Prof. Hallett on Scottish Independence

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BOLOGNA — English Members of Parliament challenged Prime Minister David Cameron’s vow to maintain spending levels that favor Scottish citizens this week. This policy is one of the many promises that influenced a crucial number of Scottish citizens to vote “no” on the independence referendum after seeing a chance for further devolution with Westminster. As politics take over the devolution process, some analysts are predicting that the independence debate has only just begun.

Last Thursday, Professor Andrew Hughes Hallett, University Professor of Economics at George Mason University visited SAIS Europe to take a retrospective look at the Scottish referendum in a discussion titled “The Economics of Independence or Autonomy.” Professor Hallett has been a consultant to the World Bank, the IMF, the European Commission, and a number of governments and central banks. Before the discussion, the Observer was able to meet up with our guest to get an insider’s look into the Scottish independence debate.

The Scottish have wanted independence for centuries. Why do you think the referendum happened this year?

I think there are several answers to that, but I think the most immediate answer is all to do with the political system. In 2011, there was a Scottish election in which the SNP government was reelected, but got no majority in the Scottish Parliament. It has in its constitution, which was written in the 1930s, a clause that the party was required to pass for an independence referendum when it was in the position  to do so. 2011 was the first time it was in a position to do so. So that’s the quick and dirty answer, I suppose.

But as you say, in Scotland, it’s had this on the agenda for a long time; it possibly became live in the 1970s when the oil from the North Sea started flowing,  and they started getting the first SNP members in the London government. The Scottish Parliament didn’t exist then. The campaign slogan was, “It’s our oil; it’s our money. Why aren’t we getting any?” So the pressure for it was there for a long time, which is why you see a build-up beginning with, “Should there be a Scottish Parliament?” It was put to a referendum in 1979, and some would say it was lost on a technicality and re-invented in 1997. Then a parliament was set up. Of course, once you set a parliament up, the question is, “What should it do?” Certain factions are obviously going to look for either partial separation from the London government or a total separation. So you can see with the SNP getting elected, first in 2007 and then the big victory in 2011, that would trigger a call for a referendum.

What part, if any, has the global recession had in contributing to the call for a referendum?

I don’t think so. I think a  much bigger motivation is the dislike of the kinds of policies which you get out of Westminster. Scots, by and large, would prefer a different balance of policies. Scotland’s much more social democratic than the UK, as a whole, is. So it’s not like the nationalist parties you get in most other countries, which are more on the right. This is on the left. So that would be a big trigger.

The recession, not so much. In fact, Scotland’s economy is much more resilient than the English, so they were hit, but not so hard as the English economy. The other thing, I think, which motivates it is the sense that you would have if you were there talking to the Scottish politicians there is a complete indifference in London as to what’s going on in Scotland and in other places like in Northern England. They’d like to get away from that.

If their economy is sturdier than England’s, what would the political and economic implications have been if they had voted yes? There were plenty of negative forecasts for this eventuality.

It’s difficult to answer, because, of course, when people say that, they’re either saying it out of a knee-jerk reaction, an impression, or they appeal to the Public National Council of Scotland, which suggests that [the economy] is not that robusts and dependent on subsidies from England. But you have to bear in mind that the concept is wrong in a very distinctive sense. They have the accounts for the way which Scotland is financed now in a dependent situation. If you were to take the accounts and reconstruct them as necessary under UN conventions or as national accounts of an independent economy, you’ll find that Scotland’s got a much stronger position.

For example, the North Sea oil revenues – forget what size they are – are accounted for as part of the UK accounts, not Scotland’s. So a number of billions of pounds go to the UK treasury, and they recycle about 50-60%, which goes back to social support in Scotland. So, if you were independent, you would get the other 40 percent, and that changes the accounts quite considerably.

There’s a whole list of things which are not in the accounts as they stand at the moment. Tax revenues, for example, from people who work in England but live in Scotland because they commute every day by plane is another thing. Scots subsidize the rest of the UK’s pensions; they subsidize housing for people who live in social housing. There’s a list of these things, so Scotland would actually be in a much more robust position than the rest of the UK.

