckless blithering incompetence of Westminster politicians. Is this really the best they’ve got? Ed Balls said he would resign as Exchequer if Labour wins in 2015 if a currency union is pursued. Think about that. While there are undoubtedly some competent politicians on Thames, just observe the quality of the cream that rises to the top. Do Scots really want that lot governing them in perpetuity?
Any competent government seeking to convince a constituent territory not to become independent would never make such stupid threats. A competent government would say, “we will make all the convincing arguments we can to encourage Scots to stay within the UK, but it is ultimately their decision.
We will grant their parliament more powers before a referendum, so they know exactly what will follow a ‘no’ vote, and renounce parliamentary supremacy so they can never be withdrawn, with more powers potentially allocated later. However, we will not issue patronising threats to harm their future economic prospects, especially because if we followed through they would harm ours equally” The markets would have respected that and sterling would have remained stable.
Were Westminster’s values even remotely egalitarian, Scots may well have been content to stay within the Union. Obviously, Westminster’s moral compass is pointed in the opposite direction.
This imbroglio also demonstrates that Scotland will be in the drivers seat in negotiations. It will be the r-UK that needs a currency union much more than Scotland. It is the UK which is hopelessly indebted, not Scotland. It is the pound of the r-UK that the markets will punish for breaking up Sterling, not Scotland’s currency outside of a union.
With the immense oil revenue that will accrue, perhaps Scotland could simply not issue bonds nor borrow any money. The billions spent by Westminster on bond interest every year that could be filed in a folder marked ‘not my problem’. What would have been spent on currency investors could be spent on helping normal people improve their lives.
You might get whiplash watching how quickly all three parties make a humiliating u-turn on currency after a ‘yes’ vote. The markets have spoken, and Westminster has only itself to blame.