Sunday, 31 March 2013

Independence weighed in the balance

Some Scots support independence come what may and nothing would change their minds. Other Scots want the UK to continue and are just as fixed in their view. But for those people who have not already decided, the debate is really a matter of weighing up the potential advantages and disadvantages of independence. The fact that most commentary on the issues involved is completely one-sided, can hardly be helpful for people looking at the pros and cons in this way. The polarisation of the debate means that nationalists frequently attempt to argue that the UK has no benefits at all, while unionists frequently strive to portray an independent Scotland as if we would be joining the Third World. But this is to treat political opponents as if they were fools. There must be something attractive about independence, otherwise the idea would not have attracted the support of a significant number of Scots and we would not be having the debate at all. Likewise, there must be something attractive about the UK, otherwise we would have become independent long ago. The essence of the debate should be an attempt to investigate these advantages while assessing the corresponding disadvantages.

Looking at the pros and cons of independence is to look fundamentally at two issues, money and power. Economically, the main pro is North Sea oil. It was the discovery of this resource which gave wings to the independence campaign some 40 years ago. Without it few in Scotland would ever have considered independence as an option. This is is not to talk Scotland down, but rather it is to recognise that Scotland’s position without oil would be not dissimilar to that of Wales, Northern Ireland and the North of England. Those parts of the UK, which were centres of heavy industry, have still not fully recovered from the decline of those industries. The difference between a Scottish nationalist and a Welsh nationalist is that independence is an economically viable option for the former, while it is not for the latter. The difference is oil.

At the moment oil revenues are shared in Britain. They help Scotland economically, but they also help Northern Ireland, Wales and England. But if we had these revenues to ourselves, clearly we would get more. It’s like a cake divided between four at present. If Scotland had the cake to ourselves, we could scoff the lot. For people, supposedly on the left, to put forward this argument has always struck me as hypocritical, but nevertheless, having all of the revenue from oil is clearly something to be counted on the pro side of the debate about  independence.

But what of the the downside? At present Scotland gains a share of central government funding from the UK, calculated according to the Barnett formula. This enables the level of public spending per person in Scotland to be somewhat higher than in England. In the event of independence,  this funding would obviously cease. As a newly independent country, we would also have a number of disadvantages. Our borrowing costs would certainly be higher than the rest of the UK (rUK). Assuming that we kept the pound, we would be borrowing in a foreign currency, which is inherently more risky than borrowing in our own currency. Moreover, as a new country we would have to establish a track record economically before the markets could assume that we would be economically prudent. We would likewise have certain start-up costs. We would have to set up things like a tax collecting agency, a pensions agency and a passport’s agency, not to mention an army, navy and airforce. No doubt, much of this would already be in place, but just as any new business has start-up costs, so too would Scotland. There would be some loss of the economies of scale, which at present we enjoy by being a part of the UK and most likely some disruption to the UK single market, which to an extent depends on us all living in the same country.

No one knows the exact figures and anyway they are subject to the bias inherent in this debate, but it is reasonable to guess that the advantages of having all of the oil revenue versus the disadvantages already mentioned, would leave us perhaps a little bit better off than we are at present, but not by much and maybe not at all. But it must be remembered that oil revenues fluctuate greatly and anyway are in decline. Scotland will not become Norway. Its too late and besides we are not remotely like Scandinavians. The main economic advantage of independence therefore can be summed up as a much greater share of a declining resource. Even if it we were to be better off in the short term, what about 30 years from now?

The other main advantage of independence is that we would not have to share power with Westminster. We would have complete political control from Edinburgh. But let’s look at how the political situation works at present. Under devolution the Scottish parliament already controls health, law, education, local government, road, rail and air, farming, fisheries and sport. The Scotland Act 2012 gave the Scottish parliament the power to raise and lower income tax. At present around two thirds of public spending is controlled by the Scottish parliament. What this means, in practice, is that we already have two thirds of the power. What power on the other hand is retained by Westminster? The UK government controls defence,  macroeconomic policy, foreign affairs, immigration, broadcasting, social security, pensions and the constitution. What this all means is that the debate about independence is really a debate about gaining power over these issues as to all intents and purposes we are already independent with regard to those issues that are already controlled by Holyrood.  

