Author
Yianis Varoufakis
Bank of
Scotland Note: Scotland should state its intention to decouple from sterling,
once independent, rather than petitioning for a continuation of its subservient
role in an asymmetrical sterling union. Or so I argued in the Scottish Times in
‘Scotland Must Be Braver’ (28th November 2013).
Why
should Greece not exit the Eurozone?
The main reason is that there are no Greek
banknotes either in circulation or in storage. Any decision to exit from the
Eurozone will be accompanied by a weeklong bank closure during which euro notes
will be marked manually (e.g. with indelible ink) to differentiate them from
euros and brand them as New Drachmas (NDs), until freshly minted NDs circulate
many months later.
Even before the prolonged ‘bank holiday’
begins, the ATMs will have run dry and will remain so for a while (as the banks
will not have the authority to dispense euros any more). In the meantime,
Greeks with hoarded cash will try to take it out of the country, to prevent
their stamping and devaluation. Liquidity will thus disappear. Meanwhile,
strict capital controls will re-appear and the Schengen Treaty provisions will
be suspended indefinitely, since every bag and every suitcase leaving an
airport, a port, or a land border will have to be checked by armed police.[1]
And when the banks re-open, long queues of angry depositors will form outside
seeking to withdraw their stamped euro notes with a view to trading them as
soon as possible for unstamped ones (or for other currencies) based on a
self-confirming expectation that the NDs’ exchange rate will fall and fall and
fall…
In summary, a Greek exit from the Eurozone
will trigger a week-long bank closure, the rapid loss of liquidity for the
already fragile private sector, a subsequent bank run upon the banks’
re-opening, an instant exodus of cash savings, and Greece’s loss of one of the
European Union’s few achievements: unimpeded movement within the EU. It will
also mean that the Athens government will no longer be in a position to
negotiate a write-down of its debt with the EU and the IMF (appr. €280
billion), as a de facto default on its euro-denominated debt will be
unavoidable. The economic impact of these developments will be, undeniably,
shattering.
Might the political benefits outweigh the
economic cost? While it is true that, presently, Greece resembles an occupied
nation, and is ruled over by a Berlin-directed troika of bailiffs, it is
important to recall that this state of affairs is not cast in iron and would
disappear in a puff of smoke if Italy, Spain, Greece, Portugal etc. were to
form an alliance to demand different policies. In sharp contrast, Scotland will
always be dominated by England within the sterling zone, courtesy of a
permanently demographically lopsided two-member union.
Why
should Scotland issue its own currency?
English Euro-sceptics were right to lambast
the Eurozone, only they did so for the wrong reasons. Caught up in their
Burkean narrative, they argue that money must be issued and controlled by a
state whose authority is sourced in a single nation, exuding collective
sentiments and evolved conventions reflecting a shared national history. The
euro’s problem, according to this view, is that there is no nation-state to
back it up (correct) and that no European institutions can/should develop to
play that role (incorrect).
What England’s governing Euro-sceptics seem
to miss is that, if no currency can serve the interests of a multi-national
state, then either Scotland should issue its own currency forthwith or the
Scots do not qualify as a bona fide nation? The SNP’s decision to ‘demand’ the
continuation of the sterling union is a missed opportunity to turn the Burkean
argument against Mr Cameron and his merry Englishmen. To say to him: “If you
are right about the Eurozone, then we have a moral duty to make Scotland
independent of London and immediately to issue a Scottish currency. Unless, of
course, Mr Cameron you do not think that the Scots are a ‘legit’ nation. Which
of the two is it David?”
Further to the political argument for a new
Scottish currency, there are formidable economic arguments in its favor;
arguments that do not obtain in Greece’s case.
First and foremost, Scotland, unlike Greece,
has its own banknotes. This may well be an historical curiosity but,
nonetheless, it could prove hugely beneficial for an independent Scotland.
Presently, three Scottish banks issue Scottish pounds under an agreement with
the Bank of England which limits the quantity of printed money. [2] Upon
independence, the Scottish government can commit to maintaining (say, for two
years) the same rules except that the control of the three banks’ note issues
is transferred to a Scottish Central Bank which commits to maintaining a
currency board that allows for a seamless transition to a free-floating
Scottish pound (within two years). Unlike in the case of a Greek abandonment of
the euro, in Scotland there need be no bank closures (as the Scottish notes are
already in circulation), no ATM disruption, no re-writing of short and medium
term contracts and no fear of bank runs. Indeed, the currency in people’s
wallets will be exactly the same as now.
Turning to the issue of public debt, another
difference with Greece (which will default de facto the moment it leaves the
Eurozone) is that Scotland does not have a public debt. Or, to be precise, it
will have whatever debt it inherits from the United Kingdom as a result of a post-referendum
negotiated settlement between London and Edinburgh. The SNP’s misguided
commitment to staying within the sterling union is forcing Mr Alex Salmond to
sacrifice the debt issue, using it as a bargaining chip for securing the
continuation of a lopsided currency union (rather than issuing a new currency
in order to minimize the amount of UK debt shouldered by an independent
Scotland).
