Saturday 16 May 2015

The Poundzone and the Eurozone follow the same logic

There are two great issues facing the UK in the next few years: sorting out our own constitutional mess and sorting out our relationship with the EU. In reality, they are the same issue.

I’m going to start with a few assumptions. They are widely shared. In the modern, globalised world you can’t have a long-term, viable currency union without a political union, a fiscal union and a transfer union.

It was the establishment of a single currency that made East and West Germany united. It was the willingness of West Germans to transfer vast sums to East Germans that made them compatriots. To cease to be willing to transfer those sums is already to cease to be part of the same country. The difference between a compatriot and a foreigner is that money is transferred to a compatriot in trouble as a gift while to a foreigner as a loan. We have friendly relations with other sovereign states, but we tend to be unwilling to pay off their debts for nothing. Within our own sovereign state, however, we do not count the cost. We share with the poorer parts of our country without limit and we do this forever without thinking of repayment. It is this willingness or unwillingness that marks the difference between one sovereign nation state and another. It is what makes Germans compatriots to each other rather than foreigners. But there are two sides to this coin. When East Germany accepted membership of a currency union and accepted transfers from the West, it also gave up its own sovereignty. It ceased to be a sovereign nation state in its own right. Ultimately, those who control the currency hold the sovereignty.

In the United States the Fed controls what is politically possible. In the Eurozone the ECB has this control, and in the UK it’s the Bank of England. These banks may or may not be politically independent, but this matters little. What is possible politically is determined by those who hold the purse strings.  This is especially the case when an economy gets into trouble. The Republic of Ireland found its political decision making controlled by the ECB and others. The same, of course, goes for Greece et al.

The issue facing the Eurozone is either they must become like the USA, (i.e. they must create a single nation state called Europe, let’s call it the United States of Europe (USE)), or they must revert to their old currencies. There isn’t a third option.

We in the UK are approaching a vote on membership of the EU, but it is crucial that we reflect on what we would either be leaving, or on what we would be choosing to remain a part of. The Eurozone may become a single nation state with a political union, fiscal union and transfer union, but the UK will not be a part of this until and unless we choose to join the Euro. You can’t have political union without currency union, but we have our own currency, so if the Eurozone creates a political union, we in the UK will be outside it.

So our relationship with the EU will by default be different from, for example, France’s relation. There clearly needs to be a different status for countries like us who don’t share the Euro. We are not moving towards becoming part of a political union, because the condition for the possibility of that movement is sharing a single currency. Therefore, it is clear that the EU ideal of ever closer union does not apply to the UK.
We cannot be part of the transfer union, fiscal union and political union necessary for the Eurozone to function for the simple reason that we have our own currency, which necessitates our own political, transfer and fiscal union. It makes no sense to expect the UK to transfer funds to Greece, because Greece does not share our currency. But it does make sense for Austria, Finland and, above all, Germany to do so.

In reality the UK’s special status in relation to the EU happens in and of itself. EU countries within the Eurozone have one status while EU countries outside it have another. By choosing not to be part of the Eurozone we have already chosen not to be a part of the core EU project of moving towards becoming a nation state.

At the moment, however, there is no guarantee that the Eurozone will become a political, fiscal and transfer union. The failure of countries to follow through the logic of monetary union and transfer money from the richer to the poorer states means that the Eurozone remains fragile. It may break up. If that were to happen, we would all go back to being nation states with separate currencies. In that case, if the EU were to survive at all, it would go back to what it was when we called it the Common Market. It would be a trading block. But if this is what the EU would be if it ceased to have the Eurozone, it makes sense that this is what it ought to be for those countries who do not take part in the Eurozone.

The main benefits to the UK in being part of the EU are free trade, the Single Market and free movement of people. The UK particularly benefits from access to the EU labour market. One of the main reasons for our economic success in recent years is that our job vacancies have been filled by citizens from the EU. But clearly if we are not going to be part of an EU superstate, and how can we given that we have our own currency, it makes no sense for us to take part in those aspects of the EU which have to do with political union. The UK ought to be able to negotiate a withdrawal from those areas of EU life that simply do not and will not apply to us.

The logic of currency union is relentless. In the end, to be in a currency union is to be in a country.  Scotland is in a currency union with the other parts of the UK. But this requires political union, fiscal union and transfer union. It is this, above all, which makes the idea of Full Fiscal Autonomy (FFA) so problematic. The reason for this is that FFA would apparently get rid of the fiscal and the transfer unions. If the fiscal and transfer unions were to be retained, Full Fiscal Autonomy would be neither Full, Fiscal nor Autonomous, which is all rather pointless. Moreover, Full Fiscal Autonomy really already equals independence. West Germans were willing to transfer billions to East Germans as they thought of them as compatriots. They are at present unwilling to transfer billions to Greeks as they see them as foreigners. It is this willingness or unwillingness to transfer which marks the distinction between one independent nation state and another. Therefore FFA equals independence. With FFA the UK would turn into a mini Eurozone. Moreover, given that Scotland had its own parliament and that parliament had Full Fiscal Autonomy, what purpose would it serve to send MPs to Westminster? On what issues would they vote? Logically FFA makes even political union pointless. All the issues that affect Scottish constituents would already be decided at Holyrood. What’s left?

