Osborne’s stance on currency-union savaged by top economist


  By Martin Kelly
UK Chancellor George Osborne’s reasons for rejecting a currency union with an independent Scotland lie in tatters today after a top economist described them as lacking logic.
In a withering analysis of the evidence behind Mr Osborne’s recent speech in which the Chancellor claimed he would block an agreement on currency, Professor Leslie Young, of the Cheung Kong Graduate School of Business in Beijing, accused the Tory MP of basing his stance on a “lurid collage of fact, conjecture and fantasy”.

In the study, commissioned by entrepreneur Sir Tom Hunter, the world renowned economist is scathing of UK Treasury advice which underpinned the UK Chancellor’s views.

In the wake of a speech in Edinburgh earlier this year, Mr Osborne published a letter from his Permanent Secretary summarising Treasury advice on the currency union issue.  Mr Osborne’s decision broke with convention and led to claims the civil servant who wrote it, Sir Nicholas Macpherson, had expressed politically biased views which failed to take into account the benefits to the rest of the UK of a currency union, or the drawbacks of having no agreement.

In his analysis, Professor Leslie Young writes: “As such advice is normally kept confidential, it is fair to presume that Chancellor Osborne published it to explain his decision, that he felt that it addressed all key issues objectively and convincingly, and that senior Treasury officials had weighed up every word prior to its publication.”

However the academic then adds: “The Treasury letter therefore invites scrutiny, but this it cannot withstand:”

Professor Young then goes on to list and challenge seven key areas he says undermines the credibility of Sir Nicholas Macpherson’s advice.

1. It does not even address the question that it purports to answer: whether the currency union is in the interests of the UK, if Scotland voted for independence.
2. Its references to the Eurozone are misleading as guides to the prospects of a currency union with an independent Scotland.
3. Its claim that Scotland would be an unreliable partner in a currency union is unsubstantiated.
4. Its claim that Scotland’s financial system is “far too big”, and would therefore expose UK taxpayers to heavy burdens, is unsubstantiated.
5. Its claim that the “asymmetry” between the economies of rUK and Scotland makes the exposure of UK taxpayers to “Scotland’s financial system and sovereign” especially inequitable is not merely unsubstantiated: it is the reverse of the truth.
6. Its claim that the likely misalignment of the fiscal policies of the UK and an independent Scotland would put “intolerable pressure” on the currency union is evasive — and unsubstantiated.
7. Claims (4) and (5) assume a legal framework for the currency union that is inconsistent with the framework assumed in claim (6), so these claims do not constitute cumulative arguments against a currency union.

Professor Young says: “The Treasury claims are invalidated, not by errors of fact, but by errors of logic. These errors are subtle and difficult to disentangle. But only subtle logical error could have led Treasury to claim, in effect, that past risky behaviour by investment bankers in London, inadequately supervised by the Bank of England, somehow disqualifies an independent Scotland to be a currency union partner of England.

“There may be good reasons for the UK to reject a currency union with an independent Scotland, but none can be found in the Treasury letter. Yet, that letter is the key justification for the stance of the UK Government.”

Young criticises the advice for refusing to consider the impact on the rest of the UK should a currency-union not happen.

He writes: “‘If Scotland were to vote for independence’, then it must choose some currency option, be it currency union with the rUK, the euro, a currency board or a flexible exchange rate. The Treasury letter and paper never compare the impact on rUK of a currency union with the impact on rUK if Scotland instead chose one of these other currency options. The latter choices would almost certainly be worse for rUK, as I shall argue in Part B of this report.”

Turning the ‘Plan B’ question on its head, the economist says the UK Treasury should itself explain what arrangement it believes would be in the best interests of the UK.

“[The UK] Treasury has a duty to the Chancellor to compare in detail rUK’s transactions costs and microeconomic, macroeconomic and financial risks under Scotland’s various currency options. It has not done so.” he adds.

Other paragraphs in the letter, says the academic, contain “confused thought” and focusses on “non-issues”, having “loose analysis” with “inconsistent assumptions”.

On claims that an independent Scotland could not have withstood the banking crash, Professor Young writes: “…in any replay of the 2008 financial crisis featuring an independent Scotland, the burden of bailing out RBS and Lloyds would have fallen on the rUK taxpayer. That would have been entirely appropriate, since the high-risk, high-fee activities of these banks that expose taxpayers to large-scale bailouts take place mainly in London and benefit mainly the rUK economy.”

A spokesperson for the First Minister said: “This report totally demolishes the Treasury’s argument against a shared currency.

“As the Fiscal Commission Working Group has pointed out, the UK Government analysis to date has overstated the risks but failed to fully capture the benefits of formal monetary union.

“With the Osborne-Balls alliance, Project Fear has been losing the political argument. Now they’re losing the fiscal argument too.”

Blair Jenkins, Yes Scotland’s chief executive, said: “The report states that no good reason can be found to reject a currency union in the Treasury’s letter, proving that George Osborne also knows that a currency union makes sense. The reality is that the economics will trump political posturing after a Yes vote in September.”

Responding to the analysis, a Treasury spokesman said: “A currency union is not going to happen. The UK Government has set out detailed analysis supported by numerous independent voices as to why a currency union is not in the interests of an independent Scotland or the rUK. This decision is not going to change. This means less than six months from the referendum the Scottish Government still has no plan for what currency they would use.”