I’m no fan of UK Chancellor George Osborne’s economics, but he is a pretty good politician. He pulled out all the stops a few weeks ago when he ruled out a monetary union if Scotland became independent. (For the background, see here.) Not only did he get his Labour opposite number Ed Balls to agree, but he also had the Treasury’s Permanent Secretary take the highly unusual step of publishing personal advice that monetary union was unwise.
What has rather amused me since has been the reaction of some that this is only a bluff. Incredulous indignation brimmed over from Kevin McKenna in the Observer: “Is a UK chancellor of the exchequer seriously asking us to believe that he is contemplating damaging the entire UK economy following a yes vote?” The chair of the Scottish government's fiscal commission working group, Crawford Beveridge, whose other members are Professors Andrew Hughes Hallett, Sir Jim Mirrlees, Frances Ruane and Joseph Stiglitz, said that none of them believed "for a minute" that chancellor George Osborne was serious.
Why was I amused at the idea that George Osborne could not possibly plan to do something that would be damaging to the economic interests of the UK economy? Just yesterday in opposite pages of the FT were two news items that gave clear examples of where for the Conservatives politics trumps economics. First, the chief executive of the engineering company GKN warned that the possibility of Britain leaving the EU following the proposed referendum was harmful to UK companies and was already being used by competitors against them. The second was on a report that migrants to the UK set up one in seven new UK companies.
Now you could argue that planning a referendum on leaving the EU and curbs on immigration are not ‘true’ Conservative policies, but are being forced on the party by the rise of UKIP. I’m not sure about that, but it is not the point. Both policies are clearly harmful to the economy as a whole (don’t forget the damage that the current immigration policy is doing to one of our more successful export industries, higher education), yet are being adopted for political reasons. Politics is dominating economic interests.
And then there is the small matter of fiscal austerity, which the OBR estimates has reduced UK GDP by a total of over 5% of annual output up to last year. That is a large economic price for the political goal of a smaller state.
Perhaps the bluff idea comes from the perception that once the Scots have voted yes, the political incentive to say no to monetary union disappears. That seems naive. Losing Scotland will be deeply humiliating for this government, and unpopular among remaining UK voters. The political imperative after a Yes vote will be to make it appear as if the Scots have made a mistake. In that situation, are politicians likely to quickly turn around and say they have changed their minds on monetary union?
The incentives of the Scottish government after a Yes vote are more interesting. Without a monetary union, will they continue to use sterling or will they create their own currency? While keeping sterling will be the least disruptive option, in political terms it would vindicate Osborne’s strategy, because the remaining UK would get most of the benefits of monetary union without the costs. A new currency would give Scotland more independence, which would seem to be where the Scottish National Party’s heart is, particularly if they could say that this is an option they had been forced to take by the ‘auld enemy’. So I think my money is still on a new currency if there is a Yes vote.