Scottish Independence TV Debate: Nicola Sturgeon V.S. Michael Moore

I've just finished watching Scotland Tonight's debate on the economics of Scottish independence again, which was very interesting indeed. Nicola Sturgeon from the SNP and Michael Moore from the UK government went head-to-head live on national television, and both were given the opportunity to make an opening pitch and put forward their case, before cross-examining each other and asking questions. 

So who came across better in the debate? The short answer, without a doubt, is Nicola Sturgeon. What she was able to do was forcefully put across her arguments to Michael Moore, who was not able to do the same. Her questions to the Secretary of State were also much more pressing. 

I normally think Michael Moore comes across quite well on TV, in his interviews for instance, or on Question Time. But on Scotland Tonight it was an entirely different ball game. To be fair, Moore's opening pitch was a good one. He decided to focus on the broad macroeconomic benefits to Scotland of being part of the larger economic unit that is the United Kingdom. But when he went head-to-head against Sturgeon he failed to build on that positive start.  

The main discussion points were on the currency issue, and poverty. On both of these points Moore should have done much better. I'll discuss the later first. 

Sturgeon read out a range of statistics showing unacceptably high levels of poverty in Scotland (which occur for many reasons, not one of which is the constitution). This was effective, because Moore was unable to provide a satisfactory response. He simply tired to defend the government's record without turning the question around. The Scottish government is largely responsible for all domestic policy in Scotland, and can vary the rate of income tax by 3p in the £1 (soon to be devolved fully) without using that power once. Why, therefore, would shifting control of air passenger duty or corporation tax from a building in London to a building in Edinburgh result in a more equal society? Do the SNP not take responsibility for anything happening in Scotland just now? And on that point, why is it Scotland has poorer outcomes than the UK in areas such as health and education, which the Scottish government are fully responsible now? There is no proof that a change in the constitution would help inequality. Rather, we are better pooling our resources together and taking advantage of a broader and more dynamic tax base to address problems in society. 

Then we have the currency, which is the nationalists' weakest position beyond all else. Yet Moore did not put across questions to really test Sturgeon on the issue. For example, why do the SNP think they have a robust currency position when fellow nationalists, Yes Scotland board members, former Bank of England experts, senior economics, and Alex Salmond's former economic advisor all say an independent Scotland would have to have its own currency? 

To her credit, Sturgeon kept repeating the recommendations from the Fiscal Commission, which suggests an independent Scotland should attempt to enter a sterlingzone with the rest of the UK. But Moore did not highlight the fact that the Commission takes the position that Scotland is independent. In other words, it does not analyse whether Scotland should be independent, like the UK Treasury paper does. He also only highlighted the flaws of independence and inconsistencies in the SNP's policies, such as the fact that the SNP want Scotland to be independent - only to remain within a UK framework. But he did not discuss why the current system works best. To win, the UK government and Better Together must do both. 

Generally speaking, for a currency union to work, the states sharing the currency need synchronised business cycles, deep trade integration, wage and price flexibility, and fiscal transfers. All of these would change under a separatist scenario. The Scottish and rUK economies would diverge, fiscal transfers would end, and monetary policy needs in Scotland and the continuing UK would differ at different points in time. The current system works well because of the deep integration of the Scottish and rUK economies, and the ability to use fiscal transfers across the United Kingdom to adjust to economic difficulties in different parts of the country. 

There were other things Sturgeon was allowed to get away with too. Highlighting that oil revenues account for a much larger proportion of GDP in Norway than in Scotland, she suggested Scotland wouldn't be overdependent on oil for revenue if it was independent. Yet Moore did not point out that whereas the UK's oil companies are privately owned Norway's are state owned. The country therefore has a bigger role in deciding on the rate of production. It also does not use oil to fund current expenditure like the UK does. 