It gets murkier when you get on to banks. It’s one of the things up on the referendum: you couldn’t support the banks if they go bankrupt. Well, they are bankrupt, and they’re actually run from London already. So we wouldn’t have to support them. They’re not [in Scotland]: they have a brass plaque, but they’re not there. That’s actually prescribed by that latest British banking law from 2013, which controls how much you have to bail a failing financial institution out. You won’t hear that in the political discourse, because people in London don’t have any interest in allowing you to think this.

So I guess the better question would be if Scotland had gotten their independence, how would that have affected the UK?

Well, England is 90 percent of the UK: Scotland is very small. So anything that happened in Scotland would affect the rest of the UK, but it will be small because the place is small. I think, very clearly, the rest of the UK would be somewhat damaged; most of that damage, of course, will but just south of the border. It would do nasty things to places like Newcastle, unless, of course, the Scottish economy is stronger and growing better. In that case, there would be positive spillovers to the rest of England. There are some reasons for supposing that that would be the case.

So it’s not a zero-sum game actually; there will be some gains. For instance, if Scotland’s economy was in better shape, London wouldn’t have to borrow so much money on behalf of Scotland, because now Scotland is not allowed to borrow anything. So you see some positive things coming up there, but numerically, it’s not going to be huge for the rest of the UK.

What kind of positive spillovers do you mean?

Well, supposing that the Scottish economy grows faster, then it will import more from the rest of the UK. That’s an immediate positive spillover that generates incomes. In economics, that’s called a locomotive effect: pulling them along. Scotland is England’s second biggest trading partner. Bigger than all the BRICS put together: Brazil, Russia, India, China, and South Africa – the emerging economies. And it’s bigger than the trade England does with Germany and France, certainly less than the U.S.

We might pause there for a moment, because it’s interesting to think, “Do they understand that  down in London?” Well, they either don’t, or they don’t want to talk about it.

So Scotland is important from that point of view. And an independent Scotland would result in a trade surplus, because the oil will be in there. That’s a large component of the Scottish economy, but it’s a small component of the UK economy because of their relative sizes.

There are benefits to be had, and likely some costs as well. I think the effect of the Scottish independence, if run well, would be entirely positive. Small numbers, but overall positive.

In a previous interview, you said that there isn’t much the UK could do if Scotland chose to continue to use the pound. Why couldn’t they do anything? What would the alternatives be?

Well, you have to understand what the alternatives are. The arguments all revolved heavily on currency union. When I say currency union, I mean having the pound and having all the policies surrounding the pound: interest rate decisions, for example. London, somewhat disingenuously, announced that Scotland wouldn’t be allowed to keep the pound and that they would not have a currency union.

There’s two points about that. First, Scotland’s already had a currency union for the past 300 years, so what are they going to get rid of? Second, if they want to forbid you from using the pound, question: how are they going to do it? You arrive on a train coming up from the south. At the border, they stop you, and English, not Scottish, border guards make you empty your pockets? How about if you buy something off Amazon, and you elect to do it in English pounds? How are they going to stop you from doing that? They’re going to have to cut your computer cables. You can [buy] in dollars right now if you want to, and there’s nothing to stop you.

So it’s completely  uncooperative to say, “You can’t use it.” As one of my colleagues said, it’s economic vandalism: they can’t stop it.

The question is are there disadvantages if you just continue with the pound without London’s agreement? Well, you wouldn’t be able to have an input into the interest rate decisions. But since the Monetary Policy Committee would have one extra member from Scotland and nine from the rest of the UK, the chances of being able to have much influence as one vote in ten are small. So that disadvantage is very small.

