William Bain MP (Labour, Glasgow North East) is a shadow Scotland Office minister
The only person less happy than David Cameron with Monday’s TNS-BMRB UK poll showing a 14-point lead for Labour over the Conservatives will be Scotland’s first minister Alex Salmond. For the recent SNP Conference, far from being the beacon of positivity of what the social democratic purpose of a separate Scottish state would be, was a curiously negative affair.
In his keynote address, the first minister failed to spell out how he would fund the higher benefits he implied he favoured, or square these with the lower corporate taxes he believes, in the face of international evidence, is the main fiscal driver of higher growth in a separate Scotland.
Instead, it was defensive Nationalism in full intellectual retreat.
Given recent evidence that support is ebbing away dramatically from the Yes Campaign, the SNP is floundering on detail, bereft of vision, and relying on whipping up anti-Tory sentiment.
Little wonder 55% of Scots say, in a ComRes/ITV News poll from last week, his plans for separation – involving a flawed system of divorcing decisions on interest rates from those on spending and borrowing to run Scotland’s economy – would damage Scotland’s economy.
After all, it has manifestly failed large countries like Spain as well as small countries like Ireland in the eurozone.
But Scots voters are the canniest on the planet – more than capable of distinguishing between their often differing choices at Scottish compared with UK general elections, more than prepared to show discontent with the failed austerity economics of the Tory-led UK government, while believing the United Kingdom is not a failing state.
Speaking with constituents in Glasgow at the weekend, they emphatically stated it is what happens to jobs, their money in the bank, their pensions, and economic growth which will shape their decision on Scotland’s future. Even before Tuesday’s scandal of the cover-up over the non-existent legal advice on Scotland’s status within the EU, 65% of Glaswegians in the most recent poll were utterly unconvinced by Alex Salmond’s evasions and bluster on these critical issues.
Unlikely as it may seem, the first minister would be in the running for a gold medal in acrobatic gymnastics given his tactical tumbles and spins on the currency and macroeconomic framework – the platform of stable growth in any state.
In Chicago last month, he asserted there would be no fiscal treaty to accompany a formal currency union with the United Kingdom post-separation, having seven months previously agreed fiscal rules on spending and borrowing would be required for the Bank of England to act as lender of last resort to a separate Scotland’s financial system. He also claimed a separate Scotland would be able to borrow more cheaply on international money markets than the United Kingdom can at the moment. A look at the evidence shows that to be entirely without foundation.
Ten-year bond yields in the UK, aided by the Bank of England’s asset purchase scheme, stand at 1.80%. If we consider the only other two small non-bailout EU states with a higher debt to GDP ratio than a separate Scottish state would inherit in 2016 - a per capita share of 79% of UK GDP debt, according to the OBR - Belgium (102% of GDP in Q2 2012) and Hungary (79% of GDP in Q1 2012), both pay more than the UK for their borrowing. Ten-year bond yields in Belgium stand at 2.43% and in Hungary at 7.27%. Even Austria, with debt at 75% of GDP - slightly less than Scotland would have - has ten-year bond yields at 2%, with borrowing costs higher than the UK, or its neighbour Germany.
Thus, a separate Scottish state with no prior credit history, debt approaching 80% of GDP, no control over its own money supply, no direct benefit from quantitative easing, or further purchases of Scottish gilts by the Bank of England, would face an immediate premium on borrowing costs on separation, placing a tougher burden on fiscal policy. The immediate cost of separation would be higher borrowing costs, leading to higher personal taxes, or spending cuts, or both – a point emphasised by the Permanent Secretary to the Treasury in evidence before the House of Lords economic committee recently.
Asked at the press conference following the Edinburgh Agreement on the devolution of powers why he was committed to a macroeconomic system where decisions on interest rates would be taken in one country (the UK), but decisions on spending and borrowing taken in another country (Scotland) - without any co-operation or interaction between the two sets of policy - Salmond asserted the eurozone had failed because of the productivity gap between Germany and Greece. He did not accept the eurozone failed because of the lack of fiscal union to accompany monetary and currency union, and therefore a Scottish-UK currency union would not require fiscal union.
Salmond is desperate to avoid admitting the lesson learnt from the eurozone crisis is that a successful currency and monetary union requires strong fiscal union too - countries cannot simply share bank notes and an interest rate, there must be a mechanism to share resources and economic demand too. In the US, 30 states are direct beneficiaries of resources distributed from the federal government. Scotland benefited to the tune of £75.8bn between 1999-2008 under Labour from our successful fiscal union with the rest of the UK which separation would scrap for good.
How does Salmond’s argument the productivity gap was the main reason for the euro’s structural flaws – which he claims a separate Scotland would avoid in a looser currency union with the UK – stack up? Poorly, according to a new study by the House of Commons Library (pdf).
Here is a direct quote:
“It is not really possible to argue that labour productivity on its own contributed the build-up of public and private debt in the eurozone periphery that has resulted in the crisis. Productivity may be lower in certain parts of a currency union, and indeed it may diverge over time, provided the cost of labour adjusts to reflect these differences.”
Salmond argued the gap between Germany and Greece (22.4 euros per hours worked) is the key indicator, but the other figures from Eurostat show other large and small EU states suffered similarly disastrous consequences under the fiscal/monetary policy split in the euro, despite much closer alignment in productivity levels. Take for example Italy and Spain, whose productivity levels were only 10 and 12 euros per hour worked less than Germany’s respectively, and both at the EU-27 average productivity rates, and only slightly below the eurozone average productivity rates.
Ireland’s productivity, even before the financial crisis, was 3 euros per hour worked higher than that of Germany, so Salmond’s argument to avoid the inevitable conclusion fiscal union is a necessary partner of monetary union in any successful modern European currency union is comprehensively dismissed. A recent paper by economists at MIT and Harvard shows fiscal transfers via fiscal union in a currency area helps sustain growth in periods of economic downturn, yet the first minster bases his argument for no fiscal union with the UK on a misreading of economic theory from the 1960s.
As support for separation dwindles, so the SNP’s argument for it has become ever narrower and short-termist - vote Yes to get rid of the Tories at Westminster. But Scotland shows every ability to distinguish between ditching the coalition at the ballot box in 2015, from the long-term implications for jobs and growth of adopting a flawed system without fiscal union to run Scotland’s economy under separation.