Wednesday, February 19, 2014

Debunking Some Common Myths About the Consequences of Scottish Independence

Last week there were 2 main events in the tale of Scotland's quest for independence.

  • George Osborne, with the backing of the British Establishment said that there would be no currency union.
  • José Manuel Barroso, President of the European Commission made the claim that Scotland would not be accepted into the EU upon independence.

I'll tackle both events in order. Currency first, EU second. If you don't feel like reading each short essay, check under each one for the TL:DR version.

A - The Currency Union Debate

Now, while I do think it makes sense for businesses to operate in a currency zone within the British Isles, and there are benefits in the form of enforcing sustainable economic practices between the two states in such a scenario, I do think at the end of the day it is the right of the UK government to rule out a currency union if they wish to. I don't think its "bullying" as the nationalists complain. I really can't think of an example where the central bank was divided up between countries upon the succession of one from the other.

However, I should add that I take issue with 2 of the economic reasons that the UK and the media are using to defend this position.

  1. It doesn't want to bail out a foreign country or its banks.
  2. There was been no successful monetary union ever. The LMU failed horribly and the Eurozone is going the same way.

A1 - Bailing out

The first reason sounds entirely feasible.  I mean, who wants to bail out a foreign country in order to keep your own country safe from the economic shocks that comes with a neighbour you are tied to via currency from going belly up. Look at Germany and Greece as a great example of that. Surely the UK would never want to have to do such a thing, right?

Oh snap. The UK bailed out Ireland to the tune of 7 billion pounds when it was in trouble. Why? Because that's what neighbours with interlinked economies do to each other. Help. As Osborne said in that very speech in the houses of parliament in November:
"We are doing this because it is overwhelmingly in Britain's national interest that we have a stable Irish economy and banking system.The current Irish situation has become unsustainable. Their sovereign debt markets had effectively closed and had little prospect of reopening."
Now, last time I checked, Ireland and the UK had very different currencies. The currency issue is a red herring when we talk of bailing out a foreign country. You don't do it because they are using the same currency as you and may bring down the union. You do it because the worlds economy is interdependent and if one major trading partner goes down, you go down with it. Union or not, you will suffer if you don't act to protect your own interests by issuing a bailout.

The BBC and "unnamed" government ministers also like to point out that the RBS bank is 12 times the size of the Scottish economy and if that collapsed in an independent Scotland then England would have to bail out the RBS under a currency union. This is false because regardless of whether Scotland uses the pound or not, RBS conducts most of its business in London and is heavily invested in the markets there. If RBS fell, England would have to bail them out regardless of whether Scotland and England are in a currency union or not because RBS is so integral to the day to day functioning of the City of London. This wouldn't be a problem if Westminister did the sensible thing post 2008 and cut RBS up into its component parts, but expecting Westminister to do anything sensible when it comes to the financial industry is like expecting the Japanese government to apologise for its part in WW2, it ain't gonna happen.

An interesting case study to look at when it comes to nations bailing out foreign banks would be the bailout of the UK financial juggernaut Barclays by the US Federal Reserve in 2008.

The Fed bailed out Barclays to the tune of 863 billion dollars. Why? Self interest. Economies and and banks from around the world are so interconnected that should one of the big ones go down, the effects will be felt in London, or Wall St, or whereever. You simply cannot base an argument against a currency union on the basis that you will have to bail out the junior partner when times are tough. That happens already!

On another note, can you just imagine how far up **** creek the UK economy would have been if the US Fed didn't jump in to save Barclays and left us to do the heavy work? Another 500 billion pounds in debt would have been absolutely catastrophic for our economy. We British like to forget those little facts when it is convenient for us to do so. We have a very selective memory. So,  USA! USA!

TL:DR: Neighbours and friends bail each other out when the going gets tough.

A2 - Has there ever been a successful monetary union?

Lets move on to the second reason now. When there is talk of a currency union, its almost inevitable that someone will bring up the Eurozone or the Latin Monetary Union as examples of bad currency unions, and then follow that up with the assertion that there have been no successful long term currency unions in history. As with many things in the news though. You always hear the bad, never the good.

Its true the Eurozone is failing. Countries set rules and refused to adhere to them from the get go. Countries borrowed too much and then hid the figures in their books. Naturally, that is a recipe for failure.
Its also true the Latin Monetary Union was a catastrophic failure. The nations set their currency at parity with each other, so they could freely use them as if they were all one and the same. Then Italy and Greece decided to debase their coins hoping that they could get away with it....and the rest is history.

We never hear about the success stories though. Which I guess is about what you would expect from a media that thrives on fear and panic. To find a success story, we should travel back to the mid 20th Century. Belgium and Luxembourg established an Economic union before WW2 and pegged their currencies to each other. 1 franc from one country was equal to 1 1/4 francs from the other. After WW2 though, this developed into a true monetary union. 1 Belgian Franc was equal to 1 Luxembourgian Franc and nationals from each country could freely use their own coins and notes in the other country. The union was stable and because of how economically interlinked they were, they both had a vested interest in maintaining the union. There were no cases of economic freeriding as we have seen with Greece in both the LMU and Eurozone. It was stable and should have served as a model for future currency unions - a small union between 2 culturally and economically similar nations that maintained enough space for political differences. People might say...ohhh but that was an exception to the rule, however that doesnt seem to be the case.