People in Scotland are able to influence the powers that are retained by Westminster, because we have a vote in each General Election and MPs from Scotland have frequently been important members of successive governments. This would clearly cease to be the case in the event of independence. Moreover, if Scotland became independent and kept the pound, it is doubtful that we would gain much control over macroeconomic policy. The Bank of England would still control matters such as interest rates and monetary policy. To remain successfully in a currency union with rUK, Scotland would largely have to follow the same economic policies as rUK. It might even be necessary for the rUK Chancellor to oversee the Scottish budget. The foreign policies of most Western European nations are generally very similar and  follow reasonably closely the line of the larger powers. To be frank, we neither know nor care about the foreign policy of a country like Denmark and Scotland’s foreign policy would be similarly irrelevant. If an independent Scotland were to be a member of NATO, we would be further pressured to follow the American line or face the consequences of US displeasure. If an independent Scotland wanted to retain an open border with rUK, we would not be able to have our own immigration policy as immigrants to Scotland could immediately move south of the border. Scots should ask themselves if gaining control over broadcasting, losing the BBC and ITV,  would give us better television and radio. Would gaining control over defence, including setting up our own version of MI5 and MI6 really make us safer? Each of us should think seriously about whether we would rather have our pension and social security rights guaranteed by the UK treasury or by a newly formed Scottish treasury?

While there are advantages to Scottish independence, there are also disadvantages. Most importantly, we would be giving up the shared solidarity of being citizens of UK. What strikes me as strange is that we would be turning ourselves into foreigners in order to take control over matters, which are often fairly abstract like the constitution, or which work well at a UK level and which frequently are not at all big issues at the average election. Holyrood already controls the day to day issues that affect our lives, like health and education. In the event of independence, there would be a new sovereign nation called Scotland. There would be a seat at the UN and no doubt, there would be a lot of flag waving. But practically speaking, we would not have gained much extra power. Breaking up the UK would cause years of negotiation and uncertainty. It would certainly spook the markets and damage the economies both in Scotland and the other parts of the UK, but the potential gains appear marginal and scarcely worth the trouble.

People who are desperate for Scotland to be a sovereign nation will not be concerned by any of this. It’s always worth remembering that some people would argue for independence even if they were to be worse off, because their ambition that Scotland should be a nation again is central to their sense of identity. The rest of us however, need to carefully consider the pros and cons of independence. Otherwise, the deal we are being offered when weighed in the balance might be found wanting.

Sunday, 24 March 2013

The benefits of independence

The economic crisis, which began in 2008, has provided us with a number of lessons. The latest chapter of this evolving story involving Cyprus, provides another. One of the most important morals to the story is that there are benefits to a country being independent.

Take the example of Iceland. This small country, with a population not much more than Aberdeen, had an enormous banking sector. When this collapsed, tiny Iceland was faced with debts that looked insurmountable. But with help from the IMF, capital controls and a currency devaluation of around 36%, Iceland was able to successfully overcome an enormous debt crisis. Iceland’s position now is actually rather enviable. Its sovereign debt rating has improved. Its economy has been growing at an enviable rate of over 2%. It has largely retained its social cohesion and unemployment has been kept relatively low.  Of course, no one should underestimate the scale of the crisis which hit Iceland in 2008. The Icelanders went through an extremely difficult and painful period, which had severe financial consequences for ordinary people. But their position now is much better than that of the Cypriots. It is also, for that matter, better than other struggling Eurozone countries like Spain and Ireland. Iceland shows the benefits of having control over your own currency. It was the fact that Iceland had the Icelandic kr√≥na that made all the difference. The IMF formula for countries with debts that look insurmountable is a combination of loans, austerity and devaluation.  Devaluation immediately makes the country’s exports cheaper, makes it cheaper for tourists to visit and gives the economy a chance to grow. Austerity cuts government spending and makes the economy more efficient by lowering unit labour costs. However, crucially it is the combination of austerity with devaluation, which helps the country to recover. Austerity alone is liable to choke off growth and can lead a country with a sovereign debt problem into a debt spiral that it cannot get out of. 

