"All things are wearisome, more than one can say." - Ecclesiastes 1:8

Sunday, November 21, 2010

On Ireland and the case for Scottish independence

One wonders whether in the future small and medium-sized countries will begin to worry when commentators start using their economies as case-studies: whom the gods of economic history wish to destroy, first they make them examples from which wider lessons should be drawn?

Everyone remembers that this was the case with Ireland and its apparent economic miracle. For free-marketeers, Ireland showed the virtues of providing a business-friendly environment with its competitive cuts in corporation tax. Young George Osborne, for example, saw it as nothing less than a "shining example of the art of the possible in long-term policy-making".

He was less keen on the lesson drawn by European enthusiasts. For them, Irish growth rates had made the case for membership of the single-currency unanswerable.

The present travails have led people to draw rather different conclusions. It has become the misfortune of Ireland to now serve as a warning. For some it has vindicated the argument that European monetary union, in the absence of fiscal union, is incapable of absorbing 'asymmetric shocks' in the Eurozone countries. For Keynesians the current meltdown shows the folly of fiscal retrenchment in times of recession.

One can agree with both of these up to a point, although with the latter I wonder what Keynesian solution is open to Ireland with its debt reaching the prices it now has on the markets? A more important qualification is that these are both policy variables that have exacerbated, rather than caused, Ireland's present economic woes.

But if you'll forgive me for being parochial, the purpose of this post is to wonder what conclusions the Scottish nationalists are now drawing from all this? While Alex Salmond in particular would frequently use a variety of small European countries as exemplars, it is practically impossible to exaggerate the extent to which he linked the political aspirations of the Scottish nationalists to the economics of the 'Celtic Tiger'. For example, in his 2008 lecture, "Shaping Scotland's Future", no-one in the Dublin audience could have been left with any doubt over the future shape that Alex Salmond thought Scotland should take:
"Scotland looks out to an Arc of Prosperity around us. Ireland, Iceland, Norway, Finland and Denmark. All small independent nations. All stable, secure and prosperous.

Of all these nations, no example is more impressive and inspiring than Ireland. And none is more relevant to the decisions that Scotland faces today."
It is important to point out that Salmond and the SNP have consistently argued that not only would an independent Scotland be economically prosperous, it would be so because it was independent. Given that this is the case, it is entirely unsurprising that he should have taken particular interest in the Irish model. First politically independent from Britain, then economically through membership of the EU and later the Euro, for Salmond Ireland's growth rates served as an example of what was possible if the dead-weight of the British state could be removed from Scotland's shoulders.

The identification with the Irish model was practically absolute. Membership of the Euro was to form part of the 'Independence in Europe' policy - and even post-credit crunch he was inexplicably arguing that membership might prevent one in the future.

Scotland should also adopt the Irish policy of competitive cuts in corporation tax to attract inward investment, pointing out that the excruciating 'Braveheart' was partly filmed in Ireland. I think we were to take it that this was a bad thing.

Most crucially, as far as I am concerned, the former economist for the RBS was as uncritical as anyone else of the 'light hand on the tiller' approach to banking regulation and at no point gave the slightest indication that he was concerned about the weight of the financial sector in the Scottish economy:
"And of course we Scots are lucky enough to have the one of the best brands in the world - a global recognition and affection for our culture that money cannot buy.

Take financial services. With RBS and HBOS - two of the world's biggest banks - Scotland has global leaders today, tomorrow and for the long-term."
That Salmond and the SNP should have been a little more careful with their choice of comparators goes without saying. The Herald's Ian Bell was prescient enough to point this out over two years ago:
"[I]f a property market failure - with 270,000 construction jobs at stake - leads to negative equity and mass unemployment during a global recession, the Irish beast may seem a little less glamorous. Close study need not imply unthinking imitation, in any case, and nor should it, on the evidence. Yet you would not guess as much when Mr Salmond connects independence with the "arc of prosperity" across northern Europe, and when he holds up Ireland as an exemplar. Best stick to Norway, for now."
Salmond has belatedly followed this advice with Norway now serving the exemplar function. It is a clumsy shift in emphasis that only the amnesiac would find convincing. But I'm wondering what the political consequences of this will be for the SNP? It's too early to say but they might not be as profound as they could be or, as some of us would argue, should be.

Apart from the weakness of the Scottish opposition, there are two reasons for this:

1) From the outset of the banking crisis, I have been astonished at the impressive ability some people have to pretend that absolutely nothing that could even dent their world-view has happened at all. In public at least Salmond gives the impression of belonging to this group - although whether this is so privately, I couldn't say.

2) When economic disasters on this scale hit, they tend to shatter a consensus view that has been more widely-shared than some people care to remember. What has happened to Ireland is a species of the more general meltdown in the world banking system, affecting countries large and small, some who are part of the Eurozone and some who are not. Not even all of the opposition parties in Scotland can claim distinct policies on the Euro and Scottish independence and even those who did cannot claim to have many Jeremiahs in their ranks.

Nevertheless, nationalists have some difficult questions to answer. The experience of banks being 'too big to fail' is one that has not been unique to Ireland but the reality is that smaller nations are by definition more likely to experience this, as well as being less able to cope with it. Salmond is right to suggest that we have seen two of the biggest threats to the independence of small nations - territorial acquisition by larger states and lack of access to markets - effectively removed over the last twenty years or so but in his assumption that globalisation was an entirely benign development for small countries he failed to take account of this one.

I would imagine it is dawning on the more thoughtful supporters of Scottish independence already: while it is obviously possible for small countries to have both, prosperity is not the same thing as sovereignty, the latter does not guarantee the former and, most importantly, if we had followed the trajectory drawn by Alex Salmond and the SNP, it seems highly probable that Scotland today would have neither.
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