Scottish independence in an interdependent world: New evidence
Andrew Hughes Hallett 20 June 2014
The UK and Scottish governments are engaged in a set of parallel and overlapping games in the economic and political arenas. This column presents research that analyses how decisions about whether to cooperate over financial regulation, fiscal rules, and the choice of currency and monetary policy, will all have far reaching implications for a newly independent Scotland and the rest of the UK.
Any economy must have a policy framework designed to manage the three basic macroeconomic imbalances:
- The private financing (savings-investment) gap;
- The public spending-revenues (fiscal) gap; and
- The foreign financing (trade) gap.
These imbalances imply a need for financial regulation, fiscal rules, and a currency/monetary policy choice, respectively. A newly independent Scotland would be no exception.
Europe's nations and regions Monetary policy
monetary independence, currency union, Scotland, Scottish independence
A well-designed sterling union will be needed if Scotland votes for independence
Oliver Harvey, George Saravelos 28 May 2014
Much ink has been spilled over Scotland’s currency options in the event of independence. This column argues that a breakup of the sterling area would be truly unprecedented. The sterling union is unique because it services a unitary state with a highly integrated and complex financial sector, an indivisible payments system, and an overlapping legal system. Politics aside, neither a unilateral nor a mutual break-up would be credible, leaving a negotiated currency union as the only option. However, as the Eurozone crisis demonstrates, a badly designed currency union could be exceptionally costly.
The currency options of an independent Scotland have become a crucial point of contention for both sides ahead of the September 2014 referendum. However, the debate has so far focused on the suitability of different regimes based on the optimal currency area framework or fiscal implications (Armstrong 2013). There has been little focus on the practical issues involved. This is problematic because a breakup of the sterling area would be historically unprecedented and uniquely complex.
Europe's nations and regions Monetary policy
monetary independence, currency union, Bank of England, Currency unions, Scotland, sterling, Scottish independence
Moving closer? Changing patterns of labour mobility in Europe and the US
Mai Dao, Davide Furceri, Prakash Loungani 01 December 2013
Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism.
On 21 September 1992, four famous professors – Olivier Blanchard, Rudi Dornbusch, Stan Fischer, and Paul Krugman – took part in a panel discussion at MIT on the merits of the proposed European currency union. Echoing a view common among US-based academics at the time, all four agreed, according to a record of the event, that “a common European currency would have unfavourable economic repercussions.” Blanchard noted that “currency unification works in the US because labour can move between states. The labour mobility in Europe is negligible.”
eurozone, euro, currency union, labour mobility
Why a collapse of the Eurozone must be avoided
Anders Åslund 21 August 2012
It has become increasingly fashionable to talk about Europe without the euro. But this column points out that in the last century Europe has seen the collapse of three multi-nation currency zones: the Habsburg Empire, the Soviet Union, and Yugoslavia – and they all ended with disastrous hyperinflation. The lesson for the Eurozone is clear: avoid break up at almost any cost.
Articles on a possible breakup of Eurozone either see it as a mere devaluation (Lachman 2010, Roubini 2011) or reckon that its collapse would amount to a major economic disaster (Buiter 2011, Cliffe et al. 2010, Normand and Sandilya 2011). It seems the latter is more likely. Large imbalances have accumulated between southern debtor countries and northern creditor countries. Any capping of these balances would disrupt the payments mechanism between the Eurozone countries and impede all economic activity (Åslund 2012).
EU policies Europe's nations and regions
Habsburg Empire, currency union, Soviet Union, Eurozone crisis, Yugoslavia
Managing a fragile Eurozone
Paul De Grauwe 10 May 2011
Why does the Spanish government pay significantly more to borrow than the UK government – despite having a smaller deficit and lower overall debt? This column argues that the reason lies in the Eurozone’s fragility. Its members lose their ability to issue debt in a currency over which they have full control. The column discusses ways to deal with this weakness.
A monetary union is more than just a single currency and a single central bank. Countries that join a monetary union lose more than one instrument of economic policy. They lose their capacity to issue debt in a currency over which they have full control.
This separation of decisions – debt issuance on the one hand and monetary control on the other – creates a critical vulnerability; a loss of market confidence can unleash a self-fulfilling spiral that drives the country into default (see Kopf 2011). The economic logic of this is straightforward.
EU policies International finance
currency union, Eurozone crisis
The macroeconomic costs and benefits of the Economic and Monetary Union
Roel Beetsma, Massimo Giuliodori 27 November 2009
Currency unions strip national governments of a macroeconomic policy instrument. What do they get in return? This column says the European Economic and Monetary Union has eliminated incentives for competitive devaluations and enhanced inflation credibility. But monetary union may necessitate fiscal coordination and discipline.
More than ten years since its start, the costs and benefits of the Economic and Monetary Union (EMU) in Europe continue to be debated. “Technically”, the EMU has been a success. There have been no disruptions in the financial markets as a result of the monetary unification, nor has there been economic chaos otherwise. The euro is accepted everywhere Overall, the ECB has fulfilled its obligations by keeping the area-wide inflation rate close to its target. However, the union has had to withstand substantial divergences in the business cycles of its member states.
EMU, currency union, fiscal policy
Why have currency unions dissolved? A test of optimum currency area theory
Andrew K Rose 06 February 2008
Since World War II, economies have exited currency unions at an average rate of one per year. Yet the evidence confounds established theory: economists are unable to predict which economies are likely to leave currency unions.
The euro’s success has piqued the world’s interest in currency unions. The Gulf Cooperation Council is planning to establish one by 2010, the South African Development Community by 2018 and plans for an Asian currency union have circulated for years. Peter Kenen and Ellen Meade have a new book that surveys the prospects for regional monetary integration around the globe.1
Global economy Monetary policy
euro, EMU, monetary independence, currency union, membership