Scotland is set to vote next week on independence from the United Kingdom and a new poll gives the pro-independence supporters a small edge for the first time. What’s interesting, and perhaps tragic, about the growing preference for breaking free of Britain is the apparent dismissal of the economic consequences that may arise from independence. The macro risks are quite stark. In fact, we’ve had a real-world test that’s ongoing of just how bad things can get when a small economy is on its own with fiscal matters but remains tethered to a currency that’s controlled by another government. This could work out, but just ask officials in Spain or Greece–or the (unemployed) man on the street, for that matter–about the downside to a shared currency while shouldering any fiscal fallout and you’ll get an earful.
Yet its politics and national pride that seem to be in command. Economic lessons, which continue to unfold for all the wrong reasons via the Eurozone, seem to have dwindling influence. “I think we will make a better job of running the country ourselves rather than having decisions made by the UK government,â€Â says Scotland’s finance minister John Swinney. Although the risks of sharing a currency while shouldering fiscal independence are well known, particularly in the wake of the euro debacle, Swinney insists on going down this route, apparently blind or indifferent to history. Last month he insisted that Scotland remain in a currency union with Britain after independence. Otherwise, Scotland won’t pay its share of UK debt, which is valued at £100 billion–roughly 40% of Scotland’s economy.
This all sounds rather cavalier and dangerous given the empirical record on suboptimal currency unions. As Paul Krugman writes today in his New York Times column:
Everything that has happened in Europe since 2009 or so has demonstrated that sharing a currency without sharing a government is very dangerous. In economics jargon, fiscal and banking integration are essential elements of an optimum currency area. And an independent Scotland using Britain’s pound would be in even worse shape than euro countries, which at least have some say in how the European Central Bank is run.
I find it mind-boggling that Scotland would consider going down this path after all that has happened in the last few years. If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.
