In the sterling zone
The received wisdom is wrong. Europe doesn’t lack a functioning multi-country currency, fiscal and banking union. But it’s in the United Kingdom, not the euro zone – and Scotland ’s government is keen to break it up.
The Scottish finance secretary said that an independent Scotland – the goal of his Scottish Nationalist Party – would continue to use the pound sterling as its currency. It even wants UK regulators to watch over Scottish banks, although Scotland would no longer be in fiscal union with the UK. It all sounds alarmingly like the euro zone.
The zone is in crisis because it has a common currency, but disparate budgetary positions and no adequate cross-country system to support its banks. A more integrated zone would have fiscal transfers moving between countries and a full banking union – as the UK has long had.
The British system has not served Scotland badly, though it is true that Scotland, just like the rest of the UK, has innumerable problems which might be handled better. Scotland’s desire to govern itself is fully understandable. Devolution makes sense. But to abandon tried and tested currency and fiscal arrangements and experiment is dangerous, as the euro zone shows.
Perhaps Scotland’s leaders see things differently. Spanish banks might go bust but there could never be a Royal Bankia of Scotland, could there? But in fact the 45.5 billion or so pounds required to shore up the Edinburgh-based Royal Bank of Scotland in 2008 comes to 8,750 pounds from every Scottish man, woman and child. Scotland, like a less volcanic Iceland, has a relatively small population and a large financial sector. The two do not go together well.
Small countries can be buffeted by markets, even if their banks lack Icelandic pretensions. An independent Scotland would risk dependency on oil revenue that is in secular decline and an oil price that has been high in recent years but might easily plunge. It’s all too easy to imagine a euro-style crisis of confidence.
The UK ’s economic union has survived the test of centuries. The euro zone’s incomplete one is struggling to reach adolescence. Scotland ought to keep that in mind.