All in all I do not think Moore effectively put forward a strong enough case, and he allowed Sturgeon to walk all over him. I do not think she talked much sense, but she put forward her arguments strongly enough and did well. Polls show that around 30% of Scots will vote for independence no matter what, while around 40% of Scots will vote to stay in the UK no matter what. So the people in the middle who are undecided will largely decide the outcome of the referendum. These are also the same type of people who will only tune into the debate when it makes big news in the media, and so these TV debates will help them make up their minds.  

The one positive thing coming out of Moore's exchange with Sturgeon is that she failed repeatedly to say if the SNP have a Plan B if a sterlingzone could not be agreed; and if so, what would it be? I suspect we'll be coming back to that issue again at some point in the future. 

Osborne Strikes Back

I've sometimes been critical of George Osborne on this blog, and with the current state of the UK economy he's rightly come under a lot of pressure from commentators. But persuading Lucasfilm to produce Star Wars VII in the UK is a fantastic piece of news. 

Creative industries contribute 6% of the UK's GDP, and employ more than 2 million people. It is absolutely paramount that the UK government encourages the sector to develop further. This will not only help the UK economy rebalance, but it will also ensure that the country can continue to play a leading role on the world stage in all things creative. The government rightly deserves credit for developing a sound strategy to help the creative industries, and it is now beginning to pay dividends. 

As George Osborne says in the video below: "the force is strong with this one."

Trident and the Illogical Position of the SNP

Following on from my previous post on the UK's nuclear deterrent, I feel inclined to discuss the SNP's views on Trident, because their opposition to nuclear weapons has come up time and time again in the Scottish independence debate. They have always tried to give the impression that Scots are against Trident, while English people are for it. This is not true. The UK's nuclear deterrent divides opinion across the UK. It is not an issue that unites Scots against England. Rather, it is one that splits opinion among Brits. 

The SNP have always in their history been opposed to nuclear weapons. They have also been opposed to NATO. But this has now changed, with the party recently changing its stance on NATO membership. Their position now is that they are opposed to nuclear weapons but wish an independent Scotland to be a member of a nuclear alliance (i.e. NATO), which is a bit like being in favour of monetary union without a fiscal union. 

When they are pressed on the issue the SNP are correct to point out that not every NATO member has a nuclear weapon. But they do not mention that Scotland would be the only state opposed to nuclear weapons (the SNP want a written constitution, where nuclear weapons are illegal in Scotland), as well as one that wishes to remove the UK's nuclear weapon - a key part of NATO's nuclear umbrella - from the Clyde (one wonders what NATO would think of this). 

More fundamentally, however, the SNP either misunderstand or wish to ignore a core purpose of NATO; to provide an American guarantee of European security. If the worst ever came to the worst, every NATO member is sheltered by America's nuclear arsenal. So the reality is that an independent Scotland in NATO would be just as dependent on nuclear weapons as it is today. The only difference is that the missiles would be controlled from Washington, not London. Outstanding achievement. 

Being opposed to nuclear weapons is a perfectly reasonable view to hold, but then by definition you must be opposed to a nuclear alliance. That is a consistent position. But it makes no sense to on the one hand claim nuclear weapons are inherently 'immoral', but then on the other hand propose joining an organisation founded upon the idea of nuclear deterrence. This position is inconsistent, illogical, and above all not credible. 

The UK's Nuclear Deterrent

There was a poll out today showing that the majority of Scots believe the UK's nuclear deterrent should be replaced. I'm sometimes asked my opinion on nuclear weapons, so now seems like a reasonable time to write about it.

My views are as follows: in an ideal situation with world peace and no terror then there would be no need for nuclear weapons. Not just in the UK but in any country. Unfortunately, this is not the world we live in, and I do not think nuclear disarmament is a realistic option when states like Iran and North Korea are developing nuclear programmes. Hence, I believe it is the UK's national interest to maintain its nuclear deterrent.

