The media reaction to Bank
of England governor Mark Carney’s speech in Edinburgh this week has been rather
dramatic. Under the rather prosaic and dull title of The Economics of Currency
Unions, Carney’s talk – given the time, timing, place and audience – was
intended to be a ‘technocratic assessment’ of the pros and cons of the proposed currency
union that is integral to the SNP’s plans for an independent Scotland.
Rarely, I think, has a
lunch lecture to business dignitaries on such a topic set pulses racing. Yet
the London commentariat – despite their best efforts to hide their jubilation –
figuratively jumped for joy when the governor made his speech.
Of course, there has been a
lot of hedging of late on the issue of Scottish independence – not least as
most London-based national newspapers have relatively healthy circulations in
Scotland and are chary of losing 6 million potential customers. Usually there
is at least a pretence of impartial coverage. So it was interesting to see that
their reaction to this speech – detailing a cornerstone of prospective SNP
policy – nearly made them thrown caution to the wind and gloat over the central
banker’s intervention.
Of course, much of the
coverage fell along the usual predictable lines; most outlets decided this was
a disastrous intervention that boded incredibly badly for the Scottish
nationalist road-map. More measured analysts paint Carney’s approach as a calculated effort to remain above the fray. But what
precisely is Carney saying? Very few pundits
have attempted to paint this as positive endorsement of post-independent
Scotland’s monetary structures. Most have, instead, narrowed in on Carney’s
concluding remarks that ‘‘a durable, successful currency union requires some
ceding of national sovereignty’’. This is understandable, nor is it unusual to
surmise that Carney would not endorse any pro-independent policy.
Carney is, after all, a
political appointee and a deeply conventional economic thinker. When this fact
translates into his position on any given policy, it is typical to conclude
that his stance would be antipathetic to drastic alterations in the political
or economic structures of the United Kingdom. It is therefore unsurprising that
news outlets concluded that this was a ‘pounding’ of pro-independence
aspirations.
If this is an operating
assumption – and it is understandable to suppose so – then it might be worth
applying this presumption of Carney’s conservatism to the structure and
statements of his Edinburgh luncheon. That is, if our stating assumption is
that Carney attempted to put a damper on the independence blueprint, we should
look at how he went about it.
Firstly, the speech was
structured in particular way. Roughly, it was a speech of two parts that got
increasingly vague, incoherent and political toward the second half. After the
usual flattery and platitudes addressed to his Scottish audience (Scotland’s
great, thanks for the free lunch, Adam Smith etc.) Carney commenced with a
brief – very brief – description of the benefits of currency union. These
appear to be many, but were swiftly covered in the speech. Low transaction
costs, mitigation of foreign exchange risk, access to liquidity, the
maintenance of liquid markets, reduced borrowing costs (both personal and
sovereign), increased trade and easier mobility for labour and capital all flew
by in a few paragraphs. This was followed by the drawbacks of currency union in
relation to independent monetary policy.
The second half is more
interesting, but loaded with value-laden terms like ‘credibility’, ‘prudence’
and ‘stability’. There Carney indicated that a successful currency union would
have to maintain a central bank (the Bank of England) as a lender of the last
resort, a shared supervisory structure (the Prudential Regulatory Authority and
the Financial Conduct Authority) and a common financial deposit guarantee and
compensation structure (the Financial Services Compensation Scheme). It is
worth noting that this does not depart from SNP plans
for independence
– these will all be maintained, with only the Financial Ombudsman Service
becoming part of a ‘super’, all-inclusive consumer
dispute resolution service in Scotland.
So, this ‘banking union’ is
uncontroversial – it exists now and would continue to exist if the SNP had
their way. But Carney’s next point best illustrates his conservative position.
It is also indicative of the thinking that has sadly characterized economics in
the last few years. The lessons Mr Carney seemed to learn from the Eurozone
crisis seem firmly derived from the ‘peripheral irresponsibility’ school of thought. There
is not room here to point out how silly and flawed this argument is – but
applied to this debate, Carney indicated that fiscal policies in an independent
Scotland would have to be limited and monitored from London in case a departure
from ‘‘prudent behaviour’’ caused contagion in the wider currency zone.
Furthermore, a bizarre
argument based on moral hazard was put forward. Put bluntly, Carney stated that
a currency union would incentivize reckless spending by weaker countries –
because they were aware that they would be bailed out by the stronger country
that had ‘‘run their finances prudently in the first place.’’ That is, that
they would engage in reckless spending because the safety of the wider currency
union would be jeopardized if they were not bailed out from the effects of
their spending. The logical (in Carney’s argument) conclusion was an alleged
need for ‘‘tight fiscal rules’’ – namely, control of national budgets that
would render the intended results of Scottish independence negligible.
Obviously, this is both
insulting and intended to pander to an ingrained idea of Scottish
public-spending proclivity that is gaining increasing purchase in England. Let’s get it straight
however – Carney’s argument is that currency union (without ‘tight fiscal
rules’) would cause an independent Scottish government to spend too much due to
their awareness that Rump UK would ‘bail them out’ eventually. This is
nonsense. Does any government – or would any government – ever behave this way?
Of course not. Most bailouts have occurred due to unforeseen systemic shocks or
market shifts that reduce revenue, cause bank-runs or increase bond-yields.
They don’t occur because a government consciously overspends due to the
mercenary calculation that they will be ‘bailed-out’.
Of course, this is meat for
many opposed to Scottish independence. Yet there is something incredibly
encouraging from Carney’s intervention. Firstly, it was terribly mistaken, but
infinitely more measured than many other interventions (compared to, say, the
Treasury’s shrill prognostications and jeremiads). It is also possible that
Carney has no personal emotional investment in Scottish independence and was
attempting to edge debate toward considering a separate currency altogether. Carney
may also have been attempting a qualified endorsement of a currency union –
with the tacit caveat that it would be difficult to operate. For all that,
Carney did not hide his ideological stripes. He spoke as an austerian and
betrayed the incredibly unimaginative nature of his economic thought – one that
brought up the Euro-bogeyman frequently but doesn’t seem to have imbibed any
real lessons from the Eurozone crisis.
Mark Carney probably went
to Edinburgh intending to scupper the economic vision of the Scottish
nationalists. That his contribution was so weak and vague is heartening – after
disregarding much of the false assumptions and bad examples, a limited array of
modified financial instruments and decent policies could, and should, be able
to overcome the stifling limitations placed on Scottish economic policy before
and after independence. Failing that, let us hope, at least, that some sort of
imagination begins to be seen in tediously repetitive and acrimonious debate on
Scottish independence.
