Introduction
0:00
I'm Ronald McDonald professor of
0:01
microeconomics and international finance
0:04
at the Adam Smith business school
0:06
throughout my career I've specialized in
0:08
issues relating to international finance
0:10
particularly currency issues and
0:12
currency regime issues
0:14
I've advised the international monetary
0:17
fund the World Bank the European
0:21
commission many central banks such as
0:24
the European Central Bank The Reserve
0:27
Bank of New Zealand and so on on
0:29
currency regime issues and I've also
0:31
advised governments on how to set up a
0:34
currency regime and what that currency
0:37
regime should look like where I'm coming
0:39
from and where I've always come from in
0:41
the independence debate is as a
0:43
professionally columnist I spent my
0:45
career 30 to 40 years studying currency
0:48
regimes it seems a very narrow area but
0:50
there's a huge huge literature in this
0:52
and when I started back in the early 80s
0:56
in my career little did I realize that
0:59
this issue of currency would be the
1:01
defining issue for an independent
1:03
Scotland
1:04
and for me not to
1:06
um to say the truth and what is going to
1:09
happen would I believe be a derelation
1:12
of my duty as as a professional
1:13
economist
What is macroeconomic policy
1:16
macroeconomic policy or the
1:18
macroeconomic framework means two
1:21
important things first of all the fiscal
1:23
side which is taxes spending and
1:25
borrowing and on the monetary side it's
1:28
the money that is in the uh in the
1:31
economy to facilitate transactions it's
1:33
the setting of interest rates and
1:35
crucially also how your currency relates
1:37
to other currencies which we as
1:39
economists refer to as as the exchange
1:42
rate regime is your currency linked in a
1:45
fixed way to other currencies does it
1:48
move in relation to other currencies is
1:52
it floating is how we would describe
1:54
that
1:55
um and for example in the UK since 1973
1:58
Sterling has been floating relative to
2:01
other countries currencies by that we
2:04
simply mean that if there is a shock to
2:06
the economy be it pandemic be it brexit
2:09
be it Financial shock the exchange rate
2:12
can move and alter your competitiveness
2:14
so that employment is maintained in the
2:18
economy jobs are sustained in a way they
2:21
wouldn't be if you didn't have that
2:23
ability to adjust your currency
Monetary policy
2:26
what helps us in terms of our monetary
2:28
policy in the United Kingdom is that we
2:31
have the ability to create money which
2:33
is very very important
2:35
um obviously the creation of money can
2:37
lead to problems if it's not a credible
2:40
policy which some countries have got
2:43
caught out by but we have had
2:47
um much stability in the UK because the
2:49
bank of England has a very credible
2:50
record of issuing money without causing
2:53
inflation so that has been a very
2:55
important aspect and important strand of
2:58
our economic policy making and that has
3:01
been very important in allowing
3:02
countries to borrow funds at very
3:06
competitive rates in international
3:07
markets and of course that has meant
3:11
we've been able to during the pandemic
3:13
certainly support very large fiscal
3:15
deficits which otherwise would would not
3:18
be possible if we didn't have the
3:21
ability to to issue our own currency and
3:24
set our own interest rates when we don't
3:26
have a crisis
3:28
because of the bank of England's long
3:30
history of credibility over 300 years of
3:32
credible performance in international
3:34
financial markets we've never had a
3:37
default in this country so interest
3:39
rates are lower than they would be in
3:42
say a newly minted country
3:44
but also in non-normal times if I can
3:47
put it that way in crisis times the
3:50
power of having an independent Central
3:52
Bank with this credibility has shown to
3:55
be very important both in the UK and in
3:57
other independent countries
Monetary Union
4:00
prior to the 2014 referendum the SMP
4:04
were proposing that Scotland's currency
4:07
regime should be one in which we
4:09
retained the formal monetary Union with
4:11
the rest of the UK
4:13
so since 2014 moving forward the SNP are
4:17
now proposing
4:18
to hold Sterling in an in an informal
4:22
way so rather than being part of a
4:23
formal monetary Union which means that
4:26
you would have the support of the bank
4:27
