A STIR has been caused by forecasting group Capital Economics over its report last week on what Scottish independence would mean for the rest of the UK. I am not surprised.
I read it with a growing sense of foreboding. And I defy anyone in business Scotland to feel otherwise.
The report sets out what it sees as the potential implications of Scottish independence for the rest of the UK (rUK). Its main conclusion is that the direct fiscal consequences of Scottish independence “would probably be minor”. But it has more serious reservations over the need for the rUK to continue acting as a backstop to the Scottish financial sector. “These potential monetary implications”, it concludes, “are more troublesome.”
An arcane discussion with a flabby conclusion, you may feel. But its analysis goes to the heart of the independence issue. It explores what independence might mean in practice. The range and complexity of the issues being opened up are formidable. Yet many still view “indyref” as a simple and clear-cut political choice: rule from Westminster or rule from Scotland.
The SNP has responded by lambasting the report as “deeply flawed”, with “ill-informed guesswork, unsubstantiated claims and basic errors”. This is a bluff retort to a report whose searching questions deserve a better answer. The errors did not pertain to the substantive issues raised. And of course it can be dismissed as guesswork and unsubstantiated claims. That is what an examination of the future necessarily involves. On this basis, the entire SNP prospectus for an independent Scotland could equally be dismissed.
The report makes clear at the outset that “the precise economic impact of Scottish independence would be conditional upon the actual settlement arrived at between Scotland and the remaining United Kingdom… As far as the detail of any settlement goes, it is almost impossible to know before the event”.
Put another way, there is every prospect that the macro-economic policy framework could be uncertain for years ahead.
A “yes” vote would be far from the end of the matter. Much of the shape, scope, and dynamics of an “independent” Scotland will still be unresolved. Critical issues will need to be negotiated. These include the terms and conditions of Scotland adopting the currency of the rUK and the arrangements over the Bank of England acting as lender of last resort.
How bank debts and liabilities are divvied up, how public sector pension deficits and North Sea oil revenues are apportioned, how de-commissioning costs are assigned, how and by whom the financial sector is to be regulated – these are just some of the issues that will feature in these negotiations. And these need to be settled clearly and quickly. For as Capital Economics points out, there is the possibility of Scottish companies moving their headquarters down south, which would be a gain for rUK – and why not when close to 70 per cent of Scotland’s exports go to the rUK and when, if you are a life insurer or fund management company, some 94 per cent of customers are outwith Scotland?
These negotiations are set to be complex and prolonged. Nationalists will hang tough for every inch of discretion and latitude they can secure. But Westminster and the central bank will be no less tough. They need only to look at the Eurozone to see how experiments in a shared currency and a shared central bank can end very badly.
No matter the elaborate systems of fiscal rules that were drawn up at the outset – the Growth and Stability Pact, the limits placed on member government borrowing and debt, the diabolical machinery of fines and penalties for those who broke the rules – all these failed to prevent the Eurozone and its economies from being plunged into the deepest economic and financial crisis since the 1930s.
Now there is colossal pressure to secure greater fiscal control at the centre.
Back in the late 1990s Hans Tietmeyer, the powerful then president of the German Bundesbank, predicted that monetary union led inevitably to fiscal and political union. So it is turning out in the single currency zone – the very opposite of the end being sought by the SNP.
This is the spectre at the post-vote negotiating feast between London and Edinburgh. The result could saddle Scotland with an independence far removed from the aspirations of the SNP: an intensity of surveillance, monitoring and rules than could ever be conceived in the worst imaginings of Alex Salmond. Little wonder some are already predicting there will be demands from disappointed nationalists for a second referendum – to approve the negotiated terms.
The SNP rebuttal is that such analysis is scare-mongering. But this is wearing thin. These are the concerns shared by many in business Scotland who already sense the immediate problems they face are being marginalised by a political class obsessed with constitutional process and protocol. And it is the spectre of prolonged disputation that cannot but fill business with foreboding. The referendum vote in 2014 will not be the end of an already long period of uncertainty, but the end of the beginning; not a resolution, but yet more indecision; not a closure but an opening of yet more disputatious fronts. It could push an investment-led recovery here well over the horizon.
PPI stimulating
I never thought that the Payment Protection Insurance mayhem and the huge fines being levied on the banks over the Libor affair and other scandals could possibly be seen as an economic stimulus. Now I’m beginning to wonder. The total cost to the industry – the amount being shelled out to claimants – is now reckoned at between £12 billion and £20bn – a spending stimulus to households greater than anything George Osborne could afford.
Now I read that the Financial Ombudsman Service is to double its workforce over the next two years, having added 1,000 staff to help deal with claims pouring in at the rate of 5,000 a week. With the government now taking a cut from the hefty fines being levied by the FSA, a slice of the £300m plus set to be levied on RBS, the Treasury has itself a nice little earner. Financial regulation seems to be the one area of the economy still left with a pulse.
Twitter: @Bill_Jamieson