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 http://rupinder-econ.blogspot.com/2012/01/psi-budget-commissioner-for-greece.html .
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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