Danny Alexander and George Osborne have raised what is perhaps the key issue from an economic perspective facing Scottish independence – what on earth would Scotland do about its currency?
Initially, Alex Salmond had favoured the euro for an independent Scotland, but unsurprisingly, support for this idea has plummeted as a result of the finacial crisis. Not many Scots would now welcome the euro, so Mr Salmond has been forced to shift his position and now advocates continued currency union with the rest of Britain, at least initially.
Yet if there is one thing that the single crisis has demonstrated beyond debate it is that you cannot have crisis free monetary union without matching fiscal union. Mr Salmond appears to have no convincing answer to this farely obvious flaw in his strategy. Nor has he even remotely begun to articulate how monetary union between two states operating independent fiscal policies would work. To have one country pursuing fiscal austerity while the other engages in the sort of fiscal expansionism favoured by the SNP would plainly be completely unsustainable.
Does Mr Salmond envisage putting his own representative on the Monetary Policy Committee to represent the Scottish voice in the policy debate (a similar arrangement, in other words, to that which exists with the European Central Bank, where all seventeen members of the euro are represented), or will he simply abide by decisions determined solely for the benefit of England, Wales and Northern Ireland? There are examples of countries that accept these latter arrangements – Panama uses the US dollar even though it has no influence on policy, and similarly, Kosovo uses the euro – but few of them are happy situations, and there tend to be quite idiosyncratic reasons behind them.
Monetary union between two fiscally sovereign states would eventually produce much the same problems as we've seen in the eurozone – a possibly quite severe divergence in competitiveness accompanied by a balance of payments and intra-union debt crisis. Indeed, it might well be that English regulators (for indeed they would be after separation) would be forced to impose controls on Scottish lending by UK banks to prevent just such a crisis developing, quite a challenge given that the two largest UK banks are Scottish domiciled.
In any case, it is pretty obvious that the SNP hasn't properly thought through these issues. In practice, an independent Scotland would have no option but to move rapidly towards adoption of the euro – a case of out of the frying pan into the fire if ever there was one – or it would have to start issuing its own currency, and very probably the latter given the strict rules that now exist on convergence before EU member states can join the euro. An independent Scottish currency is quite unlikely to command support among investors, making deficit funding problematic.
It is somewhat ironic that in "escaping" Britain, so as to be able to pursue fiscal policies free of Westminster control, Scotland would only be subjecting itself to ones determined in Berlin and Frankfurt instead. Monetary union implies ever closer fiscal union; there is no other way it can be made to work in the long term.
Freedom! Och Aye the noo.....
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Originally Posted by rvg
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