As we see from the Forbes article
"In fact some of the world’s richest nations are members of currency unions. Examples include Hong Kong/Macau and Singapore/Brunei.

Then there is the granddaddy of them all, Switzerland/Liechtenstein. Established in 1920 and still going strong, it is an arrangement that neither nation has had any reason to regret. Certainly Switzerland ranks well up among the world’s richest nations, with a per-capita income more than 50 percent higher than America’s. Meanwhile Liechtenstein’s per-capita income at $142,000 at last count was the world’s highest."
I am in no way saying that the England and Scotland are similar to those examples, however they do show that, contrary to the Treasury's claims,  a currency union of some sort is most defiantly not an  unworkable proposal, which goes along exactly with what the Governor of the Bank of England said weeks ago. Logically, it follows that if it is not unworkable, then it is workable. Logic does not lie, unlike politicians (That should be my signature phrase!).

TL:DR: Currency Union between many countries of very different cultures = bad. Currency union between 2 countries of very similar cultures = good.

B - The European Union Debate

source: Wikipedia

Now moving onto the second event, Mr Barroso's rather interesting intervention on Scottish (and Catalonian) membership of the EU.  Mr Barroso essentially claims that Scotland will exit the EU and have to reapply as a new member, but will never be accepted because Spain will block it, like it blocks Kosovo... Now, lets ignore the absurdity of comparing Scotland to Kosovo for a minute and look the main issue here. Will Scotland be part of the EU?

 On one hand, the Russians are jumping with joy at Mr Barroso's flat footed intervention in the Scottish affair because they can wave this idiocy in front of the Ukrainians and say "look guys, the Europeans don't really came about self determination and liberalism." The Russians look at the independence movements and see a region leaving a bigger country and then try to spin that into the region wanting to leave the EU because its not the land of honey and spice. It certainly doesn't help things when Barroso comes out and says that the region will have to leave the EU. It gives the Russians all the ammunition they need to destroy the hopes of the Ukrainians.

Someone please give Mr Barroso idiot of the year award for helping foster that stupid view.

On the other hand this whole line of debate is one gigantic red herring anyway. One could make an appeal based on common sense that it simply does not make any sort of business sense to eject Scotland. The nationalists have been using this argument extensively. They say that without Scotland, Europe will lose most of its oil and much of its fishing grounds. Europeans will also lose free access to Scottish Universities and have to go through complex visa processes to continue their studies. Fair points, but I'm sure that arguments can be made against those points (though I wont try to). Basically I think those premises are fairly weak to base your argument for EU admission on.  One need not make such an argument though. I'll tell you why.

According to Mr Barroso, on independence, Scotland (or Catalonia for that matter) would not be a member of the EU, ignoring the fact that these lands have been EU territory since the 70s (or 80s for Catalonia). That part is incredibly important. EU territory. The Catalonians have already done their homework on this issue and the Scottish nationalists would be fools if they ignored the advice given by the French expert advising the Catalonians on this issue. It's a gem that solves all their problems and renders every single argument used by Better Together on the issue of the EU completely null and void.

"In addition, Gouning highlights the legal argument resulting from article 50 of the EU Treaty, which deals with the withdrawal of a Member State from the Union. The Treaties clearly say that the withdrawal is not automatic and has to be negotiated, specifically regarding the relationship of the State with the EU. Therefore, automatically excluding Catalonia or Scotland, without a negotiation, would be quite problematic regarding Article 50."

You see, according to Article 50 of the EU treaty, a territory or nation cannot unilaterally secede or be expelled from the EU. To leave the EU, one must conduct extensive negotiations will all members of the EU and formally begin withdrawal procedures. There is a precedent for this kind of negotiated withdrawal, Greenland from the EU's predecessor, the EC in the 80s. Essentially, the implication of this is that Scotland has no choice but to start life within the EU, but must either renegotiate its terms and conditions in order to reflect its new status(which may be more taxing on the nation than its current terms and conditions as part of the UK), or it must begin negotiations with the rest of the EU for an eventual, formal withdrawal.

This should also be of interest to the Anti-EU wing of the Tory party and UKIP. The implication of Article 50 of the EU treaty also affects them as it means they cannot unilaterally withdraw from the EU if they win a referendum on that issue. They will have to undergo a lengthy and costly withdrawal process involving ALL members of the EU. With the way the UK behaves and treats mainland Europe, I can only imagine the fireworks that might go down at those meetings.

Did anyone really expect the EU to give up its territories as easily as the media suggests? It ain't bloody likely as long as the treaty is adhered to, as all members are legally obliged to do so.

TL:DR: It's damn near impossible to leave or escape the cold grasp of the EU. Its written into the treaty for things to be that way. Scotland is safe.

By the way, if it wasn't already clear, the point of these posts I am making are not to argue in favour of anything. When it comes to the Scottish Referendum D-Day on September the 18th, I want people to vote knowing as much as possible about what they are actually voting for or against. Your vote is not my business, do what you like.  Living outside of Scotland I will not be able to vote anyway. The point of these posts are to debunk assertions that are made by politicians and the media in order to muddy the waters and confuse people. Information is as precious as gold during referendums and if there is one thing politicians hate above all else, it is people making informed choices. They will make baseless assertions in order to get you to do what they want. Assertions are just that, assertions. Never believe anything unless someone gives you a source for their claims.

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