We can't let campaigning economists catastrophise independence

For MacDonald, independence is the wrong policy choice. Like any campaigner, he presents his case so that it is as compelling as possible. Invited on the site to “take the test,” I discovered that with independence, my household would become much poorer, largely because Scotland’s currency would crash.

That is certainly a possibility. Imagine that Scotland, after becoming independent, votes for a government of naive fools, persuaded by venal think tanks to adopt their paymasters’ policy. The country would most likely become worse off. We would simply be repeating the Brexit experience.

If the Scottish Government insists on implementing a raft of imprudent policies which ignore the realities of the economic situation which the country faces, economists will give stern warnings about the likely consequences before providing a running commentary as they occur. Most likely, like the Truss administration, such a government would not last for long.

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Reading MacDonald’s predictions, in the website’s slightly demented layout, I found myself thinking of Kenneth Clarke.

Having presided over the debacle of Black Wednesday, as sterling was ejected from the Exchange Rate Mechanism, Norman Lamont soldiered on as chancellor of the Exchequer, looking for the green shoots of recovery. He seemed shifty, and unpersuasive. He was quickly sacked, with Clarke replacing him. As chancellor, he exuded bonhomie, through the carefully crafted persona of a cigar-smoking, whisky-swilling, jazz lover. He practised studied directness in interviews. He had that ability, crucial for any finance minister, of projecting calmness.

That allowed him to provide widespread confidence after his predecessor had entirely shredded his reputation.

Clarke tolerated the fall in the value of sterling, ran a low interest rate policy (this was before Gordon Brown, practising hair-shirted denial, gave the Bank of England the authority to set interest rates), and oversaw the start of the only sustained period since the Second World War in which the UK economy grew more quickly than the US economy. And he managed to do all this as the Conservative Party largely fell apart over Europe.

When MacDonald warns us that there will inevitably be a huge fall in the value of Scotland’s currency after independence, he wants us to believe that whatever can go wrong will go wrong and secondly that there can be no recovery. He does not seem to have the imagination to predict how the Scottish Government might forestall the catastrophe, and how it might respond if it finds itself in very challenging circumstances.

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Among the lessons which we should have learned from the last two months, a country can look over an economic precipice and draw back, even if that means MPs withdrawing their confidence from a recently appointed prime minister.

Instead, it seems that MacDonald believes that Scotland will settle for government by numpties.

He also seems to assume that Scotland’s exchange rates will be determined by the markets – the same markets, more or less, which Kenneth Clarke assuaged with disarming confidence.

We talk about markets having minds and we might even think of them as having egos, so that they are susceptible to flattery, and can suspend disbelief. In the hands of unscrupulous – and self-deceiving – financiers, that can lead to asset price bubbles, and dramatic crashes. Subtle politicians, like Clarke, can also influence them.

In setting exchange rates, small countries, as Scotland will be after independence, rarely allow themselves to be exposed to the vagaries of international currency markets. In Europe, they often choose not to set their own exchange rates, accepting constraints on their economic policy, protecting themselves from extreme market volatility by fixing the exchange rate to the euro, even without being a member.

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Scotland will simply be unusual in having the choice of fixing its currency to sterling, at least initially. There will need to be some negotiation about that, and it would be prudent for the Scottish Government to be ready to launch its own currency soon after independence, not just to address some of MacDonald’s concerns, but to be certain that Scotland will use sterling purely because that is in its best interests.

I could go on, and on, and on. My last point is that MacDonald is very likely correct in saying that a new Scottish currency would naturally devalue. When Gordon Brown took over as chancellor from Clarke,

the value of sterling started to appreciate again and for much of the last 20 years, that overvaluation has been about 20%. MacDonald’s projected 30% deflation is mostly a policy correction, resulting from Scotland no longer being shackled to one of the world’s leading money centres.

(On that, some interesting news: for the first time, the value of assets traded on the Paris Bourse has overtaken the value of assets traded on the London Stock Exchange. Another Brexit bonus.)

And to finish off, given that all the independence-supporting parties have accepted the principle that Scotland should have its own currency, there should be some debate about the practicalities of making that possible quickly and effortlessly. Concerned only with policy principles, my work on this topic is done.