Financial Times. Scotland has thought the options through and counted the cost From Prof Andrew Hughes Hallett and Prof Drew Scott. Sir, Martin Wolf (“Scotland needs to judge the costs of independence”, January 20) raises important questions regarding the conduct of monetary and fiscal policies in an independent Scotland, should Scotland retain sterling as its currency. However, the picture he presents is undeservedly negative. First he assumes that independent countries are unable, or unwilling, to co-operate over matters of mutual interest. One example is the future regulation of Scotland’s financial services where one would expect the Bank of England to retain overall responsibility to ensure that the UK internal market for financial products – from which all consumers benefit – remains intact. Mr Wolf argues that a Scottish government would be unable to rescue financial institutions in distress, encouraging the banking sector to relocate south of the border. But if the regulations are effective and apply with equal force in both counties, the only reason for so doing would be a belief that the rUK (remainder of the UK) government both would and could (and Scotland would not or could not) underwrite all bank liabilities within their own territory, though not in another jurisdiction. Applying this logic across the board would, of course, have spelt the end of all cross-border banking operations long ago and does not reflect the co-operative, and self-interested, international response to previous financial crises. It would also reflect an almost inconceivable failure on the part of UK and European Union financial services regulators to reform the regulatory system to ensure the conditions precipitating the crash of 2008 do not recur. It is worth recalling that the US authorities, in co-operation with the UK government, bailed out the Bank of Scotland and the Royal Bank of Scotland to the tune of $180bn and $230bn respectively in 2008. Similarly the Dutch, Belgian and French authorities jointly bailed out the Dexia bank and Fortis Bank (twice) rather than allow either to collapse in one, and hence all three, jurisdictions. The second assumption is that the Bank of England would not stand ready to bail out a Scottish government finding itself with an unsustainable fiscal debt. The analogue here is the eurozone where 17 countries use the same currency but none has legal or political authority over the central bank responsible for their currency. No one seriously believes that the European Central Bank printing money to bail out indebted sovereigns is the solution to that crisis; indeed, under current statutes, the ECB is not allowed to. Nevertheless, the ECB has found it necessary to bail out illiquid and insolvent institutions within its member states repeatedly since 2007, and continues to do so in tranches of €500bn at a time. Evidently it fears a financial markets collapse originating in the periphery of its currency zone more than it fears arguments over who should be held responsible or whether the ECB should intervene in the public interest (including the more disciplined) before the whole system collapses. Why would the Bank of England be different? And who is to say the more disciplined won’t be the problem cases in the future? The key is to separate private risk from sovereign risk, and provide a lender of last resort facility that underpins the stability of the private financial markets; plus fiscal constraints to minimise the chances of sovereign default. The former requires a rigorous system of financial regulation; the latter a system of debt limits with effective sanctions (a debt protocol) operated by an independent fiscal policy watchdog. Having separated the two, problems in the financial sector can be treated on merit and by targeted lending of last resort. Unsustainable fiscal policies will eventually be ruled out by technocratic solutions. But in normal times, markets and policymakers are free to pursue their own interests without constraint. Which regime the Scottish government eventually chooses remains to be seen. But Scotland has certainly thought the options through and counted their cost. An independent Scotland would have to implement and observe strict fiscal and financial rules to prevent unsustainable imbalances emerging. However, this is a matter of institutional quality and the determination of the politicians. It is not part of sterling zone membership. Andrew Hughes Hallett, St Andrews University and Scottish Council of Economic Advisers Drew Scott, School of Law, University of Edinburgh
Posted on: Fri, 02 Aug 2013 16:42:21 +0000
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