But it’s worth remembering that FFA is not an ideal situation for anyone in the Eurozone. It is the absence of fiscal transfers that is causing such trouble there. Of course, countries like Greece, Spain and Portugal are doing worst out of the arrangement, but it’s not as if the Northern European countries are particularly happy either. Likewise, in the UK it is hardly an ideal arrangement for England to be put into the Eurozone in relation to Scotland. After all, isn’t it precisely this that everyone has been so desperate to avoid all these years?

Scotland with FFA would cause the UK the same dilemma as the Eurozone. Scotland would require huge levels of austerity in order to remain in the Poundzone, just like Greece et al. It costs more to provide services in Scotland owing to the rural nature of most of the country. It is for this reason that it has been right and proper that Scotland has over the years received rather more from Central Government than places that are more densely populated. But anyway why would a patriotic UK Government want to treat a part of the UK as if it were Greece? We didn’t act in this way towards Northern Ireland when a proportion of their population were opposed to the UK. Rather we stuck by the pro-UK people of Northern Ireland through thick and thin. The majority of the Scottish population, as measured by the referendum, want to stay in the UK. Why treat us worse than our compatriots in Northern Ireland?

FFA in Scotland would lead to years of austerity undreamed of up to now. It would lead to a huge increase in taxes for ordinary Scots, it would lead to job losses and massive cuts in public services. The SNP may or may not be blamed for this. My guess is that Cameron would be blamed just as the Greeks blame Merkel. If you think Nicola Sturgeon would be blamed, you don’t understand nationalist psychology. Anyway, soon enough the logic of currency union would be made plain.

Either Scotland would eventually find its position in the Poundzone untenable and would be forced to leave, or the UK would be forced to reintroduce a political, fiscal and transfer union. There isn’t a third option. If leaving a currency union were so easy, why hasn’t it happened in the Eurozone? Why is everyone going to such desperate lengths to prevent the breakup of the Eurozone? Spain, Portugal, Ireland, Italy and Greece have had to endure huge levels of austerity in the last few years. They could have avoided this by defaulting, devaluing and leaving the Euro. Why didn’t they? The answer is simple. It would have caused chaos, not only for the country leaving, but also for the countries remaining.

Whether Scotland is “independent”, or has FFA it is not really possible for us to leave the Poundzone.  The talk during the referendum of Scotland being forced to leave the pound was, of course, nonsense. When push came to shove, the central bankers would have knocked heads together and pointed out the damage to both Scotland and the other parts of the UK of Scotxit. It would cause economic chaos not only in Scotland but in the rest of the UK as Scotland leaving the Poundzone would involve default and devaluation with shock waves rather larger than Lehman Brothers.  It would have the potential to make 2008 look like a minor blip. But the logic of this works both ways. Given that Scotland is in a currency union with the other parts of the UK, independence is not really possible, nor for that matter is FFA. We can harm ourselves hugely testing this by experiment, but the logic of currency union is relentless. Currency union quite simply requires political, fiscal and transfer union. The mere fact of being in the currency union acts as an elastic band pulling you back to the centre. The attempt to become independent is like a Tom and Jerry cartoon where Tom is running with an elastic band tied round his waste. He runs and runs, but eventually he’s yanked back to where he started. Of course, a lot of energy is wasted in this attempt to get away and it may well cause chaos to not a few of us, but it’s all futile and illusory. The Bank of England and the markets anyway determine what is politically possible. Full Fiscal Autonomy would provide the illusion of autonomy just as independence would amount to little more than flag waving and an opportunity for minor grandstanding on the world stage.  

Ireland made a choice in the 1920s which looks like it may have a long term political consequence unforeseen back then. If the EU becomes a United States of Europe, then Ireland will find its independence and sovereignty subsumed into the USE. They will have a football team and they’ll still no doubt be called a country, but in reality they will have no more sovereignty than Saxony or Bavaria. All will in the end be ruled by the paymaster in Berlin.

In the same way for Scotland there is a choice. Choose the EU, choose Scotxit be a nation again, but just like with Ireland you will eventually end up putting a hard border between your fellow English speakers and largest trading partners, and you will end up being ruled by people who don’t speak your language.

The alternative is a semi-detached UK with rather a lot of sovereignty big enough to be a Japan to the EU’s China. Devolved power in a relatively independent UK looks a better long term bet to me.

On the other hand, and this is highly unlikely, if the whole of the UK decided to join a United States of Europe, i.e. if we joined the Eurozone, what difference would it make where we drew the borders? After all, in the USA it hardly matters now whether there is a border between West Virginia and Virginia. The former seceded in 1861, but now that there is one USA, it makes no difference whether that act of secession occurred or did not. It is an accident of history and of no consequence.

The whole debate both about independence and the EU is sterile and ultimately meaningless. Scotland can no more leave the Poundzone than Greece can leave the Eurozone, or at least it can’t without economic disaster for all concerned. There is an important debate to be had about the UK’s relationship to the EU and it would make sense for our special status to be recognised and for concessions to be made. But having a vote on the UK leaving the EU is for the most part meaningless because we have already left. The difference between voting to leave and voting to stay is only a difference of emphasis, for whatever happens, we will need some sort of relationship with the EU, but it is of very small consequence compared to what the Eurozone itself decides to do. That far more than anything we decide will determine the nature of our future relationship.

If you like my writing, you can find my books Scarlet on the Horizon, An Indyref Romance and Lily of St Leonards on Amazon. Please follow the links on the side. Thanks. I appreciate your support.