Tag Archives: currency union

Alistair Darling and Portugal

I was tempted to write a post today on Johann “Wee Things” Lamont, but decided others had already covered her gaffe far better than I could. There are also far more important things to talk about. Like the implications of Mark Carney’s “technocratic” speech on currency unions. The new Governor of the Bank of England gave a master class in outlining the advantages and disadvantages of currency unions. The advantages are clear – elimination of transaction costs, promotion of investment, reduction in borrowing costs etc. But as with all good things in life, they come with a price. For Carney this price involved some ceding of national sovereignty.

This notion that Scotland would have to cede some sovereignty was of course picked up with alacrity by Unionists and magnified into giving up just about all sovereignty. This in turn is what got Johann “Wee Things” Lamont into a spot of bother and ridicule. But it was not just Johann Lamont who indulged in this wilful exaggeration. Our well known friend and leader of Better Together, Alistair Darling was at it as well. He appeared on radio and TV to warn us of the lessons from the Eurozone. He decided to take Portugal as the subject for his exemplary tale. He rhetorically asked in his half shrieking voice “when Portugal and Germany sit down at the table together, who calls the shots?” The message is clear – the smaller country has to do what the larger country demands and thus the implication is that Portugal is not really sovereign or fully independent.

Now this is very naughty of Mr Darling who should know better, he was Chancellor of the Exchequer after all. Portugal and Germany do not sit down at the table together. At least they do not do so on their own, which is the clear impression from Mr Darling’s rhetorical question. Both countries are part of the Euro currency union and along with everyone else in that union have signed up for the Fiscal Stability Treaty in 2012. So when Portugal and Germany do sit down at the table they do so with the other 16 countries in the Eurozone. Is Mr Darling just trying to mislead or is he wilfully lying? And why pick on Portugal? Does Mr Darling suffer from some post traumatic stress factor arising from a previous visit to that country?

As regards the Fiscal Stability Treaty, what does it involve, or what restrictions does it impose on the Eurozone countries. The two key restrictions are that countries resolve to keep their budget deficit below 3% of GDP and to keep their national debt below 60% of GDP. If a country exceeds these limits it is required to introduce balancing measures. It is worth noting that there are exemptions if a country suffers from a significant recession. Now clearly this treaty involves some ceding of sovereignty. But I doubt if any of the 18 countries in the Eurozone would regard these restrictions as meaning the complete loss of all sovereignty. After all there are significant differences in tax rates and systems in all these 18 countries, not to mention different pension and welfare policies. Methinks Mr Darling doth protest too much. Just a pity that none of his interviewers were sufficiently informed to challenge Mr Darling on his absurd assertion.

The reality is that no country is completely sovereign in the sense that it can do whatever it wants without suffering any consequences. This is especially so when it comes to finance and government debt and borrowing, as Mr Darling must well know. In these matters it is the global financial markets which impose restrictions on sovereign states. And it is precisely to avoid the punishing restrictions that these financial markets would impose, that sovereign countries freely decide to come together and agree on their own Fiscal Compact. Here we have independent countries agreeing to cede some sovereignty in oder to avoid an even greater loss of sovereignty to the global financial markets. Just ask Ireland or Portugal. In this respect it is worth noting that two non Eurozone countries, Denmark and Romania, have decided to be bound in full by all the requirements of the treaty, while a third, Bulgaria, has declared itself bound by the deficit and debt restrictions.

These latter three examples show that even countries outwith a currency union and countries as proud and long standing as Denmark are willing to cede some sovereignty when it is felt to be in their national interest to do so. The essential point in all this is that you need to be independent in the first place in order to cede some sovereignty if you choose to do so. Which is why independence is so staunchly valued and defended by all the other countries in Europe and the wider world. Just why would the likes of Darling and Lamont not want Scotland to be in this position?


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Are Austria and Denmark Independent Countries?

Flag-Pins-Denmark-AustriaThe currency question has once again reared its ugly head during the past week. An assortment of Unionists have asserted that the rest of the UK would not, most definitely would not, agree to a currency union with an independent Scotland. There are arguments for and against such a currency union as proposed by the SNP. I have posted before on this matter, here, while Iain Macwhirter has a typically robust article on this issue here. This post will focus on a slightly different aspect of the currency debate – the link between currencies and independence.

