February 17, 2014

Excluding the Scots from sterling would be juvenile

Posted in Economic History · 22 comments ·
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My earliest memories of Castle Street, Dalkey, were Saturday mornings in Dom McClure’s barbershop with my father. Dom cut my Grandad’s hair, my Dad’s hair and now he was shearing mine.

As usual when I peeked into the shop on a Saturday morning, Dom put on his best Scottish accent – which he called ”Scotch – gently mocking my grandfather who came from Scotland to Dalkey in the 1920s. According to Dom, both my grandparents had ”shocking Scotch accents.

My grandparents must’ve been the only people to emigrate to Ireland in the 1920s, when it seemed that half the nation was leaving. After independence being a Scottish ”mixed marriage might also have brought its own difficulties, but if it did, it was never talked about.

Growing up, my Dad always told me that I was half-Scottish and the Scottish dissenter gene was something to be proud of. I think he was getting at the endemic sleeveenism that he saw all around him, even if he never made that too explicit.

As a boy, this bond with Scotland was made flesh in the form of Ally’s Army in the 1978 World Cup. Scotland’s side was the dream-team, with Dalglish, Buchan, Gemmill, Robertson, Jordan, McQueen, Souness and the like. They were going to win the World Cup – until they crashed against the giants of Peru and then Iran.

Our family is originally from miles up in the Outer Hebrides – a wild place called North Uist. Today, I have relations in Scotland who wear both the blue of Rangers and the green of Celtic – which isn’t that typical in a country where sectarianism is still extraordinarily virulent.

The first thing that has perplexed me in the debate on Scottish independence is not economic but cultural. It shows how this vote is more complex than we appreciate at first blush.

There are 800,000 Catholics in Scotland. This is a big bloc. Traditionally they have been Labour voters, but as Irish people in Scotland have ascended the social ladder in the past two or three generations, this Catholic equals Labour equation is no longer as firm as it used to be. But the question is: why are many anti-royalist, Celtic fans voting ”unionist in the referendum?

The reason is that they feel, rightly or wrongly, that an independent Scotland would be an Orange Scotland. They would be a small Catholic minority in a Scottish population of five million Protestants. This had never struck me until I spoke with a bunch of Catholic ”Weegies – as Glaswegians are known in Scotland. They admitted that they saw London as an honest broker in the Scottish context and their fear, somewhere deep down, was that they would end up living in a big Northern Ireland. As someone who also has Northern Irish family, on the Rangers side, it is not hard to imagine how the average Scottish Catholic might fear an independent Scotland, even if the chance of this happening was more alive in the nightmarish memory of their grandparents than the reality of modern Scotland.

So you can see how complex the independence debate is.

There is also no contradiction in an independent Scotland retaining a monetary union with sterling. The best model for this is Ireland. We severed our ties with London in 1922 but kept the monetary union with sterling till 1979. I never know why the Scottish nationalists don’t bring this up when they are squirming, as they were doing last week, in arguments about the currency for a new independent Scotland.

Despite George Osborne’s bully-boy tactics of last Friday, when he said the Scots couldn’t be in the sterling zone, every sensible person knows that it is in the interests of both Scotland and England (and indeed Wales) to have Scotland in the currency union with sterling. Osborne is just playing politics and, frankly, I don’t know what part of Scotland he doesn’t understand. The notion of a plummy Sasanach coming up to Scotland to threaten them is exactly why Scots feel the need to be independent – it’s enough to bring the Renton, Begbie and Spud from Trainspotting out in all of us.

In economic theory, countries should be in currency unions with the country that (a) they trade most with and (b) with whom they have labour movement.

These two conditions mean the economic cycles of the countries in the union will not be out of kilter, causing massive problems such as the problem Ireland faced 2000-2008 where the interest rates in EMU were too low for us, triggering a massive credit boom, ending in disaster.

These two conditions are satisfied between Scotland and the rest of Britain, so much so that a currency union with anyone else would be stupid. Trade between Scotland and the rest of Britain was worth nearly £110 billion a year, with British companies also making £47 billion a year from their bases in Scotland. When you take oil exports out, £47 billion of a total £73.6 billion goes to the rest of Britain and almost half of its oil and gas exports were to the rest of Britain.

Scotland’s exports of oil and gas to the rest of Britain and international markets were worth an estimated £30 billion in 2012. There is little doubt that this can be a functioning independent country.

However, my only doubt is that when a nationalist movement gets bogged down in an argument about economics, balance sheets and pounds, shillings and pence, it has already lost.

National movements tend to get swept to power on a sense of injustice, hurt and ethnicity rather than a rate of interest, profit and accountancy. I could be wrong and how fitting would it be if the Scottish nationalists win because they won the argument on prudence and money? If it ends up being the case, it will have been a very Scottish coup indeed.

David McWilliams writes daily on international economics and finance at www.globalmacro360.com

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  1. Your friend Liam Halligan has a slightly different take on it David.

    Scottish independence is economic nonsense

    http://www.telegraph.co.uk/finance/comment/10641240/Scottish-independence-is-economic-nonsense.html

    “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.”