The contrast with the Eurozone is obvious. In the Eurozone there has been austerity without devaluation. Because the Eurozone countries are in a currency union, they can not devalue relative to each other. One Euro is worth the same in Greece as it is in Germany. What this means is that when Greece found itself with debts that it could not pay, it could only swallow half of the IMF medicine. Without devaluation Greece has been unable to offer ultra cheap holidays to foreigners and its exports have not benefited from a fall in its currency. This means that the austerity side of the medicine has had to be correspondingly more severe. The debtor countries in the Eurozone have had levels of austerity which we in Britain can scarcely imagine. The cost has been correspondingly high in terms of social cohesion and unemployment.

Britain too has faced an enormously serious crisis since 2008. It is frustrating to realise that both government and opposition are still playing politics with an issue, which amounts to a national emergency with the potential to massively and permanently undermine our standard of living. It  makes the debate about Scottish independence appear trivial and unworthy of serious attention. But although no one should underestimate the seriousness of our economic problems it is worth pointing out that Britain has benefited enormously from being an independent country. Because we have our own currency and our own central bank we have been able to self-administer the IMF medicine of austerity and devaluation. The pound has fallen considerably since 2008 against a wide variety of foreign currencies. The Bank of England has been able to follow a path of ultra low interest rates and expansive monetary policies have provided liquidity to the economy. This has meant that although we have had a certain level of austerity, it has been at a much lower level than would otherwise have been the case. If Britain had been in the Eurozone we would have had to take only the austerity side of the medicine and it would have been correspondingly more bitter.

One of the main benefits of being an independent country is having one’s own currency and control over fiscal and monetary policy. It is this which saved Iceland. But being an independent country within a currency union means being in the position of Cyprus, Greece or Ireland. Compare and contrast what happened to Scotland in 2008. Our banking sector, just like Iceland was far too big for the size of our population. The crisis which hit the Bank of Scotland and the Royal Bank of Scotland was a modern Darien scheme, which had the capacity to bankrupt all of us. But we were lucky. We had a Scottish Chancellor of the Exchequer and we had a Scottish Prime Minister and we were bailed out. We were not only in a currency union with the other parts of the UK, we were in the same country and under those circumstances our fellow countrymen did not count the cost. Money was transferred around the UK to wherever it was needed. Being a part of one of the world’s great financial powers meant that we had the combined strength to deal with the crisis. 

If Scotland had been fully independent when a financial crisis like this had hit, we could have dealt with it. But only if we had had our own central bank and our own currency. If tiny Iceland can come out of such a crisis in good shape, so too could Scotland. It would have been difficult, but we would have managed. The one position however, that would be extremely difficult would be if we were an independent nation state in a currency union with foreigners. What we have learned from the crisis in Cyprus is that foreigners in the end have a limit to their generosity. Germans will not bail out Cypriots for free. The fact that they are in the EU and the Eurozone does not make them any less foreigners. Independent Cypriots are on their own, but being part of the Eurozone they have given up the means to help themselves.

The debate about independence is overly polarized. Nationalists are unwilling to see any benefit in being in the Union, while unionists are unwilling to see any benefits to being independent. But, being a fully independent state clearly has benefits. Perhaps, the most important of these is having one’s own currency and central bank. These give a country the ability to adapt economic policy to its own needs. Being an independent country within a currency union however, means that citizens of that country can not expect to obtain the same preferential treatment that is given to compatriots, but neither do they have control over the economic levers, which full independence would grant. In the event of independence, Scotland would be in the position of Cyprus rather than Iceland. We would be in a currency union with England, but they would be pulling the strings. If we have learned anything from the economic crisis, it is that monetary union without fiscal and political union is economically incoherent. If Cyprus were in a political union with Germany there would be no question of the Germans transferring whatever was needed to help out their compatriots. But without this political union the Cypriots get the worst of both worlds. An independent Scotland with its own currency and central bank is economically coherent and possible. Whether it is desirable is another matter. But this is not what is on offer. If Scotland were to vote for the SNP model of independence, we would lose something vital and beneficial, our citizenship of the UK, but we would not gain even the benefits of independence, which were available to a country as tiny as Iceland.  

