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The Disastrous Economics of Scottish Independence

Political commentators are still spellbound by the amazing success of the Scottish National Party (SNP) in the recent British election, when it took 56 of the country’s 59 Parliamentary seats. Suddenly, independence is back on the political agenda, and a second independence referendum is possible in the next couple of years. Whatever you may think about this prospect in the abstract, though, we can certainly agree on the simple fact that the current SNP leadership is utterly unqualified to lead such a venture. If independence were to be achieved in the next four or five years, the new state would soon come to envy more successful smaller European countries, such as Greece.

We can illustrate this from many points of view, but let us take one issue above all, namely the currency. The SNP has no idea what it is doing, or the risks it is running. Worse, nor does it seem to care.

During a debate in the referendum campaign last fall, then-SNP leader Alex Salmond was asked simply what currency an independent Scotland would have. That would be no problem, he said. We would carry on using the pound, together with the rest of the United Kingdom, and we would share control of a central bank. Absolutely not, said his unionist opponent. Every British political party has made it starkly clear that they would never accept such an outcome. By the way, that was last year, when the rest of Britain was feeling much less aggrieved than it is now by the SNP’s general demagoguery and hate campaigns.

So, given that the shared pound is not a starter, asked his critics, what was Salmond’s Plan B? Repeated questioning failed to shift Salmond at this point, demonstrating to all but his most unyielding supporters that there was no Plan B, and that the SNP had never even thought through the currency issue. That might have been the single moment at which the referendum campaign was lost. Salmond resigned as SNP leader after that debacle, but he has been very visible in recent days, repeating the familiar claims and boasts.

Fortunately, Scotland never had to confront the consequences of this insanity, but let us assume that, after the recent elections, they do become independent. What about the currency?

In the referendum debates, Salmond’s next option was a threat, something at which the SNP is expert. If the United Kingdom refused to share the pound, he said, then the new Scotland would refuse to pay its share of the national debt. The problem there is that an independent Scotland would begin its career as a nation in default, unable to raise credit even for its existing commitments, never mind covering the expense of the ever-expanding welfare state promised by Salmond’s party. The likely consequence would be social collapse and mass unemployment. Presumably English and European aid would prevent actual food riots.

There are indeed other options. Scotland could, if it wished, keep on using the pound without English consent, in the same way that countries like Panama use the U.S. dollar.

Sterlingization is possible, and England could not prevent it. But the only way to Sterlingize is to cut public spending enough to generate sufficient amounts of the master currency. Scotland, as I say, is a very generous welfare state, and has ambitions to become even more so. Thus, see my remarks earlier about the prospects for social collapse and civil disorder. And why Scotland would want to give control of its economy to a foreign central bank is a master of some mystery. Moreover, the fact that Scotland’s currency would not be under the control of any central bank of its own automatically closes the door on possible membership in the European Union.

Ah yes, the European Union. All SNP rhetoric is founded on the principle of a close and continuing link with Europe, and EU membership. In the referendum campaign, though, European officials made it clear that any breakup of the existing UK would preserve the continuing membership of the London government, while the new Scotland would be forced to apply for membership afresh. That opens multiple cans of worms. No solution for Scotland, whether political or economic, is possible without full and early EU membership. But the application process can take years or decades, and is only possible if no existing state raises difficulties. It is very much in the interests of some countries–Spain and Belgium, notably–to avoid giving the slightest encouragement to potential secessionists on their own territory, and they would likely oppose or delay Scottish aspirations. For several years, at least, Scotland would be outside all European trading blocs.

Even if Scotland did jump those complex hurdles, the EU is quite clear that any new member is strictly required to accept the Euro as its currency. That solves the currency issue neatly, but it also means that Scotland would be forced to accept all the EU’s stringent rules about public expenditure and debt. Hard though this may be for Scots to believe presently, the English would no longer be subsidizing their welfare systems with their present generosity. Again we see the fundamental dilemma that would suddenly become the central issue in Scottish politics, whether to accept huge social spending cuts, or national bankruptcy.

Scotland does have a serious alternative to all these nightmare scenarios. Accept independence outside Europe, and set up an autonomous currency under its own central bank–call it the Scottish Dollar. The currency would take years to establish, and when it did come fully into operation, it would be a very risky venture. Norway manages to stay outside the EU with its own currency, but it has immensely more oil reserves than the Scots could ever dream of. This policy would mean decades of penury for the new Scotland, but it would mean authentic independence. Why they would want that is a question of emotions and rhetoric, not economics.