The second one, and this is more important, you wouldn’t have access to the capital markets, on the same basis in London as you would if you had a full currency union, for the purposes of providing emergency liquidity to the banks if it’s necessary to bail them out, because what they can refuse is constructing a UK banking union. They’re in it now, but [London] can throw them out. Of course, there’s the EU banking union, and they can perfectly well go into the EU banking union: that doesn’t require  you to be on the euro. Denmark is a case in point and is in the process of getting itself into the EU banking union with its own currency. So there was considerable discussion, and that is likely what would have happened had they said from London, after a “yes” vote, “You can’t have the pound.” [Scotland] would just say, “Well, we’ll use the pound, but we’re going to the European banking union.” It was perfectly feasible. My guess is because that option is there, London would suddenly say, “We made a mistake. Of course, you can have your full currency union.”

There are lots of other options. You can have your own currency. You can let it float. You can fix your currency to something, anything you like: the US dollar, the pound, the euro. You could take the euro. You can have what is called a currency board, which is what they used to do with the colonies years ago. Mostly these options have one disadvantage or another.

The two options of using the pound are still there. You have to bear in mind – this is the bit that, in London, they’ve found very difficult to swallow – both of these options would be significantly better than the current arrangements. Scotland has the pound, but no freedom over fiscal policy. One option has both using the pound under one system or another; the second option is just taking it and requires no agreement from London, just like Ecuador using the dollar.

Do you think the surge of support for the “no” vote movement was the negative foreshadowing on the currency of an independent Scotland?

No, I don’t actually. Interestingly, it might have been; you’re right to suppose that. I think the really crucial thing was the leaders of the three unionist parties, being Mr. Cameron from the Conservatives, Mr. Miliband from Labour, and Mr. Clegg from LibDems (Liberal Democrats), they signed a pledge a week before saying they’d allow Scotland to have these devolved powers, these specialized powers, if Scotland voted “no.” The exit polls discovered that, out of the “no” vote part of the population, a quarter of them said they voted “no” in order to get those powers and autonomy, but they didn’t want to be a separate country. So I think that’s what swayed it. If the ten percent margin of “no” to “yes” means only five percent had to move, without that poll option, it would have been an overwhelming “yes” victory.

The reason I think that that’s true, apart from opinion polls, is because now the political ground is shifting markedly. It’s as if now that though “yes” side lost the referendum, they’ve won the war in the sense that the support for “no” is crumbling like crazy. Political support for the unionist parties within Scotland is vanishing, and all the talk is about trying to keep the London politicians up to their promises in the media the week before the referendum. Because they appear to be backpedaling on that, that middle ground is shifting out of “no” and into “yes.”

What exactly were the powers that won the Scottish people over in the polls?

Basically, the freedom to set their own fiscal policy. You could imagine if you had had a different referendum, which is question one, “Do you think Scotland should be an independent country or not?” and question two, “Do you want Scotland Parliament to be able to control its own financial affairs?” the first one would have perhaps been rejected, and the second one would have had a huge majority in favor of it. It’s why Mr. Cameron refused to allow that question.

So, going back a year before the referendum, there was the Edinburgh Agreement, which says that Scotland is going to be allowed to run, in contrast to Catalonia, its own referendum on this issue. It’s legal; London will respect the results. Mr. Cameron agreed to that in trade for not having the second question on the vote. What’s happened is that you can see there’s an overwhelming preference for something like the second question to come into being, but the option’s not there. So if Mr. Cameron’s frightened of future referenda or pressure for change in Scotland, he’s made a big mistake. Had he had the second question, he probably could have got rid of the whole issue, but he refused to allow it. So I think that’s now the key thing. The question is what’s going to happen now?

The answer is we don’t know, but what I can see from the politics is the ground is shifting. The SNP support is increasing rapidly; the numbers are astounding, actually. Members of the SNP have quadrupled in a month. So you can see the trends. These are people who with a balance of powers solution, realizing that they’re not going to get the extra powers.

The London government has appointed in the interim a commission under somebody called Lord Smith, and it’s known as the Smith Commission, which is the “What next?” Commission, as it were. That has been set up in order to review the options of further devolution given the “no” vote on the referendum, but those need to succeed on the terms of references they’ve been given from London, which say, “You can recommend anything you’d like, but you cannot recommend anything which will change financially the advantages or disadvantages of the UK as a whole or any constituent of the UK.” Which means you can’t change anything because anything you change is bound to have some influence somewhere. In other words, what they’re trying to do now is squash the debate. So that’s the next issue.