Sunday, 10 March 2013

The difference between a compatriot and a foreigner

In the debate about Scottish independence, there is a great deal of claim and counterclaim. Even those of us who follow the debate closely find it difficult to know for sure what is truth and what is spin. When trying to point out the advantages of independence, nationalists are naturally biased in their arguments by the fact that they want independence to have advantages, because they want independence come what may. Thus they read selectively, pick out facts or interpretations, which are favourable to their theory about independence, and discount or rubbish anything which appears to contradict it. This confirmation bias is not, of course, limited to nationalists. Unionists also start from the point of view that we want the union to continue, look for ways of proving our theory that the union is beneficial, cast doubt on the supposed advantages that the nationalists list and seek error in their reasoning. Even in science there is confirmation bias. A scientist develops a theory. His reputation, funding and status depend upon him arguing his case. He therefore seeks that which is favourable to his theory while ignoring, discounting or arguing against that which is unfavourable. If science proceeds in this way, how can we expect that politics could proceed without bias? The tendency therefore, of some nationalists to complain about the bias of the other side, while ignoring their own bias shows not only that they lack self-awareness, but also that they fail to grasp the nature of political debate.

But what can be done in the context of everyone being biased? We can try to reach a common ground with regard to the essence of the debate. If we can agree on what independence means, not in terms of details, but more generally, in terms of what an independent country is, then it is possible to present more clearly the choice we face. None of us really knows what the future will bring economically, but I’ve always accepted that Scotland could become a successful independent country. There have been a number of European countries that have successfully become independent in the last twenty years or so, such as Latvia or the Czech Republic. If these places could do so then, of course, Scotland could also The advantages and disadvantages of independence can be debated, but Scottish independence is certainly possible.

Still it is important to have a clear idea of what independence means. At around the time that Latvia and the Czech Republic were becoming independent nations, East and West Germany were reuniting. When the two German states became one, it was immediately obvious that the Eastern half was much poorer than the Western half. A process began in Germany of trying to bring the standard of living in the East up to the standard of living in the West. Huge amounts of West German wealth was transferred, meaning that the West gave to the East well over €100 billion a year. This internal transfer of money has now continued for over twenty years and must be counted in the trillions. Why would people living in the former West Germany be willing to give such huge amounts of money to people living in the former East Germany? The answer is that they considered these people to be their compatriots and they wanted the state they lived in to have a standard of living that was reasonably equal.

Let’s contrast this with the situation at present within the Eurozone. There are a number of countries in the Eurozone with standards of living much lower than Germany. Some of these countries have debts that they are struggling to pay. Germany however, is completely unwilling to transfer money to these countries or to write off their debts. Why is this? The answer is that these people are foreigners. They live in independent countries and Germans feel no particular obligation to them.

Looking at the distribution of wealth in the UK, it is apparent that there are parts of the country, which are poorer than other parts. Therefore Wales, Northern Ireland and parts of the North of England receive more from Central Government than they contribute in taxation. The exact nature of Scotland’s economic position is subject to debate, with different sides putting forward different figures. The issues surrounding oil revenues and the Barnett formula are complex and involved. My guess however, is that overall, we Scots contribute somewhat more in taxation than we receive from the Exchequer. Why should people in the South of England or in Scotland be willing to transfer money to people in Northern England, Wales and Northern Ireland? We do so because we see them as our compatriots and we want to live in a country where the standard of living is reasonably equal. What the Scottish nationalists, on the other hand, are saying is that we should treat these poorer people as foreigners and that we should not want to help them to have a standard of living similar to ours. They are saying that the burden of helping the poorer parts of the UK should fall on the South of England alone. At the same time nationalists criticise people living in the South of England as being selfish Tories. But these selfish Tories are willing to share their wealth with the rest of the UK while those enlightened, “left-wing” nationalists are unwilling to share Scotland’s wealth with people who have been our compatriots for centuries. But once selfishness becomes the motive for our actions in Scotland, why should people in wealthy Aberdeenshire be willing to share our wealth with poorer people living in Paisley or Motherwell? Once you start erecting boundaries between compatriots who is to say where to draw the line?

Nationalism is grounded in selfishness, but selfishness cuts both ways. An independent Scotland would treat the English, Welsh and Northern Irish as foreigners. We would be saying that we would have no more obligation to them than we would have to Germans or to Greeks. But then by the same token our former fellow citizens would have no more obligation to us.  Germans treat other Germans quite differently from how they treat Greeks. This difference in treatment, the obligation that exists in any country towards someone from the same country is what we have now because we are British and what we would lose if Scotland became independent. The most important thing we would give up on becoming independent would be our compatriots. This is the essence of the debate. Do you wish to be a compatriot or a foreigner?