Scottish Independence, monetary union and the eurozone: keeping the pound

by George Hatjoullis

The Scottish independence referendum is fast approaching and the independence debate is beginning in earnest. Many claims are being made about what is and what is not possible. Some of these claims appear not well thought out. The recent experience of the eurozone provides one or two pertinent observations that the Scottish National Party might usefully heed.

There is no doubting Scotland’s distinct national,ethnic and cultural heritage. From this perspective independence makes sense. However, no doubt the Catalans in Spain and the Flemish in Belgium feel the same. This may be relevant to the claim that Scotland can leave the UK and retain membership of the EU (which apparently it wants to do). It would set an interesting precedent and the governments of Spain and Belgium might not be wholly accommodative. Even if they are, it is likely Scotland would need to reapply and this may take a while.

Much of the debate seems to be about what would happen to the BBC. Perhaps this is because the debate is largely taking place via the BBC. This also serves to distract the voter from some important issues. The most important is the question of keeping the pound (I confess that when I heard this I had a McEnroe moment). The proposal it seems is for an independent Scotland to retain the pound as its currency but achieve fiscal independence. The eurozone crisis has been caused by precisely this juxtaposition yet the SNP wish to replicate it!

Keeping the pound means remaining in a monetary union with the UK and having monetary policy determined by the Bank of England. This is the same relationship that the ECB has to the eurozone. What then would be the relationship between Scottish and UK (ex Scotland) fiscal policy? Fiscal independence has been progressively eliminated for member states of the eurozone in order to stop the monetary union from disintegrating. It is unlikely that the present arrangements are consistent with long-term stability within the eurozone and a federal fiscal structure is likely to emerge if the eurozone is to survive. In short, monetary union with independent fiscal policy is not a stable situation. Scottish independence with the pound is a nonsense.

Ultimately, the EU and the eurozone must become one and the same. If the eurozone is to survive it must become ever more integrated and take over the institutions of the EU to serve its needs. The non-EU countries will become progressively marginalised and either join EMU or leave the EU. If an independent Scotland plans to join the EU and stay within it, it will ultimately join an increasingly federal eurozone. It will be leaving one union and joining another. It will be no more independent than it is now but will be subject to an even more distant elected body in which it will have even less influence.

It is not difficult to see why Scottish Independence has such appeal given the tortuous history between England and Scotland. However, it is unwise to let emotion cloud judgement on such an important issue. If Scotland truly wants independence it should look to the Norway example; leave the EU and establish its own currency. Otherwise it is better off staying within the UK and negotiating more power for the Scottish parliament. Ironically, the strongest argument for Scottish independence would be if the UK voted to leave the EU and Scotland wished to stay within the EU.