Salmond’s plan B currency alternatives clarify nothing

Salmond’s detractors still think his campaign has the currency blues. BasPhoto

In the second TV debate between Alistair Darling and Alex Salmond, the currency issue was again to the fore. This was almost inevitable after it was the Scottish first minister’s undoing in the previous debate.

But this time it didn’t give Darling the same advantage. Salmond was forced to reveal plan B – the currency alternative if Scotland were not able to enter into a sterling union with the rest of the UK. It turned out to be “three plan Bs”. Two of which looked suspiciously like plan A. Here is what Salmond is now saying:

Plan A: Entering a currency union with the rest of the UK – of course the preferred option. Putting aside whether the rest of the UK would agree, this essentially means handing over control of interest-rate setting to the Bank of England. And inevitably some degree of fiscal coordination, too. This is a strange idea of independence. We have seen recently in the eurozone what kind of tensions can arise from these sort of arrangements.

Plan B1: A Scottish currency with a fixed parity rate to another currency – meaning a Scottish central bank would intervene in the markets to ensure the Scottish currency’s value stayed at this fixed rate (or within a band between a lower and higher level). If this peg were to the pound, then this is effectively plan A. If it were to the euro, such as the Danes do with their krone, then why is Salmond so dismissive of the accession rules that since the late 1990s have compelled all new entrants to the EU to become eurozone members?

Plan B2: Use another currency. The Panama solution. But which one? If it is the pound, Scotland would have even less input into decisions over interest rates or fiscal policy than under plan A. The most inferior of all the options.

Plan B3: A Scottish currency, but free-floating rather than at a fixed rate. This would be the closest to the Norwegian case. This is probably the best option for a petro-economy like Scotland, as it allows the currency to adjust in response to balance-of-payments imbalances caused by fluctuating oil revenues. Norway has undoubtedly benefited from retaining the krone in this way. Of course in Scotland’s case, it would introduce transaction costs with its main trading partner, England, which would not go down well with the business community.

Health and welfare

Two other issues also were of note during the debate. The issue of privatisation of the health service stoked up emotions. Contrary to Salmond’s sentiments, spending on the NHS has been growing since the 1980s and is now around 8% of GDP.

The argument that voting yes would protect the NHS from privatisation is an attractive one to tug at the nation’s heart strings but doesn’t stand up to scrutiny. All spending, whether direct to NHS institutions or purchasing from private providers, comes from the same budget. This is likely to increase even in England due to a rise in the overall population and a rise in the aged population.

Salmond’s link between austerity and child poverty is spurious. Health spending is rising. There are already devolved powers over education; further devolved powers over income tax have been promised by both leading UK parties. These are levers that can impact on household income and life chances. In any case, it is by no means certain that Scotland could afford to be less austere than the rest of the UK, even if it was independent. Independence would not free us from having to make very difficult priority decisions in relation to spending.

The jobs conundrum

In the debate, Darling looked visibly unsettled when challenged to name new devolved powers that would be job-creating. He stammered through but revealed little. Perhaps politicians should not try to create jobs, but rather create conditions which foster the creation of jobs: an educated workforce, low interest rates, investment in research and development, a taxation system that rewards effort and investment. Again Norway might be a model here in terms of education, research policy, and of course, the oil fund (which is invested outside Norway).

The second debate certainly revealed more than the first, once you see through the more fiery rhetoric. Salmond’s performance was much more confident and statesmanlike. But on the all-important issue of currency, the three plan Bs have probably muddied the waters rather than clarified the arguments.