Thursday, 13 February 2014

A tale of two fishes

Today, the two fishes, Alex Salmond, First Minister of Scotland, and Nicola Sturgeon, his deputy, are banging the drum for Scottish independence. They have been spurred into action by the Chancellor of the Exchequer, George Osborne,  going to Edinburgh and saying that there would be no currency union between an independent Scotland and the rest of the UK.

There will be a referendum on independence on the 18th of September this year. Only people in Scotland will get a vote.

Since it is not likely that the Scots will take the bait it is not worth much consideration of the issue. However HMG has put quite some work into the possibility. A number of papers on how the nations could be divided are available here.

There are a couple of precedents on how to break up a nation: the division of Czechoslovakia into the Czech and Slovak republics in 1992 is one, and closer to home the formation of the Irish Free State in 1922 is another.

The media seems to consider money to be the main issue. (This blog thinks citizenship and nationality will be just as troublesome.) On money the Scots' options are: keep the pound, adopt the euro, or create an independent currency.

The Chancellor has said they are not having the pound sterling. He rightly does not want the Bank of England retaining liability as "lender of last resort" for the debts of Scottish banks. The Scots could use sterling without consent (some countries use the US dollar without permission from Washington - notably Zimbabwe where the typical note in circulation is a filthy rag of barely visible denomination). Using the pound like this means that the new Scottish government could not source notes and coins easily, and could not control the money supply. Of course Scotland does already print its own "sterling" bank notes.

Anyway the new Scotland intends to join the European Union - and it is a condition of joining that the euro is adopted. However it would take a couple of years to get into the EU so the most likely way forward is a rather unsatisfactory "informal" use of sterling until EU accession. (The UK has a euro opt-out thanks to Margaret Thatcher, but that is not available to newcomers.)

Needless to say, the euro is not popular in Scotland. They have seen what happens to small countries in the euro (Greece, Ireland, Portugal) and they don't like it.

Inventing their own currency just to handle the transition to the euro would be more work than anyone really wants.

The two fishes have been threatening that if Scotland is not allowed into the "sterling zone" then they will renege on their share of the national debt. Ironically Alex Salmond used to put it about that "the pound was a millstone around Scotland's neck." Now he wants in.

It seems likely Scotland would be able to get away with not taking any part of the national debt. London would have to continue making coupon payments on all UK gilts. There is no way of apportioning some of them to Scotland. The only response that the "continuing UK" (Whitehall speak; the term rUK is also gaining favour - where r stands for residual, but basically we're talking England here) could make is to retain some assets - oil fields maybe - but Scotland would also be entitled to a share of some pretty big pension funds (NHS, teachers, local authorities) so those could be "taxed".

Scotland has 8% of the UK's population and 31% of the land. A fair per capita portion of the debt would be approx £100bn. That's per capita of people actually living in Scotland. The fishes have said that Scottish citizenship will be bestowed on all the British residents of Scotland, plus all the people born in Scotland now resident anywhere else in the world - most of them in England of course. Making the Scots take a £100bn note would be hard. They would have to sell their own gilts, probably at a higher yield than UK gilts since they have no credit history, and then pass the cash to the Bank of England which would cancel some UK gilts - fortunately the BoE is holding £375bn worth of QE-purchased bonds so finding some to cancel will not be a problem.

An independent Scotland joining the EU would also be required to join the Schengen agreement. This gives document-free travel to all EU members of the scheme. (Again the UK has an opt-out, and so does the Republic of Ireland.)

England, Scotland, Ireland north and south, Wales, Isle of Man, the States of Jersey and Guernsey and so on are all members of something called the Common Travel Area. This gives document-free travel within the area. However CTA membership is not compatible with Schengen membership. So a Scotland joining the EU would not be allowed to have an open border with England!

Then comes the citizenship issue. History is no help here. When Czechoslovakia broke up all citizens were told to pick one: Czech or Slovak - but not both. When the Irish Free State was formed the Irish invented their own citizenship and granted it to all residents but the UK did not recognize this and from 1922 to 1948 treated all Irish people as British citizens. Even to this day the ROI has a law, the Aliens (Exemptions) Act, which says Brits are not be be treated as aliens, and there is a UK law which says the Irish are not foreigners for most purposes.

So people would need to know if they were now British or Scottish. For some it might be obvious: born and live in Scotland makes you Scottish, but there are UK citizens who have never even visited the United Kingdom - where do they stand?

The fishes intend to allow joint Scottish-British nationality. But it is by no means clear that it is in the interests of the UK to allow that. Scotland could become a back-door into British citizenship if being Scottish grants British. (We currently are playing host to 10,000-ish Somali refugees who went first to the Netherlands and were granted citizenship thus acquiring the right to move anywhere in EU and claim benefits.)

It is probably not even in the UK interest to allow the Scots to work in the rUK. And before they are in the EU they would have no obvious right to live/work here if they didn't have British nationality.

However, there is no chance that the Scots will actually vote for independence so it is all academic really

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