In
‘Scotland must be braver’ I outlined the broader argument (which I shall not
repeat here) that a shared Bank of England [3] will always favor monetary
policies:
Attuned to the needs of southern England
and the City of London
Operating as a perpetual drag on Scottish
growth
Posing a permanent threat to the solvency
of the Scottish government.
Undoubtedly,
these asymmetries afflict not only Scotland (under a sterling union) but also
Greece and other European nations (within the Eurozone). But here is the
crucial difference: the Eurozone asymmetries are not built indelibly into the
union’s demographics (as they are in Scotland’s position within the United
Kingdom) and can be reversed if the Periphery gets its act together.
Epilogue
Scotland is not Greece. It is
contending neither with a humanitarian crisis nor with an upsurge of Nazism.
The case of ending its monetary union with its more powerful partner is, in
this sense, less pressing that Greece’s need to re-negotiate its far more toxic
monetary marriage with Berlin and Frankfurt. So, why am I arguing that Scotland
should exit its monetary union but Greece should not?
The reason is twofold. By exiting the
sterling zone, Scotland stands to gain nationhood without suffering any of the
catastrophic economic costs that Greece would sustain following a unilateral
exit from the Eurozone. Greece can reclaim its sovereignty within the Eurozone
by finding the courage to challenge the faulty logic of its loan agreement with
Brussels, Berlin and Frankfurt. Scotland, in contrast, can never secure
sovereignty within the sterling zone because a shared central bank will always
force Edinburgh to dance to the tunes of the City and of England’s South East.
As Mrs. Thatcher famously said in her final appearance as Prime Minster in the
House of Commons: “It’s all politics. Who controls interest rates is political!”
In the sterling zone, unlike in the Eurozone, the controller of interest rates
is pre-determined and unchangeable: London!
Listening to unionists speak of an
independent Scotland confirms their patronizing view that Scotland is,
axiomatically, (a) better off within the United Kingdom, and (b) a permanent
beneficiary of (and a fiscal drag on) a benevolent, richer England. Underlying
this prejudice lies the unstated belief that the Scots are no longer a viable
nation; that they have been assimilated by England; and, thus, that a common UK
currency is ‘natural’ (unlike the euro) because it is used by a more-or-less
homogenous English-dominated population, with some regional folkloric
variations on its Celtic ‘fringes’.
This colonial view is what the people of
Scotland have a golden opportunity to reject in the forthcoming referendum.
Unfortunately, the SNP has undermined the referendum’s capacity to denounce the
denigration of the Scottish nation’s integrity by clinging onto a sterling
union that, according to Mrs. Thatcher’s logic, surrenders Scottish sovereignty
back to London even before it has been won.
Instead of organizing Scottish public
opinion against the idea of perpetual monetary dependence on an England that
turned away long ago from the social contract tradition that most Scots hold
dear, Mr Salmond is tying his colors on the mast of an unreportable Bank of
England.
Instead of making a virtue out of the
prospect that an independent Scotland will not rely on a large, destabilizing
financial sector, the SNP is arguing that the sterling union must be preserved
so that Edinburgh competes with the City as a… financial centre.
I can think of no better ‘strategy’ than the
SNP’s commitment to sterling if its aim is to lose the referendum and to
alienate those Scots who want to vote with pride for an independent Scotland
that seeks a path radically different to the one England embarked upon in 1979.
Returning briefly to the comparison central
to this article, Greece’s radical move for re-establishing its sovereignty (a
move equivalent to Scotland’s withdrawal from sterling) is not to exit the
Eurozone but to veto the terms and conditions of its ‘bailout’ agreement and to
demand new policies from the existing institutions. The risk of such a bold
strategy is that the European Central Bank may receive the green light from
Berlin to cut Greek banks off central bank liquidity. This would precipitate
not only a Greek exit but most likely a wholesale disintegration of the
Eurozone as well. “Let them do their worst”, I say in this case, even though I
am convinced they will not dare.
A sensible Greek demand for re-thinking the
euro’s awful architecture is more likely to act as the catalyst Europe needs to
hold the rational debate that it has steadfastly refused to have. In this
debate, an independent Scotland, with its own currency guaranteeing its
autonomy from Euro-sceptic England, can help an emerging alliance of peripheral
European countries establish a new Eurozone architecture; perhaps even one that
Edinburgh may want to join…
NOTES
[1]
Something similar happened in Cyprus when capital controls were introduced
there. The difference is that Greece has a land border which makes the controls
next to impossible to impose.
[2] The
Bank of England presently issues £1 million notes (Giants) and £100 million
notes (Titans) which are held somewhere on its Thread needle Street premises
permanently. The three Scottish pound issuers are, simultaneously, authorized
to print Scottish pounds of the same face value.
[3] Even,
that is, if London were to accept the SNP’s demand to share the Bank of England
with an independent Scotland.
(Source: http://yanisvaroufakis.eu/2014/03/10/if-scotland-why-not-greece/)