What is the rationale for Cameron to backpedal on these promises?

Well, you won’t happen to find anything in the press about those terms of reference I mentioned. I happen to have seen them, and I don’t think they’re a good idea for London.

I think what actually happened has various answers. The first thing I think happened is that Cameron spotted an opportunity in domestic UK politics, not Scottish politics, because the Labour Party, his opposition, is disproportionately dependent on seats from Scotland. As things stand at the moment, there are 59 seats in Scotland in the Westminster parliament of which 41 are held by Labour. So the proposition there is if you can reduce Labour’s share of the Westminster’s seats, which are Scottish, it’ll be much easier for Cameron to get an overall majority in the next election, which is next May. By saying he won’t go ahead with the concessions for more devolution on the argument of this wonderful question, “Why should Scottish MP’s in London have any jurisdiction over votes that have to deal with votes that are purely English?”, he puts Labour party in a jam, because it doesn’t want to concede to that since it will threaten their hold on Scottish seats. But it doesn’t want to say “no,” because then it looks like it’s being uncooperative. So the Labour Party can’t go either way, which is why you have nothing in response from the Labour Party at that time. So Cameron saw an opportunity to reduce Labour’s representation in London: that’s one answer.

The other answer: there are a very significant sections of the Conservative Party who are in a ridiculous position in which they won’t let Scotland go under any circumstances but also don’t want to spend any money on Scotland. So there is a very considerable opposition in the Conservative Party who is already under a lot of pressure because of Ukip (UK Independence Party) who plays to a considerable chunk of the Conservative Party (several of them have already defected) on other issues as well. So unfortunately, a lot of people are getting into bed with each other on this right-wing side of the Conservative Party.

So I think that’s why he probably did it. My guess is he doesn’t have a very good view of what’s driving Scottish politics: he thinks that referendum has resolved that problem. So we’ll get a nasty shock when pressure’s built  up for another one: which is already beginning to happen. If you’re seen the rhetoric, it’s beginning to boil up.

So do you think we’ll see another independence referendum sometime soon?

I don’t know about sometime soon. A week is a very long time in politics, except in this context. Before we get to that stage, we have to go through the UK-wide election, and it depends on what happens there. If it turns out that the SNP grab a number of those 59 Scottish seats, or a large proportion of that, then the balance of power will change, and it’s much more likely that pressure will come to devolve or face another referendum. I think that nothing will happen immediately, and if the Smith Commission isn’t able to offer a significant devolution despite the promises, then that will fire up that debate again.

Ironically, I don’t think anything will happen in the short-term, meaning a year or two, but I think that most people who look at these things feel independence is a lot closer now than it was at the point of the referendum. It’s one of the ironies of the situation.

It’d be so simple for the London government to trust in federalism. One of the difficulties is that, unlike the U.S., you have a government under which there are four countries: England, Scotland, Northern Ireland, and Wales. England  is still 90% of the whole thing, so it’s asymmetric. That’s a bit of a problem. It’d be conceivable that you could break England up into a number of regions, and these regions could be roughly the same shape. They’ve done it partly already because London has its own powers, but that’s 10 million people. Scotland’s roughly 5.5. They’ve had a couple of referenda in the northeast and the southwest asking, “Would you like to have your own regional assembly?” It was turned down. But things move along, the debate gets more fiercer, and there’s a possibility that Scotland could break off. Then the Northern Irish and the Welsh are thinking, “What about us?” Maybe the regions will come back to the idea that they should have their own regional assemblies.

In principle, federalism would resolve a lot of these problems. That means devolving a lot of powers, but, nonetheless, it would preserve the union. I don’t know why they don’t think along those lines. What it suggests to me is that this is not about independence. It’s about control, who has control. At this point, you’d rather take a rattle from a baby crying. It’s really that awful. The politicians don’t feel comfortable unless they’ve got all the control in their hands right here. That’s what’s causing this difficult position.

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