of England in in being able to support
4:30
any banks which were in the Scottish
4:33
jurisdiction
4:34
you would now not have
4:36
um the ability of them to support any
4:39
Scottish based Banks if there was a a
4:42
run in the banks and people demanded
4:44
more cash the bank of England wouldn't
4:47
be there to create more cash in the
4:50
current proposal of holding Sterling
4:52
informally
Sterlingization
4:55
so an important aspect of of
4:57
sterlingization or using Sterling
4:59
informally is that you don't have your
5:01
own currency you don't have a separate
5:04
currency and you have no ability to
5:06
adjust the external value of your
5:09
currency Say by depreciating it making
5:11
your goods more competitive
5:13
now this matters big time in an
5:15
independent Scotland because
5:16
historically Scotland has been running
5:18
with a balancer payments deficit of
5:20
around 10 percent of its GDP that's a
5:23
big number it's 16 billion pounds per
5:25
annum
5:26
and basically you have to you're as an
5:30
independent country you're responsible
5:31
for that
5:32
now there is a recognition I think in
5:35
the SNP that
5:36
um
5:37
in order to address that problem you
5:40
will have to have a devaluation of your
5:42
currency
5:43
but what they argue is that we can go
5:46
into Independence Day one of
5:48
Independence we can drift along happily
5:52
using Sterling
5:53
and then at some point we have to
5:56
redenominate into a new currency which
5:59
would be they now accept at a devalued
6:02
rate
6:03
but this begs the question would
6:05
financial markets find that an
6:07
acceptable policy and by financial
6:09
markets I mean that an independent
6:11
Scotland on day one of Independence is
6:13
going to have to borrow
6:15
fairly large sums of money because we
6:17
know it's got a large fiscal deficit
6:19
and so it's going to have to borrow an
6:21
international markets as other countries
6:23
do it's a perfectly standard practice
6:26
but if you are seeing to the person
6:29
who's going to lend to you that you're
6:32
going to do but have to devalue at some
6:34
point then why am I going to lend you
6:36
money when there's the expectation that
6:39
I may lose a significant chunk of my
6:42
lending to you and it is a significant
6:45
chunk because with the the kind of
6:47
balance of payments deficit that an
6:49
independent Scotland has you're talking
6:51
in my view of a devaluation of 20 to 30
6:54
percent now these are big big numbers
6:57
they're going to affect people's wages
6:59
they're going to affect their mortgages
7:01
and so on now the important thing here
7:04
to recognize and this is the key thing
7:06
that the SNP are not telling the public
7:08
is that financial markets bring events
7:12
forward because if I am expecting to
7:15
lose 30 percent of my investment I will
7:17
only lend to you a brutally High
7:19
interest rates I want to be compensated
7:21
and I also want to be compensated for a
7:24
default risk because there's a real
7:26
danger if you're running a regime which
7:29
is not credible to International
7:31
financial markets that
7:34
um you will have to default on your uh
7:36
on your loans and that again is a very
7:38
serious matter so interest rates in an
7:40
independent Scotland from day one will
7:43
be extremely high
7:45
and obviously an independent Scotland
7:47
could not afford to pay these uh
7:49
interest rates unless it was to adopt
7:51
massive austerity policies so what this
7:54
means effectively is that the the crisis
7:57
will be brought forward to day one of
7:58
Independence if not before because then
8:01
there'd be huge Capital flight in the
8:03
transition from day one of
8:06
um the vote for Independence to the
8:09
actual Independence process now although
8:11
the SNP I think and Andrew Wilson is is
8:14
now saying that they recognize that it
8:17
would be costly for Scotland to become
8:19
independent and he is now I think
8:21
recognizing these issues of
8:23
redenomination
8:25
um which is good and he argues that um
8:28
the course will be worth it because he
8:31
argues the benefits will outweigh the
8:34
course in the longer term it's for those
8:36
who propose Independence to say what the
8:38
potential benefits are I've not I've yet
8:41
to see anyone argue what these potential
8:44
benefits are that can outweigh the
8:46
massive course that's got an independent
8:48
Scotland would suffer on day one of
8:49