Or maybe–just maybe–Scotland could enter a political and currency union with its large neighbor to the south, which is already a major European player, and which currently donates disproportionately to the Scottish economy! No, I’m sorry, that’s just too absurd to be contemplated.

Philip Jenkins is the author of The Many Faces of Christ: The Thousand Year Story of the Survival and Influence of the Lost Gospels [1] (Basic Books, forthcoming Fall 2015). He is distinguished professor of history at Baylor University and serves as co-director for the Program on Historical Studies of Religion in the Institute for Studies of Religion.

16 Comments (Open | Close)

16 Comments To "The Disastrous Economics of Scottish Independence"

#1 Comment By EliteCommInc, On May 20, 2015 @ 6:01 am

I agree one of the single most important factors for any nation seeking indendence is how it will estanlish and sustain it’s economy.

The Scotts woud do well to review the process of former British and other European colonies and how they fared when the soul cause was independence.

Despite the sophsitication of modern Scottland and it’s long years of experience as a modern society in the modern economy, success is dependent on its ability to establish and or maintain a functioning economy.

It, the economy, is the achilles heel of any nation state.

#2 Comment By Buzz Baldrin On May 20, 2015 @ 8:59 am

Ever hear of BRICs, Vladimir Putin or the Chinese Development Bank, Mr. Jenkins?

Many vacuum fillers out there for Scotland.

If Scotland doesn’t want to lease Atlantic ports to a rising Eastern navy, Scotland can float the digital currency, the Iceland anti-bankster and the Clinton Foundation donation options.

#3 Comment By Johann On May 20, 2015 @ 9:33 am

I disagree with the premise that an independent Scotland could not still use the pound as its currency whether England liked it or not. Many countries have used the dollar as their currency for example. I don’t mean pegging their own currency to the dollar, but actually making the dollar as their currency. And then some have multiple currencies like their own as well as the dollar.

#4 Comment By Wesley On May 20, 2015 @ 10:09 am

The currency issue is important, but it’s minor compared to the real issue with an independent Scotland. It would have the ugliest Capitol building in the world.

#5 Comment By Colorado Jack On May 20, 2015 @ 10:40 am

“If the United Kingdom refused to share the pound, he said, then the new Scotland would refuse to pay its share of the national debt. The problem there is that an independent Scotland would begin its career as a nation in default”

Seem tendentious. The rump United Kingdom would have to pay 100% if the debt, or it would definitely be in default, with serious consequences. If it went crazy and refused to pay a portion, why should an independent Scotland be liable for that portion? There are precedents. For example, when Lithuania declared independence, I don’t recall that it regarded itself as responsible for one ruble of the Russian debt.

The UK public debt amounts to something like 25,000 pounds per capita. Getting out from under that would put Scotland in a pretty good position.

#6 Comment By Duine Eile On May 20, 2015 @ 10:40 am

“Scotland would begin its career as a nation in default, unable to raise credit even for its existing commitments.”

Bonds issued by a debt-free Scotland? Sign me up! Especially if they pay an above-market return. Right now, I’m earning 4% at best in American muni’s. Please, bring on the Scottish Dollar!

Having written about the financial crisis for years, it is abundantly clear to me that 99% of the population, including professional columnists, politicians and academics have very little understanding of how markets and currencies actually work. Mr. Jenkins here thinks he’s made an argument here, but he hasn’t. All he’s done is invoke some “scary” scenarios with zero facts to support them.

Even if Scottish threats didn’t work (and I think they would, despite current bluffing from the UK and EU), there is no good reason that floating their own currency wouldn’t work. There may be a higher interest rate to be paid initially, but smart money would pile into Scottish bonds so fast as to make your head spin.

By the way, these same sorts of fear-mongering regarding the currency were used by 19th-century Unionists who opposed Home Rule for Ireland. Some things never change.

#7 Comment By Cliff On May 20, 2015 @ 2:37 pm

Following the parliamentary election result, I’m sure the Tories would be happy to see Scotland go. Without Scotland, their majority would be enormous.

