What are the consequences for the debate about Scottish independence of a Greek exit from the eurozone? No one knows what will happen if Greece leaves. Some economists are predicting something approaching Armageddon, others are more moderate, but it is likely that the whole European economy including Britain's is heading into very difficult times. At times when I read the business sections of the papers, I begin to wonder what on earth we are doing in Scotland debating arcane constitutional matters. I'm as interested in the debate about independence as the next Scot and I'm passionate about Scotland remaining in the UK. But really it's as if Rhode Island decided to clamour for independence a week after the Wall Street crash.
Given that we are heading into still more turbulent waters, is this the time to jump ship and try to set sail on our own? Even if independence were a good idea in principle, which it is not, it would be a bad idea at present, because times are just too uncertain. What are the possible scenarios facing the Eurozone and what consequences do they have for Scotland? Fundamentally there are two choices for the Eurozone. Either it breaks up into sovereign currencies or it becomes something akin to a full blown fiscal union with transfers from the rich regions to the poor regions. This second option would be akin to a United States of Europe.
What have we learned from the whole crisis that has been unfolding for the past two years? Just this, that monetary union requires fiscal union. Fiscal union is what the UK has and what the Eurozone lacks. Now, Mr Salmond wants Scotland to become independent, but to retain the pound. What he wants therefore is the situation which exists at present in the Eurozone. He wants monetary union with the rest of the UK, but not fiscal union. But this is just this position which has lead to the chaos in the Eurozone. The tensions which exist in the Eurozone could equally arise in this new Sterling zone, which would no longer be a fiscal union. The outcome would be the same. Either Scotland would need to recreate the fiscal union with the rest of the UK, which would in effect mean a return to being a part of the UK, or it would have to leave the Sterling zone in order to set up its own currency, call them New Scottish Pounds. These new Scottish pounds would fall relative to Sterling, just as the New Greek Drachma will fall relative to the Euro if Greece is forced out. What I would like to ask my fellow Scots is this. Do you want your savings, your house, and your other property to be redenominated into a devalued currency? If you don't want this, even as a possibility, you must vote against independence.
Let's imagine another alternative. The Eurozone may choose to become a fiscal union and this may work. Personally I doubt that they have what is necessary for a successful fiscal union, such as a common language, a common culture, sufficiently similar economies etc. But be that as it may, with enough will and determination the Eurozone may continue as a fiscal union. Scotland could choose to join. But then really once more this so called independence becomes nothing of the sort. Scotland would be a state in the United States of Europe and would be no more independent than Rhode Island.
The logic of economics suggests that the only way Scotland could be truly independent is to set up its own currency, with its own central bank. This is the model which nearly all recently independent countries such as Latvia, Ukraine and Lithuania, have followed. But doing so, of course, would entail the risk of devaluation to our currency, and would mean that in the event of another crisis Scotland would be the lender of last resort. But if that had been the case in 2008, Scotland would have been bankrupted by RBS and HBOS and would have had to resort to the IMF. Anyone who thinks that there is no risk of further crises in the coming years understands nothing of economics.
Just a final thought. In the storms that are going to batter us in the months and years ahead. Where would you rather be? In HMS Great Britain or in the good ship Braveheart setting off on her maiden voyage with Captain Salmond at the helm.
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The Scottish independence referendum will be in 2014. I'm campaigning for Scotland to remain in the United Kingdom, by means of a regular blog exploring all of the issues involved. Please come and join the debate by clicking on the above link.
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