Post-independent Scotland’s use of British pound is ‘recipe for disaster’ – Paul Krugman
In an opinion piece published in The New York Times, Krugman, a Stanford and MIT professor whose research currently focuses on currency and economic crises, warned Scottish voters should “be very afraid” if Scotland becomes an independent state.
He says that comparisons between Canada and Scotland, which have surfaced in pro-independence rhetoric, are unhelpful. Scotland, like Canada, has a relatively small economy and conducts most of its trade with a larger neighbor. Both countries are also generally less conservative than their British and American counterparts. Krugman argues, however, that the similarities between the two cease at this point.
The US economist says Canada has its own currency – a measure which ensures its economic sovereignty would remain intact should a financial crisis emerge. In trying economic tides, Canada’s control over its currency ensures it “can’t run out of money," and can "bail out its own banks if necessary,” he said.
While Scotland could potentially forge its own currency, such an economic policy would likely be fraught with difficulty, Krugman suggests. Because the Scottish economy is more tightly integrated with Britain’s than Canada’s is with America's, he insists the maintenance of a Scottish currency would prove arduous.
The Scottish Independence movement, headed by Scottish First Minister Alex Salmond, has confirmed its desire to keep the British pound as the Scots’ national currency. But if independence is secured, this combination of political sovereignty and a “shared currency” will yield catastrophe, Krugman says.
In an effort to explain the peril Scots would face in such a scenario, Krugman, who was awarded a Nobel Prize for economics in 2008, drew on the “cautionary tale” of Spain. If Spain, a nation that sacrificed its currency to embrace the Euro, was partaking in a real federal system the fiscal burden of its housing crash would not have been shouldered by the Spanish state, but at a more central European level, Krugman said.
Rather, Spain suffered immeasurably as its populace and welfare system bore the brunt of the nation’s devastating economic crash. The result was a deep depression, soaring unemployment and punitive austerity measures in the face of bailed-out banks.
Krugman argues that Spain is but one of many EU states that suffered this fate. In the case of Ireland, Irish citizens shouldered approximately 42 percent of the entire Eurozone crisis bank debt.
The Eurozone crisis and its lingering legacy of unyielding austerity, high levels of unemployment, and slow economic growth exemplify the dangers of “sharing a currency without sharing a government,” the US economist warns.
In the event of an economic crisis, “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,” he argues.
He added it was “mind-boggling that Scotland would consider going down this path after all that has happened in the last few years,” stressing that “if Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.”
While previously many critics and analysts believed a majority of Scotland’s populace would vote to remain within the United Kingdom on September 18, a YouGov poll released on Sunday revealed the Yes side was leading for the first time since the campaign was launched.
As support for Scottish independence gathers momentum, many economists counter Krugman’s perspective, emphasizing the relative strength of Scotland’s position. James Meadway, an economist based at the New Economics Foundation (NEF), recently suggested that Scottish independence would hinder the UK more than Scotland, given oil reserves located in the North Sea are vital in mitigating Britain’s ongoing deficit issues.
“Should an independent Scotland claim, under international law, its fair share of North Sea oil, these export revenues will no longer appear on the UK’s balance of trade. Over the last year, the loss of North Sea oil would have bumped our current account deficit from 4.4% of GDP, to just under 7%”, he argues.
Meadway emphasizes Britain’s financial center “clearly believes Scotland is necessary to prop up the [UK’s] economic status quo,” and stresses that “the Scottish referendum is an opportunity for the whole UK to force open a debate about our hideously imbalanced economy: its failure to create decent jobs, its hopeless dependency on debt, and above all the damaging impact of the City of London.”
The surge in support for Scotland’s pro-independence campaign has rattled both the City of London and global financial markets, prompting a 3.5 percent slump in the value of the pound over the past four weeks.