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Currency Unions and Political Disunions

Why would Scotland seek an independent government but remain tied to a foreign currency?
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One of the strongest practical arguments against Scottish independence, made by Paul Krugman this weekend, is that an independent Scotland would actually wind up with less control over its economy than it does now – because it would have no more say in British monetary policy, but, so long as it kept the pound, would be as affected by that policy as it is now. And the “yes” advocates have been very clear that they intend to keep the pound.

I think he’s right. I’ve argued for some time that if anyone is interested in saving “Europe,” then “Europe” needs some kind of fiscal union – not by any means a powerful centralized state like France, but some kind of confederal or federal arrangement, with limited but real powers and direct accountability to voters. If Europe’s states don’t want to cede national sovereignty in that way, then they really do need to rethink the whole currency union thing – or just settle in to a quasi-colonial relationship with Germany and be done with it.

But if all of the foregoing is true, then why would Scotland seek an independent government but remain tied to a foreign currency? Why would “ditch Westminster, keep the pound” be a reassuring platform, rather than an ominous one?

The answer doesn’t just relate to what constitutes an optimal currency area or how integrated Scotland is with England, economically. It relates to transition costs. And it relates to what degree of confidence Scotland’s electorate has in their own, new political culture. Keeping the pound, at least initially, is much cheaper than ditching it. And the prospect of ditching it in the future would mean higher borrowing costs today. Why, after all, would you want to ditch a solid, respectable currency unless you planned to devalue? And if you wanted to tie the hands of a new government that might otherwise open the spigot a bit too wide, what better way than to force them to borrow in a foreign currency?

Precious few seceding states in recent years have adopted a truly independent monetary policy. Many have ditched their own newly-minted currencies entirely. Slovakia adopted the Euro before the Czech Republic has. Montenegro and Kosovo adopted it unilaterally. The Baltic states have rushed to adopt it as swiftly as possible. Croatia is hammering at the door to get in, notwithstanding all the nastiness of the past five years. Countries also continue to adopt the dollar as either their official currency (e.g. Ecuador, El Salvador) or as legal tender alongside a pegged local currency.

Indeed, not that many years ago, the question was whether Britain would ultimately join the Euro, not whether the Euro would ultimately collapse. If it had, then what I am calling one of the strongest practical arguments against Scottish independence would be entirely nugatory. If the UK had adopted the Euro, then leaving the UK would have exactly zero implications for Scotland’s control over its monetary policy. Even as, on one level, monetary union has made deeper European political integration more necessary, it has also made political separatism, from Catalonia to Flanders to Lombardy, vastly more plausible. But these ever-smaller political entities will perforce have even less control over the forces that largely determine their destiny than they once did as part of a national community with direct accountability to voters.

Now, if Scotland leaves, will a rump England withdraw from the European Union? If you take a static look at polling on the question, it certainly looks like ditching Scotland makes that more likely, but England’s attitudes about a host of questions would certainly evolve after separation from Scotland, if separation comes about. Meanwhile, if Scotland remained in the EU while England left, wouldn’t that make it more likely that Scotland would wind up adopting the Euro eventually? An independent Scotland might not be analogous to Canada so much as it would be analogous to an independent Quebec.

Our ambivalence about sovereignty is widespread. Political communities around the world want more political control over their affairs, but without assuming all the costs that true control incurs. They want smooth integration with global supply chains and access to international capital markets, but without suffering the risks and costs that come with that loss of control. The Scots just may vote for sovereignty. If they do, Edinburgh might not be the only capital to see its stature enhanced. Brussels might as well.

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