The media consensus was that Alistair Darling scored a convincing win last week, in the first “televised” debate on Scottish independence. I’m not so sure. Yes, the Former Chancellor, now leading the Better Together campaign to keep Scotland in the UK, did well. Conversely, First Minister Alex Salmond, who’s spent a lifetime campaigning for independence, was often on the ropes. This was a surprise, given the SNP Leader’s usually razor-sharp debating skills.
Yet, with less than six weeks to go before Scotland votes, the ballot could still go either way. While Darling indeed appeared to fare better in the debate, a pair of Ipsos Mori polls found the No-vote remained static before and after the verbal tussle, while support for the pro-independence Yes-camp rose four percentage points to 40pc. A post-debate ICM poll put the two sides even closer, with 42pc signaling they’d vote to break-up the union, compared to 47pc against.
Salmond has a formidable track record of surging from behind to secure a late electoral victory. He did it in the Scottish parliamentary elections of 2007 and 2011 – and could do so again. Those who think next month’s referendum is a formality, and the 1707 Act of Union is safe, could be in for a shock.
I’m staunchly against Scottish independence. While the UK is four distinct countries, each with a proud identity, we’re one coherent nation. Cobbled together, in a form that somehow works, our patchwork island race has forged a rich and largely successful history. The Westminster village remains complacent, even more so after last Tuesday’s debate. The reality is, though, that over three centuries of history could soon be reversed in a single day.
Having said all that, there’s no doubt that Darling rather effectively exposed the Yes-camp’s failure to come up with convincing answers on fundamental questions relating to a newly-independent Scotland – particularly on the currency and central banking. Even if parts of the voting public didn’t clock such weakness as they watched, Salmond’s answers illustrate why independence would harm Scotland and even be dangerous for the rest of the UK too.
Among the political cognoscenti, at least, doubts over which currency an independent Scotland might use have become endemic. Salmond’s position is that, after having voted to leave the UK, Scotland would continue using sterling. Down at Westminster, meanwhile, the ruling Tories and Liberal Democrats, as well as Labour, categorically rule-out a formal euro-style currency union, under which countries share a common central bank.
This suggests we may end up, if Salmond does reverse the No-camp’s lead, seeing an informal currency union – with Scotland keeping the pound and buying sterling reserves on foreign exchange markets. Known as “dollarization”, it’s the way many developing countries piggyback America’s currency.
Repeatedly pressed on this issue by Darling, Salmond didn’t impress. If the UK isn’t prepared to grant a full currency union, he warned, an independent Scotland might not shoulder its share of Britain’s £1,400bn national debt. He then admitted, though, that eschewing debts “wouldn’t be reasonable” – which he’s forced to say, even though it undermines his bargaining position, as to do otherwise would hinder an independent Scotland’s ability to borrow.
Darling was then able to warn that an independent Scotland, having chosen to severe ties with the Bank of England, may not be able to bail-out its all-important banks during any new financial crisis. Such concerns were also highlighted in a report published last week by the National Institute for Economic and Social Research, one of the world’s most respected independent think tanks. Entitled “Scotland’s lender of last resort options,” the study concluded large Scottish banks may not qualify for bail-outs under independence. Without the official arrangement Scotland currently enjoys with the Bank of England, the Scottish banking system “would need a new lender of last resort”.
Darling picked at this weakness throughout the two-hour TV battle. “Had Scotland been independent at the time of the  financial crisis, it would have gone bust like Ireland and Iceland,” said the Former Chancellor. “Scotland would not have been able to deal with it, without the help of the rest of the UK”.
It’s a telling point, given Scotland’s extremely large financial services sector – and the notorious role played by Edinburgh-based institutions such as RBS. Back in April, the ratings agency S&P similarly warned it would be “challenging” for an independent Scotland to bail-out its banks – and with good reason.
The combined balance sheets of the UK’s banks amounts to a massive five times annual GDP. We have the most bloated banking sector of any major economy, making our public finances extremely vulnerable in the event of another ruinously expensive bail-out. An independent Scotland, though, would be even more financially top-heavy – with bank balance sheets totaling an astonishing 12 times national income. When Iceland’s banks crippled the entire country in the aftermath of the 2008 collapse, the equivalent figure was seven times.
That’s why, under independence, the UK’s financial authorities may require large Scots-based banks using sterling to relocate to the rest of the UK, according to NIESR. This loss of large chunks of its vital financial services sector – which drums up £11bn of business outside Scotland, accounting for 15pc of all exports – would then hit an independent Scotland’s balance of payments, prosperity and jobs.
Mayor of London Boris Johnson gave a powerful speech last week, as he launched a report by his Chief Economic Advisor Gerard Lyons, arguing that the UK shouldn’t be afraid of leaving the EU, if it can’t persuade Brussels to adopt significant market-friendly reforms. Since its 1999 conception, the single currency has become “an engine of mass job destruction”, Johnson noted. Average unemployment is 11.5pc across the 18-nation currency block. It’s over 25pc in Spain and Greece – and double that rate among youngsters. “Half a generation has been chucked on the scrap-heap for the sake of a misbegotten political project,” the London Mayor boomed. This is bang on the money.
Scottish independence – a political project, bestowing even more trappings of office on Edinburgh’s already cosseted political elite – feels similarly incoherent, another triumph of hubris over economic common sense. The euro has spread nothing but misery and economic dislocation. A Scottish Yes-vote on September 18 – followed by a half-in, half-out currency union – could do the same.
But there’s something else. My bigger fear is that while Scotland may become officially independent, it would still be viewed as UK-backed by global markets in the event of another crash. Could London really stand idly by if Scotland’s large commercial banks – some still with vast liabilities, and still unresolved off-balance-sheet losses – imploded, given the complex web of cultural and financial links between us? Of course not. The risk to the rest of the UK’s financial markets and credit-rating would be too great.
Scotland’s often rapacious financial services industry knows this only too well, and could become ever more reckless – especially if a newly emboldened independent Scottish government adopts a lax regulatory regime in a bid to “compete with London”.
An independent Scotland will keep using sterling whatever Westminster says, and its banks will continue to rely on a London-launched bailout – knowing it will come even if a formal currency union is denied. That’s why the entire UK should have a vote in this referendum, because the entire UK will have to rescue Scotland if its vast banking sector goes bust. That’s the biggest danger posed by Scottish independence, as I’ve said before – a massive moral McHazard.