Friday, September 12, 2014

How an independent Scotland could become prosperous

For your consideration as we approach the weekend: As we approach the Scottish Referendum on September 18, there have been lots of stories of the negative repercussions of a Yes vote. I had written from a Canadian's perspective about How a Scottish-UK currency union is an idiotic idea. I believe that Credit Suisse summed up the risks best with this paragraph (via Business Insider):
Risk of an economic crisis: In our opinion Scotland would fall into a deep recession. We believe deposit flight is both highly likely and highly problematic (with banks assets of 12x GDP) and should the BoE move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus). The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn. In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10% to 20% devaluation to restore competitiveness. This would wages, driven by a steep rise in unemployment.
The FT outlined an equally dire scenario:
A Yes vote will launch Scotland, and to a lesser extent the UK, into years of uncertainty. Among the biggest doubts are those hanging over the currency. Financial businesses that must be regulated and supported by the UK will flee. Scottish deposit insurance would be as worthless as the Reykjavik-run scheme that failed to cover Icelandic banks in 2008. Cautious Scots must already recognise that the pounds in their bank accounts may end up as something else. Far safer to move the money south.

Confronted with currency uncertainty, banks will need to balance their books within Scotland. This will surely force them to shrink the supply of credit to the Scottish economy. The UK government could try to prevent money from leaving Scotland, but this would require draconian controls, which it will not impose. Either Westminster or the Scottish government could offer to indemnify lenders against currency risks. The UK government will not do that. It will let the credit squeeze happen, blaming it on the Scottish decision. It will be Scotland’s choice, if it can meet the cost.
There will be a bad taste on everyone's mouths:
These negotiations will be complex, bitter and prolonged. However amicably a divorce begins, that is rarely how it ends. It is the safest possible bet that when this process is over, the English will resent the people who repudiated them and the Scots will resent the people who did not give them independence on the terms to which they believed they were entitled. A United Kingdom will give way to a deeply divided island.

The Scots will discover the taste of austerity. Scotland cannot sustain higher taxes than the residual UK; that would drive economic activity away. It will pay a higher interest rate on public debt because its government will be unfamiliar and dependent on unstable oil revenues (almost certainly smaller than Mr Salmond imagines). Fiscal fibs will be exposed.

By then it will be too late. If the vote is a Yes, it will be forever. But what about a narrow No? That too will be a nightmare. We could then look forward to more referendums. I would prefer a clean break than that. If Scotland cannot decide firmly in favour of union, let it choose “independence”. And then, enjoy!
While it is true that an independent Scotland, as a small country with an open economy, is subject to many risks that it would not face as part of the UK. But this analysis relies on overly conventional banker thinking. What if the Scots were to think outside the box?

A neutral Scotland?
Instead of thinking like a banker about resolving Scotland`s finances, Alex Salmond could think about the geopolitical dimensions of a potential divorce. Consider, for example, that the SNP's White Paper for independence has called for a nuclear free Scotland within the first term of parliament:
Scotland has been home to one of the largest concentrations of nuclear weapons anywhere in the world, despite consistent and clear opposition from across civic Scotland, our churches, trade unions and a clear majority of our elected politicians. Billions of pounds have been wasted to date on weapons that must never be used and, unless we act now, we risk wasting a further £100bn, over its lifetime, on a new nuclear weapons system. Trident is an affront to basic decency with its indiscriminate and inhumane destructive power.
That brings up the question of whether the armed forces of an independent Scotland needs to be part of the UK`s armed forces structure. Ireland has been neutral for many years - even during the Second World War. Why not Scotland?

Does Scotland even need to be part of NATO?

Military assets: From cost center to profit center
Let`s go down that road a little further. Supposing that the Scottish budget was under pressure, instead of worrying about the fiscal burden of funding Tornado and Typhoon squadrons at Lossiemouth, etc., why not negotiate leases for basing rights with rUK? Such a move would instantly transform those military assets from cost centers to profit centers.

In fact, a neutral Scotland could put the leases at its major bases such as Lossiemouth (air base) and Faslane (Trident) up for bids. What would the Russian navy pay for basing rights at Faslane? It would a Russian military planner`s dream. Russian SSBNs in the North Sea would give Moscow the option of launching a decapitation strike to take out the leadership in European capitals and NATO headquarters with little or no warning.

Notwithstanding the uproar in Westminster, how would Washington react (and pay) to avoid Su-27 squadrons at Lossiemouth and Russian ballistic missile subs roaming freely in the Atlantic and the North Sea?

I had suggested that there was a geopolitical risk element to the Greek crisis in 2011 (see Europe dodges another bullet (not the Catalan election)). Russia could have seized a historic opportunity to rescue Greece and achieve the long Russian dream of achieving a warm water port by funding a Grexit. The test case would have been Cyprus - but the Kremlin chose to pass on that opportunity.

Now Putin might have a second chance. Instead of infiltrating Spetnaz units into neighboring territories, Moscow could just buy the country instead. Already, the Russian press is planting stories like Economic Benefits of Faslane Nuclear Base in Scotland “Overplayed” - Official. What comes next? After all, are we not all good capitalists now?

While what I have outlined is tongue in cheek and fantasy (worthy of ZH), it nevertheless does illustrate the point that if an independent Scotland gets pushed too far economically, the gloves could come off and anything can happen.


Anonymous said...

Smaller countries have a tendency to be more prosperous than their imperialist parent.

This is because it is harder to get small communities to go along with hair brained ideas and money wasting projects. It's easy when you have a giant centrally run country.

Knight-trader said...

The economic sanctions on any western European state foolish enough to entertain such an idea would dwarf any possible revenue from Russia. It sounds like a plot from a very bad spy thriller.

Anonymous said...

Not to forget the oil in the north sea.

Smaller countries are like smaller organizations:
benefits grow proportionally in size, but problems grow exponentially.
Besides this socio-economical optimum of size is the value of souvereignity and freedom.

Especially being no longer ruled by the City of London.