  2. carpetcrawler

    Have to say, I know a lot of ( Scottish ) Celtic supporters and every one of them wants Independence. They see the Orange Card a sole reserve of the Unionists. They hope a Modern Independent Scotland will undermine the control of the Tory/Unionist/Rangers Supporter type. A gamble perhaps but thats how they’re thinking………….

  3. NeilW

    “There is also no contradiction in an independent Scotland retaining a monetary union with sterling.”

    Yes there is. The Scots want a seat on the Bank of England board and influence over monetary policy. In other words they want to create a mini-Euro and all the disasters that is causing in Europe.

    The Irish pound was *pegged* to Sterling, which is completely different to a monetary union.

    The Scottish pound is welcome to peg to Sterling as well if it wants, but I wouldn’t recommend it since it would mean that the monetary policy of Scotland has to maintain parity regardless of the effect on Scotland.

    Modern Money Theory tells us that free float gives a country the most policy freedom and Scotland should embrace that and lead the world in a socially equitable state.

    It could even teach the Irish a thing or two about how much of a mistake the Euro is for their country.

  4. NeilW

    “In economic theory, countries should be in currency unions with the country that (a) they trade most with and (b) with whom they have labour movement.”

    Leaving aside the fact that economic theory is mostly a load of political and religious rubbish, the country that Scotland trades the most with and has the most labour movement with is other parts of Scotland.

  5. Adelaide

    https://www.youtube.com/watch?v=uy_sJyLevQY&list=PLPszygYHA9K2ZtV_1KphSugBB7iZqbFyz&index=161

    The Keiser Report:
    The Farce of Scottish Independence Sticking With Sterling
    “The Jocks Are A Joke”

  6. I am reminded at the Scottish wake a man attended who owed the deceased money and being a good prudent Presbyterian left his cheque inside the coffin

  7. ‘Scotland’s exports of oil and gas to the rest of Britain and international markets were worth an estimated £30 billion in 2012. There is little doubt that this can be a functioning independent country’.

    The English will want their £Pound of flesh in repatriation monies and after that has been factored in there will be small change for the Scots

  8. ps200306

    David, I hope you’re a fan of young Julie Fowlis from North Uist (the Presbyterian end, as opposed to the Catholic South, not that we’ll hold it against her … I think she’s married to a Dublin lad). Have seen her play on both sides of the water, and never miss an opportunity.

    http://www.youtube.com/watch?v=qczDug2BNRo

  9. ross81

    I don’t understand all the fuss on this issue. independent Scotland would have a relatively strong 1st world economy and a stable Scottish Pound. Sure it might initially be volatile due to international speculation but it’d soon settle and take its place alongside all the other fiat currencies floating against each other.

  10. davybunyip

    No offense david, but as a Scottish catholic who now lives and works in Ireland I have to say that your statement that a major barrier to Scottish independence is Scottish Catholics are scared to vote yes is because the Tory Presbyterians will take over is laughable. Scottish Catholics already are a minority, both within Scotland and the uk as a whole unless you live in monklands, so therefore there would be little or no difference to them.

    Talking to my catholic and non-catholic family and friends back home the main fear is that Scotland would not have the economic clout to go it alone. Unfortunately ed balls and george Osborne’s hard man routine over the pound is playing into the hands of those who want the debate to degenerate into an emotional response to the referendum rather than a practical and pragmatic one. I think what the Scottish people want is more of a say in how their country is run but perhaps independence would not be necessary to achieve that as we already have our parliament back and further power could be devolved to it.

    It was an economic problem that forced us into the Act of Union when the Darian disaster happened in the 1700′s and I think that a lot of scots are scared that something similar could happen if we break away on our own. I don’t think England could stop us using their currency but they would not have to give us a say in how the Bank of England is run, even though it was founded by a scot! As Ireland as found to its cost not being in charge of their own fiscal policy by and large has led to the mess the country is in at the moment. A point you never fail to articulate in your articles.

  11. 30somethingHiBrit

    Let’s look at this from a (mainly) English perspective:

    Currency unions work best when you have close alignment in terms of fiscal transfers, monetary behaviours and convergence of an economy.

    The SNP want to break fiscal and governmental links.

    So immediately you have political tensions between the remainder of the UK rUK) and an independent Scotland.

    Then you have the need to guarantee all banks under a currency union – i.e. a banking union.

    So in essence, HM Government is asking me as a London resident (and an Englishman/Irishman) to be on the hook for Scottish banks, with an SNP government who have promised the earth to Scottish voters – while basically saying they want nothing to do with me. Do you really think I’m going to agree to this?

    Finally trade: Only 10% of rUK trade is with Scotland. But 70% of Scottish trade is with rUK. If Scottish goods and services are more expensive because of cross-border effects, I’ll switch elsewhere. The Scots have a problem. They in essence are setting fire to their main market.I have a minor irritation.