Independence
Redenomination
8:51
I think the bad news would be for people
8:54
who were saying the public sector in
8:56
Scotland and and there had to be this
8:58
redenomination there is no doubt that
9:00
their their pensions would be
9:02
redenominated into Scots pounds and so
9:05
they would be clearly they would be
9:08
devalued also it's obvious why the SNP
9:12
do not want to talk about the
9:13
redenomination issue or do not want to
9:16
explain the reality of what is going to
9:19
happen on day one of Independence so to
9:22
take this down to the individual
9:23
household let's think of a concrete
9:25
example that the husband and wife are
9:28
both working they're funding a 300 000
9:31
pound mortgage say they perhaps have
9:33
credit card bills of
9:35
um 5000 pounds for example
9:38
what's that going to do to them well
9:40
both the the mortgage and the credit
9:43
card are will be denominated in Sterling
9:45
so obviously if you have to move to a
9:48
separate currency at a sharply devalued
9:50
rate you're going to be paying 30 more
9:53
for your mortgage and for your credit
9:56
card bill it's a huge amount of money
9:58
and obviously
10:00
um it's unlikely that wages are going to
10:02
adjust in the in the short term
10:05
um what is most likely to happen is you
10:07
also have an inflate a big inflationary
10:09
cake from such a big devaluation which
10:12
is going to further erode your your
10:13
purchasing power
10:14
so for the for the if we can call it the
10:17
average family the average working
10:18
family this is really a nightmare
10:20
scenario
Internal adjustment
10:23
if you don't let the exchange rate
10:24
adjust then you have to do what the
10:27
Greeks did during
10:29
um their uh austerity program to stay in
10:31
the Eurozone they could not adjust the
10:33
external value of their currency
10:36
and so they had to face what economists
10:39
refer to as an internal adjustment
10:40
mechanism which is austerity selling
10:43
your assets and basically cutting wages
10:47
so you've got to adjust internally
10:50
you've got to cut wages you've got to
10:52
have massive austerity policies you've
10:55
got to sell the family silver
10:56
essentially
10:58
um to to pay for this and and that
11:00
essentially is what the the um esnp's
11:04
proposal of informal sterilization
11:06
amounts to
11:07
as some of puta it's Greece without the
11:09
sunshine
Capital flight
11:11
Capital flight is inherent in the snp's
11:16
proposal and indeed you're going to get
11:17
Capital flight under any regime I think
11:20
that's clear because everyone is going
11:22
to recognize there will be a
11:24
redenomination issue you cannot avoid
11:26
that and as I say trying to kick it into
11:29
the long grass simply ain't going to
11:31
work because it's not the way people
11:32
behave in financial markets people will
11:35
start moving funds immediately they
11:38
expect Scotland to become independent at
11:40
whatever the regime is but I would argue
11:43
that the capital flight will be much
11:45
much worse with an inappropriate regime
Inappropriate regime
11:48
with all the unique linkages it's had
11:51
given the length of the political and
11:52
monetary Union
11:54
to unwind these would be horrendous and
11:56
there's no there's no example of my view
11:59
of a
12:00
such a developed Nation with such close
12:03
ties to a neighbor
12:05
there's no exam there's no example of
12:07
that
12:09
I think given the magnitude of the
12:11
issues that we've been discussing during
12:13
our talk
12:14
the balance of payments deficit the size
12:16
of the balance payments deficit the size
12:18
of the fiscal deficit I think any
12:21
government that is
12:22
um
12:23
realistic about independence and wants
12:26
to make Independence happen in a a much
12:29
smoother transition than what is being
12:32
proposed at the moment would need really
12:34
to start preparing now or at least on
12:37
the day after a vote for Independence
12:39
came about because essentially you would
12:42
need to
12:43
um to have a smooth transition you need
12:45
to deal with your balance of payments
12:47
deficit it would be critically important
12:49
and the only way you could deal with
12:51
that would be to to shrink the economy
12:54
basically to to have austerity policies
12:56
which made your um your your goods more
13:00
competitive and reduce the Imports in
13:03
into the country
No comments:
Post a Comment