Another day, another expert pours scorn on the YESNPs proposals for a currency union. How many more experts need to come forward before the Nationalists start to question the SNPs judgement over this policy? Read some of the practical issues below: On September 18 2014, Scotland will hold a referendum on independence. While Scottish voters alone will decide the result, it will affect the rest of the UK as well. Among areas where the impact will be felt are monetary and financial arrangements. The Holyrood government favours continuation of Scottish membership of the sterling area. It is not for me to decide whether that would be acceptable to Scots. But it is for me and other voters in the rest of the UK to decide whether such an arrangement would be acceptable to us. The answer should be no. Experience since 2007 and, in particular, the eurozone crisis, has demonstrated three points. First, the central bank plays a central role in any financial crisis, as it is the only entity capable of managing liquidity risk. Second, it has to work in close harmony with the fiscal authorities, who are responsible for public outlays. Third, it must know to whom it is accountable. Today, these arrangements are quite clear in the UK, particularly after the return of responsibility for supervision to the Bank of England. The bank, in turn, is accountable to the UK parliament and government. This is very different from the situation in the eurozone, where an exceptionally independent central bank floats above governments and is, in effect, unaccountable to anybody for its handling of affairs. It may help governments or let them drown, at its own discretion. One might like this arrangement or detest it. But it is entirely different from the situation in the UK, where the government is sovereign. That would no longer be the case if, as is proposed, the sterling area was divided between two sovereign states: Scotland and the rest of the UK. Unless Scotland were to accept an entirely subordinate position, a new international treaty would need to be agreed between it and the residual UK. The terms of accountability for the bank would be established under such a treaty. The bank in turn would no longer be accountable to one parliament and executive but to two. This would create a host of practical, political and constitutional problems, as Brian Quinn, former deputy governor of the Bank of England, makes plain in an important paper for the David Hume Institute, published in August. First, how would the new regime regard the fiscal policy of the two states? Would there need to be fiscal rules, as in the eurozone? Would they be imposed on the rest of the UK as well as on Scotland? Who would enforce those rules? Second, who would set the inflation target and appoint members of the Monetary Policy Committee? Who would judge whether it had done its job properly? What would happen if a target that proved acceptable to the rest of the UK proved unacceptable to Scotland? Third, who would appoint members of the Financial Policy Committee? Would it consider that it is responsible for one financial system or for two? Would it need a separate mandate for macroprudential policy for Scotland? Would it be accountable for that policy to the Scottish parliament or to both parliaments? If it tightened up lending in Scotland, to whom would it be accountable? Fourth, would the Prudential Regulatory Authority need to take account of the fiscal capacity of host governments? If the answer were yes, could it avoid recognising the size of the Scottish-based banking system, relative to Scotland’s fiscal capacity? Would it not have to impose higher capital requirements on banks based in Scotland than on those in the rest of the UK? Fifth, who would represent this new sterling area’s interests in international negotiations? What would happen if Scotland and the rest of the UK did not agree? Sixth, how would this sterling area manage a big crisis? Just imagine that, in October 2008, Alastair Darling, chancellor of the exchequer, had to negotiate the rescues of Royal Bank of Scotland and Halifax Bank of Scotland, including where fiscal responsibility lay, with John Swinney, Scotland’s cabinet secretary for finance. Or rather do not imagine: it is too horrible. Seventh, who would control activity by the bank as lender of last resort? If the bank felt obliged to undertake quantitative easing, which bonds would it buy and in what proportion? Would something like the UK’s Funding for Lending Scheme need agreement by both governments? I wish the Scots to remain part of my country. But if they wish to leave, they should do so. The rest of the UK must, however, insist that the central bank stays entirely accountable to its own parliament and government, not to some complex and almost certainly unworkable binational contrivance. An institution accountable to two masters is simply unaccountable. An independent Scotland may use the pound if it wishes. But the rest of the UK has surely not escaped the horrors of the eurozone only to create similar horrors for itself at home. It must retain control over monetary policy, financial regulation and crisis management. It must also be made clear: this is not negotiable.
Posted on: Fri, 08 Nov 2013 10:01:33 +0000