The SNP's biggest mistake

The Scottish referendum on independence is one year away. Senior members of the SNP have been doing the rounds of the television studios, putting the case for independence. A combination of the one-year countdown and the political-media class happening to be up in Glasgow for the LibDem conference has brought the independence debate into sharp focus.

One of the more pressing quandaries is how an independent Scotland would pay its way, and on this question there are sheaves of economic analysis to show that Scotland both could and could not survive as an independent economic unit. So the SNP and the pro-Union brigades can pick and chose their evidence according to preconceptions. Much of that fiscal debate has become reduced to an exchange of contradictory “expert analysis”.

There are however some economic points worth making. Nicola Sturgeon, the Deputy First Minister of Scotland and Deputy Leader of the SNP has suggested that Scotland could survive on a strict diet of North Sea oil. Oil exports would form the basis of a sovereign wealth fund, similar to that of Norway, which would fund domestic spending. All reasonable enough. The problem however, comes when the SNP says that it also intends to keep the pound.

The problem with this is that, in both relying on oil as the chief source of Scottish revenue, and retaining the currency union with England, the effect would be to take one economy that relies on natural resources—Scotland—and then to bolt that economy onto another that is based on services and manufacturing. The Bank of England would effectively have rate-setting power over both the new UK and an independent Scotland, but the Governor would be an appointee of the Westminster government and so it is clear where his or her loyalties would reside.

Resource economies have very specific monetary requirements. It is not difficult to imagine a situation in which high oil prices were causing upward inflationary pressure in Scotland. This would necessitate higher interest rates to help ease that pressure. But if simultaneously south of the border the rest of the UK was experiencing an economic slump due to high energy costs and so required lower rates to help boost the economy—what then? Scotland would require higher rates, the rest of the UK, lower ones. It is highly likely that the Bank of England would set rates in line with UK and not Scottish requirements.

This monetary situation would be extremely unfavourable to Scotland and leave it open to nasty bouts of inflation. But as well as this, if an independent Scotland were to be in currency union with the remainder of the UK, this would be to replicate one of he most fundamental weaknesses of the eurozone. The deficit-spending, consumption-based southern economies shared a currency with the manufacturing-led, surplus north—to the detriment of both. The answer to that problem is the slow move towards fiscal union.

By its plan to forge a monetary union between two such differing economies, the SNP intends to recreate the eurozone’s single most damaging structural economic mistake.