Wednesday, 8 February 2012

Scottish Independence and putative rise in Haggis Country Risk: Fact or Fiction?

I mentioned slightly tongue in check whether the Scottish would-be independents are following the Euro crisis in my piece on the Implications of the Sovereign Debt Crisis in .

The National Institute Economic Review (NIESR) has come out with a review following which the three main rating agencies have echoed what might be best-described as “cautiously  cautious” rather than optimistic or pessimistic – no an independent Scotland would not immediately piggy-back on the UK’s Triple A status.

So does this mean Scotland risks being bunched more with Iceland than Norway? Far fetched.

There’ll be a lot of discussion about what a full-scale divorce from the UK would entail, not least in terms of the splits to the Defence Forces, but if the Soviet Union dissolution could be done in 1991 then political will will take care of this, if it goes that far….which I think nobody really expects. But worth thinking through the policy aspects and potential Country Risk aspects of which there’s been a good deal of hocus-pocus in the last week.

From an economic perspective, key points of interest:

1.       The political part of the political-economy will carry the greater weight in any final outcome and the degree of fiscal autonomy/independence the Scots vote for (depending on the questions..) AND not marginal concern about a potential rating – mentioned in the last couple of days on behalf of the 3 major rating agencies. Recall the IMF giving advice to the 3 Baltics in 1991 not to leave the Ruble zone….yet these countries did exactly that, dumping it for their own currencies and successfully so.

2.       Greater fiscal autonomy via independence will go hand-in-hand with monetary independence. The focus of the Scottish National Party has been to focus on the potential oil-manna and the implied fiscal boon. With their Calvinist tradition of tight money and history of puritan Scottish Banking (recent excesses aka RBS et all excluded) there is no reason why the Scots cannot make a good fist of this – even if there is a starting point of a national debt burden through pro-rata sharing of existing UK-wide liabilities….although the new Scottish Central Bank will want a slice of the Bank of England’s reserves no doubt that will mitigate this in part.

3.       Monetary Policy? Again, harking back to the experience of the Balts or other Soviet legacy States, in principle this should  not be a major concern in terms of the institutional or functional setup. 

4.       Yes there will be interesting questions about whether to peg to the UK pound, the Euro or “do a Montenegro” and have the Euro as the Scottish currency (unlikely), peg it (common model from the GCC to Hong Kong, vis-à-vis the US$), or have their own.  But again, these are secondary technical issues to the real political demand that often drives the drive toward total separation between States  - where it happens...

5.       Two and a half other issues of note going forward for any putative independent Scotland: Taken together, Scotland wouldn’t  have the economic independence of Norway …remember Norway is not an EU Member although it shares many of the advantages through a partnership arrangement with the EU through the European Economic Area…a sort of friendly merger of sorts between the EFTA group of nations that includes Iceland (now bidding to join the EU), Liechtenstein and Norway….that allows them to participate in the EU’s Internal Market but without full-fledged membership. 

a.       Within the EU, the increasing – German led – foisting of co-ordinated economic and fiscal policies will effectively constrain significant deviation of Scottish economic management
b.      A real exchange rate rise will be a given over the coming years which will very quickly translate into a massive surge in the wages of the non-tradeable sector and make the non hydro-carbon sector increasingly uncompetitive, lead to a massive property bubble and bring with it a different set of problems of demand management.
c.       The half point: Hmm would Scotland I wonder become a net payer into the EU Budget ?

    …so perhaps the real test for Scottish independence would be to go the full hog and seek exit from the EU but have a loose link with the EU in the same way Norway does through EFTA…

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