Freeeeeeeeeeeeeeeeeedoooooooooom…or, not quite

By Sunday, September 21, 2014 No tags 0

 

Well, it’s over. The people of Scotland (whom, I’ve been told by numerous English teachers, are to be referred as ‘Scots’… but to whom one of the most learned Economists ever – John Kenneth Galbraith – correctly referred as ‘Scotch’!) weighed the alternatives…did a cost-benefit analysis…and voted to stay in the United Kingdom.

One of my ardent Scottish nationalist friends at my old school now owes me £100. I promise to spend it on Laphroaig. Another form of Scotch.

 

Leaving aside historical wounds and the political quibbles, let’s focus on the narrow rubric of economics and why so many hard-to-answer questions arise here. Yes, this is one of those posts that raises and pinpoints questions without venturing to put forward answers – it’s up to you, the student, to read/reflect and form your opinion.

Out of  looooooong list of debate points, there are four key economic points: 1) The issue of a Scottish currency; 2) EU and EMU membership; 3) taxation and public spending, and; 4) oil revenues from the North Sea fields.

1. Currency: Well, since the English parties have clearly stated – contrary to the claims of the ‘Yes’ electorate (e.g. those who wish Scottish independence) – that an independent Scotland would not be allowed to continue to use the sterling (English pound), there is not so much a choice but a lack of options.  In the words of my bucolic (= blissful countryside dweller) grandfather; “That kinda narrows it down some don’t it!?” Yes, it does rather.1)

Scotland has for over 300 years had a rather strange cooperative venture with England regarding the pound; there are four private Scottish banks that are allowed to issue Scottish pounds but these are NOT legal tender in England – any English shop that accepts these notes does so on free will and cannot in fact be guaranteed English notes at a commercial bank or indeed the Bank of England (BoE)! It gets trickier; the Scottish banks issue their own notes on a 1:1 basis – e.g. the Scottish banks will issue Scottish notes only if they hold an equal amount of notes in the BoE. Now, technically this means that Scotland already has it’s own monetary policy in terms of ‘printing money’ and could continue to do so after independence. The Scottish banks could even keep the parity rate (1:1) by storing English sterling in their own banks and guaranteeing this exchange rate. In reality, however, since Scottish issuers of fiduciary monies (money not backed by gold but by the ‘trust’ in government) would not have access to the BoE reserves, they would be quite limited in their ‘printing’ of money if they wished to keep a 1:1 exchange rate. This has the effect of severely limiting Scottish monetary independence. There would in all likelihood also have been a ‘flight’ from the Sottish pound to the sterling as households and businesses assessed the risks of holding assets in an unknown New Scottish Pound vs an Old English Pound – this would put serious depreciation pressure on the Scottish pound.2)

Now, one doesn’t need to hack out the following conclusions with the business end of a Claymore (= Sottish broadsword); if having an independent Scottish currency linked to the sterling is either denied by the English government or – as outlined above – has serious implications for Scotland’s freedom of monetary policy, what’s left?

2) The EU and the EMU (European Monetary Unions – ‘Eurozone’): Many of my Scottish friends’ immediate reaction was along the lines of “What, we’re going to leave one union and join another?! Where’s the ‘freedom’ part come in?” Good point, even though I’ve taken care to remove all the bad language from the quote above.

A newly-independent Scotland would apply to join the EU under a) ‘Article 48’, whereupon a ‘fast-track’ membership under a form of ‘internal enlargement’ would be the case, or; b) ‘Article 49’ whereupon Scotland would basically start EU negotiations from square one. While there is disagreement amongst EU experts as to which would have been most likely, there would in both cases be rather hefty costs associated with (re-) application.

A stickier issue is that of the EMU. The short argument is simply that any country joining the EMU gives up its domestic monetary policies (setting interest rates and money supply) and thus one of the key tools used in expansionary and contractionary demand-side policies. This is the classic ‘One-size-fits-all’ conundrum of a currency union, where a single interest rate throughout a spread and diverse geographical/cultural/linguistic area cannot possible cover possible economics situations where inflation is 8% in one area and 0.4% in another! When a country joins the EMU, it hands over this very important demand-side tool to the European Central Bank (ECB) and foregoes the ability to set monetary policy in accordance with domestic needs. Again, ‘independence’?

3) Taxation and public spending: A list of ‘canons’ (roughly; ‘general laws’ or ‘principles’) put forward by that native Scotch son,3) Adam Smith, were the canons of taxation. Taxes should be fair, easy to collect and understandable.

The independent movement claims that Scotland is ‘subsidising’ England – e.g. is a net payer of taxes rather than a net beneficiary of transfers. Oil revenues and tax receipts in Scotland together would more than make up for the loss of transfers (such as social security and defense) from the rest of the UK.

This…seems doubtful. Official figures point to per capita public spending being some £1,200 higher in Scotland than in the rest of the UK (average), due to UK transfer payment regulations that benefit areas with low population to geographical area ratios. Another key issue here are the declining reserves and thus revenues of…

4) Oil: Over 95% of the oil and close to 50% of the gas in UK oil fields in the North Sea would go to Scotland. While it is impossible to predict future revenues (since we would have to know not only the quantity of oil but the future price!) of North Sea oil, there is some agreement about the remaining reserves. This might act as a ‘proxy’ (here, ‘replacement variable’) for future revenues.

Chart showing oil and gas production since 1970

All calculations show a decline in the amount of oil extracted from UK North Sea fields since 1999. So far, so good. Then it gets highly contentious in terms of calculating a) remaining extractable oil, and; b) future oil/gas revenues for the next 40 or so years. Estimates on known – and exploitable – reserves vary from a low of 11 billion barrels to a high of 25 billion barrels. (One must also take into consideration the rapid improvement in extraction technology and oil prices over the coming decades – the definition of ‘known exploitable reserves’ is based on current technology and oil prices! What is at present not technologically feasible nor economically viable will in all likelihood change rather drastically in the new future.) Compounding this is the simple fact that extraction costs, at inflation adjusted values, are higher now than since the oil fields were discovered in the 1970s. This naturally has serious implications for oil proceeds and revenue streams for Scotland’s independent government.

In summa: While there is a great deal of detail available on the above points (yes, do look them up!), there seems to be scant economic incentives for an independent Scotland. As for arguments along more emotional lines, well, I’m a Swedish, middle-aged, male economist. You’d best ask someone else.

 

1) Having said that; look up Ecuador and what they did in terms of a currency in 2000. The 10 Sucre note my grandfather kept in his wallet since he came to visit his second grandchild in March 1962 is now a museum piece.

2) Incidentally, get hold of an English £20 note. Who’s on it?! Uh-huh.

3) Just testing to see if any English teachers read this.

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