The question posed above is really for those, mainly Unionists, who claim a Scotland that continued to use the pound sterling would not be fully independent. Particularly if Scotland were to form a currency union with the rest of the UK. The argument is that to secure the agreement of the rUK, Scotland would have to agree to very onerous conditions regarding borrowing, taxation and spending. These conditions would be so restrictive as to make independence worthless.

This whole claim of course is based on a very narrow, indeed restrictive view of what independence means. At one end of the spectrum independence can mean the complete freedom to do whatever you want, without any restraint whatsoever on the part of others. Now it is hard to find an example of any country in the world which has this degree of independence. Even the mighty USA has discovered limits to its freedom of action.

This is even more so in Europe, where just about all countries are either members of the EU, the EEA, or are planning to become members. Thus one could claim that no country in Europe is really independent, not even the UK. So to move the question from a theoretical level to a more practical one, I have posed the question at the top of this post. I would imagine that most people regard both Austria and Denmark as independent countries. Most people will realize that this independence is qualified but that qualified independence is what all countries have. So Austria and Denmark are neither more nor less independent than any other country in the EU/EEA.

I have chosen these two countries as both are medium sized countries and thus in many ways comparable to Scotland. The other reason is that one, Austria, is part of the Eurozone, while Denmark is not, and continues to have its own currency – the krone. Thus Austria provides some lessons on what can happen when part of a currency union, while Denmark provides some lesson on what we might expect if Scotland were to establish its own currency.

Now without getting into a detailed analysis of both countries, it is pretty clear that both are economically and financially strong and successful countries. As a member of the Eurozone, Austria is formally bound by all the conditions and restrictions that come with that membership. Interest rates are set in Frankfurt by the ECB, the exchange rate is fixed and of course there are the famous Maastricht conditions which limit the national debt and the budget deficit. Despite these restrictions, or perhaps because of them, the Austrian economy continues to do well. The latest OECD report, 2013, on Austria has this to say: “Austria has strong material well-being and quality of life. Steady growth in GDP per capita has been combined with low income inequality, high environmental standards and rising life expectancy. Supportive conditions for a dynamic business sector, generous cash benefits allowing families to provide extensive “in-house” services, a wide supply of public services and a well functioning social partnership system have helped achieve this performance. The Austrian population has therefore combined preferences for stability and work-life balance (“wealth in time”) with a thriving economy pursuing an active globalisation strategy.” So the apparently severe restrictions of a currency union do not seem to have had an adverse affect on Austria.

When it comes to Denmark, we find that its economy too continues to do very well. The latest OECD report I could find for Denmark dates back to January 2012 and stated the following: “The economy displays a number of strengths. The fiscal position is relatively sound. The flexicurity system helps adjust to shocks while limiting the social cost of unemployment and the risk that it becomes entrenched. The welfare system ensures low poverty and inequality. However, competitiveness has deteriorated in the past decade and productivity growth has been weak, eroding potential growth.” So broadly similar to Austria, despite the supposed advantages of having the extra freedom that comes from having its own currency. The reality though is that Denmark has for decades voluntarily restricted its freedom for independent action on the economic and financial front. The main tool for this has been to tie the krone to the euro. The krone is part of the ERM-II mechanism, so its exchange rate is tied to within 2.25% of the euro. Prior to this the krone was tied to the Deutschmark. So in effect, Denmark is almost as bound by the eurozone conditions as Austria. Again without any obvious detrimental effect on its economic performance.

In fact I would contend most of the Unionist assertions on the currency are just a lot of hot air, with no basis in reality. In or out of a currency union all countries have to manage their economy and finances in a way which secures their long term stability. If both the national debt and the budget deficit get out of hand then it will be the global financial markets which will exert pressure on the governments of such countries. It might have been a good idea for the previous Labour government in Westminster to have followed some simple guidelines and to have stuck to them. An independent Scotland will want to pursue prudent financial policies whether it is in a currency union or not. Just like Austria and Denmark. Otherwise we face the prospect of another UK financial crisis.

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