The first responsibility of the British government above all else is to protect its citizens. You cannot put a price on that (incidentally the annual running cost of Trident is £2 billion, or 0.0013% of the UK's GDP). The UK's nuclear weapons guard against the most dangerous threat which British citizens could face; that of a nuclear attack. 

The UK has four submarines that carry the Trident II missiles, and at least one of these is always at sea, so they are a continuous deterrence to a nuclear attack. The location of the submarine is secret, and its missiles could, if necessary, be fired against any target. It is also not dependent on security in the UK homeland in order for it to be fired which means it could respond to an attack accordingly. Any potential aggressor is fully aware of this and would therefore think twice before launching an attack on the UK.

You can watch a really interesting debate on nuclear weapons on the BBC's Hardtalk, which is shown in the video below. It was first broadcast on Monday 29th April 2013. The discussion features Kate Hudson, General Secretary of the Campaign for Nuclear Disarmament, and Douglas Murray, Associate Director of the Henry Jackson Society. 

Is it Scotland's Oil?

Ever since the debate on Scottish independence began the theoretical division of North Sea oil and gas has, to date, presumed to be a relatively simple one. So far everyone has assumed that 90% of the UK's North Sea revenues would be attributed to Scotland. Until today, that is. 

In an interview with the BBC, legal expert Professor John Paterson from Aberdeen University warned that the division of North Sea revenues could be subject to several years of legal wrangling, with the matter possibly ending up in an international court. 

I've argued this many times before (please see here, here, and here). While I am not a lawyer, a bit of research and discussions with qualified individuals led me to believe this would not be a straightforward division and could indeed take many years. I've tried to point out to readers that because Scotland would not be guaranteed 90% of North Sea revenues, any statistics that assume this can therefore only be taken as speculative. They may give a rough guide as to what would theoretically happen, but they are speculative nonetheless. 

As per the UN Convention on the Law of the Sea, every state has the right to land and territorial seas up to 12 nautical miles out. Article 3 states: 

Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention.

But most North Sea oil and gas installations are more than 12 miles offshore and are within the area of the Continental Shelf (12 - 200 nautical miles out) to which the UK has claimed right. So, in other words, apart from revenues from those oil and gas fields that are within 12 nautical miles out, everything else is up for negotiation. 

The starting point for maritime disputes is the equidistant principle. This is where you draw a line outwards from the coast at right angles to the course of the coast. If you do this then there is no doubt that 90% of the North Sea revenues would be Scottish. This is because most oil fields are in 'Scottish waters.' In reality it is very hard to know for sure. The 'Scottish share' has varied from 66% to 98%, depending on the production and profits made at different fields.

Nevertheless, ignoring this factor (and ignoring any drive Shetland and Orkney have for autonomy) and applying the equidistant principle, then as a guide we can say that 90% of North Sea revenues would be Scottish. But in practice this ignores a crucial principle in international law: the principle of equity. This means that each party should receive a 'fair share' of the oil and gas resources. 

Of course, it is very hard to define what a 'fair share' actually is. But the continuing UK would have leverage to argue for more than just 10% of the revenues on two grounds. Firstly, a large amount of British resources have been used to develop the oil and gas fields. For example, HMRC have a specific and specialised North Sea taxation division, and they have developed close relationships with companies to provide tax certainty and government support. 

Secondly, the revenues attributed to each party would have to be considered in the context of decommissioning costs. The current SNP position is that Scotland should receive 90% of the revenues while the continuing UK would pay the £30 billion decommissioning costs. Fergus Ewing, the SNP Energy Minister, has stated in the past:

In principle, given that the UK has received substantial revenue from these rigs, it seems correct that the UK has a moral and certainly a legal obligation to be responsible for decommissioning.

It is unlikely that such a position would be agreed to by Westminster, and nor would it be seen to comply with the principle of equity. 