#8 Comment By Steven Morton On May 20, 2015 @ 2:45 pm

To say that the English government donates disproportionately shows your complete lack of knowledge in this matter. If you actually looked at proper Tax receipts you would see that it is the other way round. people utilise stats and numbers for their own agendas but Tax Receipts do not lie. Scotland contributes more to the Union than it receives back, fact. It has done so on the majority of the last 100 years and only had a negative contribution when oil was its historic low of $30 a barrel. Try using some actual facts and not propaganda based stats that the main stream media have been using to drive fear into the public for many years. Also, you infer that it is the Scottish “nationalists” that are the fear mongers. This could not be more wrong. The current WM establishment and conservative funded/owned MSM are the fear mongers.

#9 Comment By philadelphialawyer On May 20, 2015 @ 4:24 pm

Yeah, independence is always impossible, until it happens!

#10 Comment By EliteCommInc. On May 20, 2015 @ 10:05 pm

“By the way, these same sorts of fear-mongering regarding the currency were used by 19th-century Unionists who opposed Home Rule for Ireland. Some things never change.”

I have but one response to this,

Ireland

#11 Comment By Markus B On May 21, 2015 @ 2:55 am

Scotland already has it’s own legal system, education sydtem, legislature, public services and government.

It’s GDP per capita is 99% of the UK average (excluding oil) It can comfortably afford independence, if it wants it.

Britain was established by international treaty between England and Scotland. Should that treaty be dissolved, then so does Britain.

#12 Comment By EU national On May 21, 2015 @ 7:34 am

None of the arguments made by the author hold up.There is no question that the EU would accept Scotland as a member, it is far better off than many if not most member states. Equally, it is entirely possible that vast sectors of the London financial sector could move to Edinburgh to ensure staying within the EU- which is by no means a given for England. They would lobby for allowing Scotland to keep the pound. If excluded from the pound it is clear that no nation would assume debt if not allowed to use the currency. As for default, Scotland would look very attractive to lenders for the very reason of its default, a debtless country. After all the default would have been caused by Westminister not Scottish policies.

#13 Comment By EngineerScotty On May 21, 2015 @ 4:46 pm

An interesting question:

Much of this assumes that Scotland would possess British oilfields off of its coast.

What if London refused to yield these, taking the position that they are UK possessions, and territories leaving the UK are not entitled to claim a share of offshore resources (particularly if they are not willing to claim a share of public debt)?

Or the military, in general? Do any military assets have a reporting chain through Edinburgh?

I don’t have a strong opinion on Scottish independence, mind you–but there are other thorny questions beyond the question of currency.

#14 Comment By sean On May 22, 2015 @ 11:33 am

I agree with much of what the author says but for many new countries, economics tends to take a back seat. One economist told David Ben-Gurion the creation of the state of Israel would violate all the rules of economics. Ben-Gurion replied “Okay then, we’ll just repeal the laws.” Nationalism can be funny that way.

#15 Comment By Michael Follon On May 23, 2015 @ 3:48 pm

‘We can illustrate this from many points of view, but let us take one issue above all, namely the currency. The SNP has no idea what it is doing, or the risks it is running. Worse, nor does it seem to care.’

Oh really. The SNP has existed for over 81 years and a lot has been learned. Philip Jenkins really needs to do some detailed research on the subjects of Scottish independence and the precise nature of the United Kingdom. Until he does and compares what he thinks he knows with actual facts I can only give him this bit of advice –

“Just remember, especially in politics, that people who make statements as facts without knowing what they are talking about are just opening their mouth and letting their belly rumble.”

By the way in the recent General Election in the United Kingdom SNP Members of Parliament were elected from 56 of the 59 electoral constituencies (districts) in Scotland which are represented in the Parliament of the United Kingdom.

N.B. I have been an active member of the SNP for over 40 years.

#16 Comment By cecelia On June 5, 2015 @ 11:08 pm

Ireland became independent under very much more difficult economic circumstances yet they eventually did fine (and yes – they did fine).

The Irish barely had a functioning economy – Scotland has a vibrant economy now. The Irish had to pay the UK for the money owed re: land reform and the UK engaged in a tariff war with Ireland – Scotland will hopefully not have to endure such from the UK. Oh yeah – and there was a world wide depression when Ireland became independent. No one can deny now that the Irish have higher living standards – much higher – than they did before independence.

This is scare mongering – the Scots can if they wish make it on their own.