Why Angry Birds Don’t Negotiate

The Westminster parties have made a lot of noise about ruling out a currency union with an Independent Scotland, but their economic position has been dismantled, and makes no political sense. They are really seeking to distract from that which could destroy them: a detailed examination of the UK’s national debt.

When Alex Salmond recently described George Osborne’s “Sermon on the Pound” as a “divebombing”, his language was descriptive of a distraction technique which will be familiar to anyone interested in the natural sciences.

Have you ever been for a relaxing walk through the countryside in Spring, only to suddenly find yourself being attacked from above by a shrieking, angry bird? This is a behaviour common to many species called “swooping”. The squawking, flapping and (sometimes) pecking is designed as a warning and a distraction. Birds engaging in it are signalling the fact that you have strayed too close to their nest.

It may seem like a pretty crazy strategy for a small bird to attack a fully grown human, kamikaze style. On the face of it, they wouldn’t have much chance of winning if it came to a fight. Their strategy, though, is to distract you so aggressively that a fight never takes place.

In evolutionary (and game theory) terms, this behaviour makes perfect sense. If you discover their nest, the angry birds may not breed again this season. With no guarantee of surviving the Winter, loss of their young could spell the end of their lineage. They have nothing else to offer you to eat, except themselves, and if they die, their offspring die too. Natural selection rewards the angry birds that attack, precisely because all of their eggs are (literally) in one nest, and they have nothing else to lose. They are making a lot of noise to distract you from the weakness of their position.

Discussion about negotiation of the UK’s assets and liabilities has provoked a lot of shrieking and flapping from Westminster. Not one, but three angry birds appeared at once, squawking “No Currency Union”. The Permanent Secretary to the Treasury joined in, ignoring rules on political neutrality to do so. Soon they were joined by Alistair Darling. Then the mainstream UK media jumped on the bandwagon and parroted “What’s plan B?” in unison.

The Three Chancellors have claimed that a currency union with an Independent Scotland is impossible, relying solely on the advice of the Permanent Secretary to the Treasury, Old Etonian Sir Nicholas Macpherson. That advice was dismissed as political by the Scottish Fiscal Commission Working Group, which contains no fewer than 2 Nobel Laureates in Economics. This week it was systematically dismantled by world-renowned and independent economist Professor Leslie Young.

If the economic position of the angry birds doesn’t make sense, their political stance seems even crazier. Why would the NO campaign risk sending a despised Tory Chancellor to Edinburgh, a move almost guaranteed to provoke a political backlash? And why would the Labour party risk a toxic association with the Tory party in Scotland: an association that has already all but destroyed the Liberal Democrats’ electoral chances north of the border?

If politicians with as little mutual respect as Osborne, Alexander and Balls, line up and scream about currency union, when a YES vote gets too close for comfort, we need to ask, from what are they actually attempting to distract us?  The Westminster Parties’ strategy for negotiation, is to rule out negotiations so emphatically, that they never occur. So why is it that they don’t want to negotiate?

To answer that question it is insightful to consider one of the arguments the three amigos put forward against currency union: comparisons with the Eurozone. They have claimed that currency union without political union is inherently unstable, citing the example of Greece versus Germany in the Euro. The Fiscal Commission Working Group and Professor Young have dismissed this idea, pointing out the much greater alignment and integration of the Scottish and UK economies.

There is, however, one sense in which the Westminster parties are being honest about learning lessons from the Eurozone. Greece’s problems were not just caused by misalignment, but also in large part by downright dishonesty about their borrowing. This would not be possible for Scotland in a potential Sterling Zone. At the outset, Scotland’s debt would be known to the nearest penny, having been agreed by negotiation. Watertight measures could then be put in place to track any additional borrowing, so that the actual fiscal position of Scotland was known at all times. What is not so clear, is if the same could be said about the UK’s finances.

In Greece, in 2001, a leftwing government blatantly lied to the EU about its fiscal position, to gain entry to the Euro, and access to cheap credit. In March 2004, they were succeeded by a right wing government, who realised the country’s finances were in a dire state, but initially covered them up, so as to avoid riots on the streets of the capital during the upcoming Olympics. The cost of those games then spiralled out of control. Now complicit in the lie, they made a limited disclosure of the problems, to justify the introduction of apparently brutal austerity measures, but concealed the true extent of their borrowing, to maintain access to cheap credit while trying to fix the problems. It was only 5 years later, under a subsequent socialist administration, when the government became unable to finance its debts in the bond markets, that the EU sent in auditors as part of a rescue package, and the true scale of the problems was exposed.

You can be forgiven for thinking this scenario sounds terrifyingly familiar.

What the Westminster establishment have actually learned from the Eurozone experience, is that independent countries with large concealed debts in currency unions, eventually have to open their books to independent audit, and when they do so, the price of their credit can spiral out of control.

A YES vote in the referendum would trigger negotiations, in which the assets and liabilities of the UK will be put under a microscope. The UK government will be placed in the hopeless position of having to decide how to respond to the Scottish Government’s fair and reasonable offer to take on a fair share of the UK’s national debt, in return for a fair share of its assets. One would assume the UK would wish the debt to be shared. Refusing to negotiate, and assuming responsibility for all of the debt, will seem reckless and spiteful, and trigger questions in bond markets about the UK government’s motivations. But if they do negotiate, the UK government will be compelled to expose every brass farthing of its debt, in order to offload as much of it as possible. The Scottish Government will also reasonably insist on an independent audit of the UK treasury’s books, to ensure they are being dealt with fairly.

None of this would pose a problem for the UK government, unless its fiscal position is even worse than it is currently letting on. So what is the evidence for that?

We already know about the £1.6 trillion in national debt that the UK is set to run up by 2016/17. Additionally, in 2012, the Office for National Statistics (ONS) estimated unfunded public pension liabilities at £4.7 trillion. Estimates of the cost of repaying Private Finance Initiative (PFI) loans range from £50 billion to £300 billion. We could also include Help to Buy loan guarantees on £130 billion of mortgages. With the NHS running in a state of financial crisis, it also seems likely that at least several billion pounds in shortfalls are secreted away in its local budgets. So, even on the basis of the UK government’s own figures, it seems that the actual scale of the UK’s liabilities is in the region of £6 trillion to £7 trillion – about 4 times the headline figure.

Then of course, there is RBS, the gift that keeps on giving. RBS recently announced another “surprise” loss of £8.2 billion, bringing total losses to £46 billion. In interview, CEO Ross McEwan stated little more than a hope that the bank might break even in 2 to 3 years time. This seems highly irregular. In a modern bank with electronic accounting systems, the investments of RBS must be truly opaque and toxic, if 6 years into public ownership, they are unable even to state best and worst case scenarios for their financial position. It seems highly unlikely that we are being told the whole story.

I have an uneasy feeling that the real reason for the united Westminster front against currency union, is that the future of the UK economy, and the careers and historical reputations of the politicians and civil servants who wrecked it, is teetering in the balance. Like the parties in Greece, those in Westminster are all now complicit in the same deceit, desperately trying to keep the wheels on the bus, and fix the underlying deficit while benefitting from cheap credit. They all know this, but cannot acknowledge it, because if the truth were appreciated, the cost of UK debt would leap up, and the whole UK economy could go into a death spiral. Then Osborne, Alexander, Balls, Darling and Macpherson would all be gone for good, quite possibly along with the parties and the system that spawned them.

Like angry birds whose eggs are all in the same nest, the Three Chancellors are tied to the same all-or-nothing fate, and now have no choice but to shriek and squawk all the way to September 18th, in the hope that nobody calls their desperate bluff.

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