    Why on God’s earth will I assist the SNP to break up my country _and_ send me the bill for breakup – plus an ongoing charge for flakey banks. What if we had had this setup in 2008? It would have made the problems involving the Eurzone look tiddly. Salmond was boasting about the strength of RBS – can you imagine how well baling out RBS would have gone down with rUK taxpayers in a currency/banking union?

    David – you quoted Clint Eastwood and Outlaw Josey Wales in re rain and urination. The SNP demands for a currency union look awfully similar.

    The rUK cannot stop the Scots using sterling – or having the pound Scots pegged to Sterling (like An Punt Nua). However, this approach means that Scotland has no control over its currency. Remind me why this is better than being part of a country where they are part of the decision making process on a currency?

    If you wonder why the British Civil Service are so aggressive on this you only have to look over the water.

    We saw the Irish version of this film (“The European Central Bank that Ate The Emerald Isle”) – and it was pretty terrible then.

    • StephenKenny

      Perhaps you are part of this “Aggressive Civil Service”, but the key to Scottish independence is that of a consideration of an overall benefit for the Scottish people, not merely financial. This is about the benefits of nationhood. It would be difficult for the Scots, but emotionally and socially it would be a bright new world – with some dark days for sure.

      Finally, there’s no particular reason that these “cross border effects” you mention should have much, if any, effects on trade.

      There’s no question of England being “sent the bill” for the break-up, beyond the civil service administration costs.

      It’s bewildering to complain about RBS, given the vast scale of bailouts, frauds, and crimes, committed, and still being committed, by UK banks in the City of London. What effects did these, and will these, have on Scotland?

      A pegged Scottish Sterling is, of course, not the same as a single currency, so any comparison with the ECB and Ireland is not really fair, since it leaves them all the options of softer and more flexible pegs.

      The Scots will elect their own leaders, they will find out what they are like, and they will see where responsibility lays. If it goes well, they will build their own country.

      For a country that has recently taken part in bombing several others back to the stone age, in the name of their right to self determination and nation building, the attitude towards Scotland is interesting.

  12. Billy Connelly says he has more in common with the bloke in Liverpool than with the farmer in remote Scotland and does not wish to influence anyone how to vote in this morass of swamps and bogs and castles and skirts and banners and drums etc .

  13. Tysday the 18t o Februar

    Mah hert is in Bonnie Scotland ‘n’ mah mynd is in london ‘n’ a’m feelin’ a’m nowhere .

  14. Th’ forthcoming referendum is an interesting concept that wull divide th’ nation o’ Scootlund ‘n’ is unlikely tae carry itself thro’ bit wull lea an abyss fur th’ sassenach tae conquer wi’ thair financial micht .

  15. Seanthomas

    “The reason is that they feel, rightly or wrongly, that an independent Scotland would be an Orange Scotland. They would be a small Catholic minority in a Scottish population of five million Protestants. This had never struck me until I spoke with a bunch of Catholic ”Weegies – as Glaswegians are known in Scotland. They admitted that they saw London as an honest broker in the Scottish context and their fear, somewhere deep down, was that they would end up living in a big Northern Ireland. As someone who also has Northern Irish family, on the Rangers side, it is not hard to imagine how the average Scottish Catholic might fear an independent Scotland, even if the chance of this happening was more alive in the nightmarish memory of their grandparents than the reality of modern Scotland.”

    “The best model for this is Ireland. We severed our ties with London in 1922 but kept the monetary union with sterling till 1979. I never know why the Scottish nationalists don’t bring this up when they are squirming, as they were doing last week, in arguments about the currency for a new independent Scotland.”

    Perhaps the reason Catholics in Scotland don’t trust Protestants is the same reason The Nationalist don’t bring up Ireland as an example for Scotland to follow. I don’t think it’s just co-incidence that Alex Salmond constantly bangs on how he wants to emulate just about every other European country except the one country that’s also in the EU, is also Celtic and also left the UK some time back. I don’t think Catholics in Scotland think this is a co-incidence either.

    I can’t help but think that David wasn’t trying to leave this clue for us given the way he laid this article out.

  16. Economic / Social Misdiagnosis

    Ireland / Scotland is an area where the greatest opposing social streams of mankind have met in Europe with the resulting consequences we have today . It has less to do with a Celtic German encounter and instead it has everything to do with the directions of the original departures from early mankind Africa .

    It just so happened they eventually met in Ireland/Scotland axis .

  17. Lewis and Harris has been named as the best island in Europe by an international travel site. It also beat rivals in Thailand, Chile and Madagascar to be included in the top five islands in the world. Scotland featured several times on the list with Orkney and Isle of Mull also named in the European top 10. TripAdvisor compiled the list based on opinions of travellers who had visited the islands.

  18. joe sod

    I think the best example of what might happen to Scotland is Ireland and that means Scotland will vote against independence. I think the success and swagger of celtic tiger ireland was a major reason for the scottish desire for independance. The collapse of celtic tiger ireland will now probably scupper scottish independance. If Scotland truly wanted to be an independant country it would have pushed for it 100 years ago when nationalism was at its height and when alot of new countries became independant.

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