Some people seem surprised that Theresa May flew to Edinburgh to parley with Nicola Sturgeon, Scotland’s First Minister, only three days after arriving at Number 10.
Britain’s new Prime Minister is acutely aware that Scotland voted decisively (62:38) to stay in the EU. Brexit is precisely the “material change of circumstance” cited in the SNP’s recent Scottish Parliament manifesto that could trigger a second referendum on Scottish independence.
For the moment, Sturgeon says she only wants a deal to maintain Scotland’s existing links with the EU and the Single Market. But if Brexit minister David Davis can’t or won’t deliver, another independence referendum is the likely option. This time with support from anti-Brexit groups who voted No to independence in 2014: Edinburgh’s middle class, farmers and swathes of Scotland’s business and financial community.
Yet is now a propitious time for Scotland to go it alone, with the price of oil down from $112 in June 2014 to under $50 today? How would Scotland fund its fiscal deficit? As a City A.M. editorial asked last week, are the economics of independence viable unless newfound sovereignty “goes hand in hand with shrinking the state and cutting taxes”? That’s hardly good news for an avowedly left of centre, anti-austerity SNP.
And what of the vexed currency question? The SNP did not convince voters in 2014 on its plan to remain in a common sterling currency zone with the UK. A post-Brexit Tory government will be even less in the mood to accommodate a common pound.
Is there a Plan B? Joining the euro is a non-starter. At best, it’s a long-term project. Which leaves establishing a new Scottish pound (or whatever name gains favour). To avoid disruption to trade, contracts and pensions, it would need to exchange at parity with the pound sterling. That limits Scottish interest rate flexibility, but think of the advantages for City-based institutions of Scotland’s bank passporting rights as a continuing member of the EU.
Setting up a new currency in a small, democratic state is perfectly possible: the Baltic States did it expeditiously after they declared independence from the old Soviet Union in 1991. Scotland is better supplied with the banking expertise to create the necessary new financial institutions. It would require a central bank as lender of last resort and (probably) a currency board. Where would the necessary foreign currency reserves come from to peg? In the short run, from Scotland’s share of Bank of England assets supplemented by monetising her legacy share of UK state assets.
However, a separate Scottish currency pegged to sterling would necessitate fiscal consolidation to assuage the foreign exchange markets. It would certainly be doable, but would require independent Scotland to cut its budget coat to fit its fiscal means. Here we come to the central argument for seeking Scottish sovereignty over its economic affairs: having the levers to boost productivity and growth.
Experience proves that episodes of economic uncertainty and crisis – and what is Brexit if not that? – are best managed by small, independent nation states. These are nimbler when it comes to making necessary adjustments (e.g. boosting productivity and exports) and exhibit greater social solidarity when it comes to sharing any economic pain – and thus minimising the time taken to get back on a growth path. Iceland, Norway and Sweden powered out of the 2009 global recession faster than the UK. Even battered Ireland has seen an export and productivity miracle.
Scotland’s post-independence fiscal consolidation should take only five years (one parliamentary cycle), lifting her economy on to a high productivity, high growth path by shifting resources from consumption to investment. That’s painful in the immediate short term but will allow Scotland to escape the ball and chain of the UK’s endemic low productivity. I doubt if the larger UK could consolidate as quickly – it never has. By contrast, look at Finland in the 1990s following the collapse of the Soviet Union, its main trading partner. Between 1990 and 1993, Finnish output declined by 13 per cent. Yet by 1997, output had fully recovered while the budget was headed to a consistent surplus.
Besides, the economic status quo is no longer an option for Scotland. Britain’s likely expulsion from the Single Market implies inward investment to the UK will drift away, something that will hurt Scotland hard. An independent Scotland inside the EU would be better positioned to craft the incentives needed to retain this inward investment. Scotland doesn’t want independence to live beyond its means. It wants sovereignty to turn itself into an economic powerhouse.