The Scottish Nationalists who raised this possibility homed in on this part of Richard's piece:
In March 2014 Bank of England Governor Mark Carney confirmed in a letter to Green MP Caroline Lucas that “It is possible that if the Monetary Policy Committee did vote to increase its asset purchases in future, it could expand the range of assets it purchased. Such a decision, however, would need to be agreed with the government.” In other words. Green infrastructure quantitative easing, about which she was asking, is possible.
What that means is that the SNP does have it within its power to demand this type of quantitative easing to pay for investment in Scotland. That’s important precisely because quantitative easing debt is effectively cancelled almost immediately after it is issued because it is effectively the issuing of new money, and not debt. And what that means is that in reality this new type of quantitative easing could be used to pay for the investment programme the SNP wants to build Scotland’s future without the debt going on the books of the Scottish government. Or to put it another way, Paul Johnson’s assumption that Scotland cannot afford to fund its growth is just not true if this innovative finance mechanism is used: it can.So, having started by saying that the SNP should persuade the Westminster government to instruct the Bank of England to monetise infrastructure bonds issued by a UK government agency, Richard appears to have moved on to suggesting that the SNP should demand that the Bank of England monetise Scotland's debt. I don't think this is quite what he meant, but it is all to easy to interpret this section in that way. But whether he meant direct monetisation of Scotland's debt, or monetisation of infrastructure bonds issued by a Scottish development bank, this is a non-starter. The reason concerns the nature of a currency union and the status of the Bank of England.
The Bank of England should more correctly be named the "Bank of the United Kingdom". It is the monetary authority for the whole of the UK, just as the Bank of Canada is the monetary authority of the whole of Canada and the ECB is the monetary authority for the whole of the Eurozone. It is required to manage the monetary conditions across the UK as a whole, without favouring individual parts of the UK. Some may argue that the Bank of England tends to favour London, because of its links with the City: this is not a discussion for this post, but my counter-argument would be that if the Bank favours London it does so because London is dominant in the UK economy, just as the ECB is seen to favour Germany because Germany is dominant in the Eurozone economy.
In a currency union it is the job of fiscal policy, not monetary, to ensure that regions within the union do not diverge so much that monetary policy loses traction. In the Eurozone, this has proved extremely difficult because of the lack of a common fiscal authority, common automatic stabilisers (taxes & benefits) and fiscal transfers. The UK's fiscal union is undoubtedly flawed: London and the South East are far too dominant and other regions have suffered badly from foolish industrial policies of the past. But it is a whole lot more coherent than the Eurozone.
And it is this coherence that the Scottish National Party wishes to destroy. The Scottish First Minister's long-run ambition is for there to be full devolution of tax and spending to the Scottish Government ("full fiscal autonomy"), accompanied in due course by dismantling of the Barnett formula. This would reduce the UK to the same condition as the Eurozone - an incomplete and incoherent currency union. The arguments against this were fully rehearsed prior to the independence referendum. But it seems they need to be aired again.
So let me make it clear. It is not possible for members of a currency union to have full fiscal autonomy. Attempts to achieve full fiscal autonomy damage, and ultimately destroy, the currency union.
The SNP should now be told in no uncertain terms that full fiscal autonomy is not on the table and never will be. "The Vow" promised extensive devolution of powers to Holyrood. But it did not promise full fiscal autonomy. And the Smith Commission has also stopped well short of recommending full fiscal autonomy. That is where the debate must now rest.
But it is not just the SNP that is treating the UK's successful currency union in a cavalier and destructive manner. UKIP's manifesto proposes dismantling of the Barnett formula, not to replace it with something better (which would be sensible) but to "save money" by forcing Scotland, Wales and Northern Ireland to become self-funding. UKIP's policy is thus for England to remain "UK core" while Scotland, Wales and Northern Ireland become "UK periphery". And they claim that this has been signed off by CEBR economists? Good grief.
And the Conservatives are equally destructive. Their proposals for "English" income tax rates and benefits would dismantle UK automatic economic stabilisers, widening regional divergence and putting pressure on the currrency union. This is utter folly. Since they have actually been in government, they should know better.
However, let's assume for a moment that the SNP gets its wish: Scotland achieves "full fiscal autonomy" and creates a new Scottish Development Bank with a mandate to finance infrastructure development in Scotland by issuing bonds. Could Scotland legitimately demand that the Bank of England monetise these bonds?
SNP supporters claim that it could, on the grounds that Scotland is part-owner of the Bank of England. Monetising Scottish bonds would be done according to Scotland's capital share, much as the ECB's current QE purchases are done according to the capital shares of the Eurozone member states.
But hang on. Scotland has only a minority interest in the Bank of England. Since when has the owner of a minority interest been able to force a company to do something against both the wishes and the interests of the majority shareholder? If the SNP cannot persuade the Westminster government to instruct the Bank of England to monetise UK infrastructure bonds, it can have absolutely no power to force the Bank of England to monetise Scottish infrastructure bonds.
I'm not going to discuss the importance or otherwise of central bank solvency, since this has been exhaustively covered by Karl Whelan and Paul De Grauwe, among others. What concerns me is the lack of democratic accountability. The decision to issue infrastructure bonds would rest only with the Scottish government and its bank. The rest of the UK - over 90% of the population - would have no say in the matter. Under what version of democracy would the Bank of England be forced to backstop the fiscal expansion of one small part of the UK without the agreement of the rest?
Dismissing this as "merely a political argument" will not do. Democracy matters. Indeed the argument for Scottish autonomy is fuelled by the perceived failure of democracy in a Westminster government dominated by London and the South East of England. How would replacing this democratic failure with an even bigger one improve matters?
The fact is that while it remained in the currency union, a "fiscally autonomous" Scotland would have much less autonomy than it would like. It would not be able to run high deficits without the agreement of its union partners, since to do so would put the value of the common currency at risk. It could not monetise debt, for the same reason. And it would soon find that sharply divergent tax and spending policies proved impossible to maintain, particularly as North Sea Oil revenues dried up. It would be forced to adopt fiscal policies compatible with those of its largest partner. If it tried to escape from this straitjacket with a large programme of debt-fnanced fiscal expansion, then unless growth was spectacular (which, pace Richard, seems unlikely) it would either be forced out of the union or end up in permanent debt peonage - as Greece knows all too well.
The lessons from the Eurozone are plain to see. It is hubris to believe that they would never happen here. They could, and they would. We must not go down that road.
Smith, Barnett and the wily Salmond - Pieria