Finally, the division of North Sea oil and gas would also be done as part of a wider negotiating process. Each issue (e.g. division of North Sea revenues, division of debt, etc.) would not be dealt with in isolation. Thus, various factors could be used as leverage by either Scotland or the continuing UK (who would have more negotiating power than Scotland). So, for example, on the issue of Trident, the SNP could play hard ball and say they would only be cooperative on the timetable of removal if Scotland receives 90% of the oil, while rUK taxpayers pay for decommissioning. 

On the other hand, Westminster could say they would not agree to allowing the Bank of England to provide lender of last resort facilities to Scotland if it was not cooperative with Trident and did not agree to allowing the continuing UK a larger proportion of North Sea revenues. These are examples of just some of the issues that might be at play, and of course there are many many more. 

The point here is that nothing is certain. Indeed, the only thing that is certain is that separation would mean a lot of uncertainty for Scotland and the continuing UK for many years to come. Only Scots can make the decision on whether throwing away all the benefits of the United Kingdom for such an incalculable and unpredictable future is worth it. 

Entrepreneurship in Spain

There was an interesting video on the BBC website a couple of days ago about business start ups in Spain, and whether or not new business creation can be an important factor in Spain's economic recovery.

The video first shows an interview with a bar owner, who's business prospects have unfortunately deteriorated during the economic crisis. As a result he is now closing his business and retiring. He said:

Things have changed because before there was lots of construction, and the construction workers owned money and they spread it around. They came to have breakfast, to have lunch, and after work to drink beer and play dominoes. Now there's nothing. 

The next two interviews, however, are with two entrepreneurs. One of them developed a software programme to allow users to post their voice on social media sites. The other opened up his own cupcake store, and is now the owner of three cafes. Neither of the entrepreneurs required a loan from the bank to start their business, so it proves there are still some opportunities in these troubled economic times.

So how does Spain compare with other economies in the entrepreneurship league? And can new business creation rescue the Spanish economy?

Firstly, Spain's established business ownership rate doesn't compare too badly against the selected eurozone economies (chosen based on data availability). But read the graph (here on pdf) with caution. It tells you nothing about the value these businesses add through economic activity in any given period, or about the employment these businesses provide, or the wages and salaries that they pay. It is simply the percentage of 18-64 population that are currently an owner-manager of an established business (i.e. one that has been operational for over 42 months).

Source: Global Entrepreneurship Monitor

More importantly, Spain's entrepreneurial spirit does not look as promising when you take a deeper look at the statistics (here on pdf). For example, its rate of new business creation has deteriorated dramatically since 2008.

Source: Global Entrepreneurship Monitor

If you're observant you'll have noticed that over the last decade the Spanish business creation rate has been higher than Germany's every single year. It has also been higher than that of Belgium, France, and Italy. So surely the low rate isn't that much of an issue? 

Well, it is. Take Germany, which has an economic model built on sound finances, rules, and processes. Enterprise is not part of its culture. The same can be said for Belgium. Whilst it is a relatively small country it is at the heart of Europe with a significant presence on the international political stage. As a result, many companies have set up operations in there, leading to ample employment opportunities in other sectors. Whilst the lack of entrepreneurship is a weakness in Belgium and Germany the problem is less significant than in Spain, because jobs are being created in the real economy elsewhere. 

Against the eurozone's periphery, Spain doesn't perform that well. Granted, its business creation rate is higher than that in France or Italy (hardly models of competitiveness), but it is also lower than that in Portugal or Greece. The conclusion we can draw is that an entrepreneurial engine is not at the heart of Spain's economy. This immediately puts it at a disadvantage as it tries to recover from its property boom.

So what might be the barriers to business creation in Spain? Why might it have very low business start-up rates? Of course, there could be many reasons. But the graph below is striking (here on pdf). 

'East of access to loans' and 'venture capital availability'
measured by a points system (1 = Very difficult; 7 = Very easy). Source: World Economic Forum

Spain ranks second behind Greece in terms of number of days to start a business, and storms in at number one for the number of days required to start a business. The heavy regulations and inefficient government bureaucracy are a clear barrier to enterprise. The country also ranks low in terms of access to loans and venture capital availability, meaning not only finance but business advice is hard to come by. 

