Sunday, August 24, 2014

Our currency options in a nutshell

"The Treasury case against a post-independence currency union between Scotland and the rest of the UK has been dismantled as 'misleading', 'unsubstantiated' and 'the reverse of the truth' by one of the world's leading economists. Professor Leslie Young, of the Cheung Kong Graduate School of Business in Beijing, accused the UK Government of relying on a 'lurid collage of fact, conjecture and fantasy' in making its argument." (The Herald, 23 March 2014)

In the video above, Crawfurd Beveridge explains, in three minutes and 36 seconds, patiently, succinctly and in a straightforward way (if I can understand it, you will) why the Nobel prize winning economists and others on the Scottish Government's Fiscal Commission Working Group came to the conclusions they did about an independent Scotland's currency and about why, after a Yes vote and whatever they say now, the British government will agree to a currency union.

He explains that the Fiscal Commission group comprises "four very eminent economists, two Nobel prize winners". They thought that there were in fact "lots of options" for Scotland: "You could have your own currency. You could have a currency that's pegged. You could make it free-float. You could go and join the euro. You could do sterlingisation. They're all very, very serious options." The Fiscal Commission experts "analysed them every which way from Sunday" (I believe he must have spent some time in the US) not just from the point of view of Scotland but of the rest of the UK as well. The "overwhelming conclusion" was that, in the interests of both sides, there ought to be a currency union. But didn't George Osborne say there couldn't be?

After Osborne's announcement, the First Minister asked them to go back and check their assessment: "did it really still stand?" Their conclusion was, "as we said at the time", that "the politics would always be going ahead of the economics on this", that "people who were trying to get to a No vote would be taking positions" but that "come a Yes vote they'd have to re-think when they got that". The Commission has always been of the view that "the economics trumps the politics in all this, for various reasons".

One is that it "is going to be a negotiation and it's a negotiation about liabilities as well as assets" and "to the extent that we might be refused some assets then we might start to refuse some liabilities, like the levels of debt that there are." If we decided we wanted to use our own currency "we'd add something like £500m to £1bn transaction costs to UK, British companies, not Scottish companies, to just get their currency changed into the way that we'd go" and "the pound would start to build even more debt because you'd have a huge export amount, £5bn or so in oil, whisky and other things like that that would no longer come into their balance of payments." "I can't see any Chancellor going into the next election saying by the way, just out of bloody mindedness we're not even going to talk to the Scots about this...It's going to cost you all sorts of money. It's going to cost your business a lot more. Your taxes are going to have to go up...It just beggars belief that they would go down that particular route."

"And finally, when we talk about 'the pound', we have to be careful about this. We're not talking about the pound coin in your pocket. That's going to be there anyway, whatever happens...We're really talking about the system of sterling...If you ask how much is the asset in the Bank of England it's not that much. It's a few billion pounds. It's not, in the scheme of things, a lot of money. What's very, very valuable is the Bank of England itself, its position as the lender of last resort. What's very, very valuable is the whole payment system that operates in the UK just now, to move money around."

"That's the stuff that we want to share with them. And sharing it makes both of us a lot better off."

So, what of the British government's position? Well, Professor Leslie Young is an independent, expert economist and he was commissioned by Sir Tom Hunter's independent Scotland September 18 site to assess the British government's claims. An independent expert commissioned by an independent think-tank. What were his views on the British government's position?

Very, very clear. Even taken at face value, the reasons put forward by the British government to explain why they couldn't agree to a currency union don't make any sense. They turn out to be reasons why they would agree. And he is quite eviscerating of the British government as he explains its mendacity. There are, he thinks:

"only two explanations for this stance by the UK Government, which has shaped the current debate on Scotland’s currency: either confused logic and inadequate economics, or a subterfuge to frighten Scottish citizens to vote against independence by raising the spectre of economic chaos immediately afterwards. Neither explanation does the UK Government much credit."

He won't say it so starkly because he can't, but I can: the British government is either ineptly incompetent or it is lying to try to frighten us. Either way, it is not to be believed. Because:

"If Scotland votes for independence, then a currency union with rUK would be better for both economies than Scotland’s other currency options: unilateral use of the Pound Sterling, a currency board, an independent currency with a flexible exchange rate and joining the Eurozone.

I arrive at [this conclusion] via a comparison of how each economy would function under the various currency options if Scotland were subject to a reckless fiscal policy, or to financial instability, or to a drop in oil prices. Treasury presented these contingencies as reasons to oppose a currency union; they turn out to be reasons to advocate it over an independent Scotland’s other currency options. I then offer three general arguments in favour of a currency union: it offers microeconomic advantages to both economies that are likely to outweigh any macroeconomic advantages from the other currency options; it better insulates both economies from international disturbances; and it minimizes the massive legal issues that both economies would face immediately if Scotland switched to a new currency."

"Misleading". "Unsubstantiated". "Confused". "Inadequate" "The reverse of the truth". "A lurid collage of fact, conjecture and fantasy".

A lurid collage of fact, conjecture and fantasy.

We can all bear all that in mind when we read anything else they say. But most especially, and most especially when we get to the ballot booth, this: "a subterfuge to frighten Scottish citizens to vote against independence by raising the spectre of economic chaos immediately afterwards". 

A subterfuge to frighten Scottish citizens to vote against independence. That, most especially.

(You can download Professor Young's full paper here.

 The members of the Fiscal Commission's working group are:

  • Professor Andrew Hughes Hallett - Professor of Economics and Public Policy at George Mason University in the US, visiting Professor at Harvard University and Professor of Economics at the University of St Andrews. Professor Hughes Hallett specialises in international economic policy and has acted as a consultant for the World Bank, the IMF, the Federal Reserve Board, the UN, the OECD, the European Commission and central banks around the world.
  • Professor Sir James Mirrlees - Professor Emeritus at Cambridge University and distinguished professor-at-large at the Chinese University of Hong Kong. In 1996 Sir James was awarded the Nobel Prize for his work on economic models and equations about situations where information is asymmetrical or incomplete. In 2010, he led the Mirrlees Review of taxation which examined the principles and characteristics of a good tax system for open developed economies in the 21st century.
  • Professor Frances Ruane - Director of Ireland's Economic and Social Research Institute previously an Associate Professor of Economics at Trinity College, Dublin. She is widely published in the area of international economic and industrial development.
  • Professor Joseph Stiglitz - Professor Stiglitz is Professor of  Economics at Columbia University. He won the Nobel Prize for Economics in 2001 and was a member of the US Council of Economic Advisers from 1993-95, serving as CEA Chair from 1995-97. He was Chief Economist and Senior Vice-President of the World Bank from 1997-2000. In 2009 he was appointed by the President of the United Nations General Assembly as Chair of the Commission of Experts on Reform of the International Financial and Monetary System. )

1 comment:

  1. Mr Beveridge is a clever articulate, man. Listening to him is an education in itself. A very heartening and informative interview with Derek Bateman.