Spain also ranks poorly in terms of overall competitiveness and labour market efficiency, as illustrated below (here on pdf). 

Source: World Economic Forum

Clearly, further steps are needed to make the labour market more flexible, including rebalancing the collective bargaining system and addressing the inflation-indexing of wages. There is much room improvement for other supply side reforms too, such as tax simplification, speeding up arbitration procedures, and developing the education system. 

All in all it doesn't look like Spain can rely on entrepreneurship to rescue its economy any time soon. 

The Currency Debate Continues

Over the last couple of days the debate about what currency an independent Scotland would use has gone on and on. But through all the rhetoric there have been some very important developments. Firstly Yes Scotland Chairman Dennis Canavan has declared it is his view that in the event of independence Scotland should have a separate currency. Speaking to the BBC he said:

I am speaking personally here, my preferred option is for Scotland to have its own currency because I think that would give us more flexibility, more freedom. It would give us a wider range of economic levers. 

If Scotland were to have its own currency then it would have far more freedom to do its own thing and it would have a full range of economic levers to determine its own economic policy.

Canavan also refused to rule out an independent Scotland joining the euro, noting it would be "something to aim at." His view has been shared by former deputy leader of the SNP leader Jim Fairlie, who argues:

If sovereignty means anything at all to the Scottish people, control of their own currency is a prerequisite.

The total confusion and increased ambiguity of Yes Scotland's policy on currency has triggered a campaign  response from Better Together on Facebook:

The SNP have responded by pointing out that the Fiscal Commission's report recommends an independent Scotland should enter a monetary union with what would be the continuing UK. But what the Fiscal Commission does not do is consider in detail whether this would be in the continuing UK's interests. This is a crucial omission, because a monetary union would require agreement from the continuing UK. If the rest of the UK did not agree then Scotland would be forced to adopt an alternative currency (sterlingisation would in theory be a possibility but in reality it would not be a realistic option for Scotland - see my blog here). There are other things the report does not consider either, which are highlighted this article by Labour MP William Bain:

Nowhere in the Scottish Government’s Fiscal Commission Working Group initial report is one of the key failures of the Eurozone – the lack of meaningful fiscal union, and the ability to manage economic demand across a potential sterling zone – addressed. 

Neither do they address the most recent research which finds that a degree of pooling of fiscal policy is required for an optimal currency union. As omissions go, this is a major one. 

Attempting to put in place an economic system without a fully-functioning central bank or convincing currency arrangements to underpin it, or without the knowledge of whether such a system would be compatible with admission to the EU or not, is like a ship setting sail for voyage without the security of its sheet anchor.

And in further bad news for the nationalists a former member of the Bank of England's monetary policy committee, DeAnne Julius, wrote an article on the Financial Times website arguing that a separate currency would be the only realistic option for an independent Scotland. A currency union with the continuing UK, she said, would prove to be too restrictive:

If Scotland wished to retain sterling as its currency, as its nationalist first minister leader Alex Salmond currently maintains, it would either have to set up a currency board and thereby give up any control over its interest rates and face much higher government borrowing costs; or it could seek to negotiate a new arrangement with the UK government and BoE. This much is clear from the Treasury analysis. 

However, Scotland’s economy is less than one-tenth the size of the UK’s. Its bargaining power as the smaller actor would be correspondingly limited. Both the Conservative and Labour parties oppose Scottish independence so the UK Parliament of the day is unlikely to offer any favours. In particular, to gain lender of last resort coverage, Scotland would have to meet stricter budgetary and debt constraints than it does today, negating the assumed benefits of independence.

When one reads through the lines of the continually evolving Yes Scotland position on the currency and looks at the details one thing is very clear: the only way Scotland is guaranteed to keep sterling is to remain part of the United Kingdom.