BlogSpot - September 14th, 2014
The Scottish Referendum and its Implications
With the first pool (or BBC) finding a majority for the independence of Scotland issued on September 7th, several banks’ shares fell in response, and the pound slipped 1.3 percent against the dollar and the euro.
Among economists, the consensus tends to highlight the negative consequences of a potential break-up from the UK. The IMF spoke of potential market fallout, while others pointed to risks to currency, EU membership, and defense. Paul Krugman (here and here) and Simon wren-Lewis (here and here) exhibit the large costs associated with Scotland being independent while not having its own currency: whether the new country continues on with the British pound or switch to the Euro, it will be unable to deal with an economic crisis in the absence of a common fiscal governance. And Scotland will have to indict itself more fiscal austerity than under the current regime. Both economists fear that economic considerations are absent from the political rhetoric. David Smith, in an EconoMonitor entry, sums up the pessimistic views: Scotland will be worse off in the short-term (Goldman Sachs has warned of a euro-style currency crisis within Britain, with the break-up threat providing investors with “a strong incentive to sell Scottish-based assets and households with a strong incentive to withdraw deposits from Scottish-based banks”), in the medium-term and in the long-term (because of declining North Sea production and revenues and high and rising public spending) if it votes for independence.
Adam S. Posen (Peterson Institute) exposes the main potential consequences of secession:
Scottish isolation from the European Union. If Jo Murkens in EUROPP underlines that Scotland’s membership to the EU would be hard to achieve on legal grounds, Open Europe stresses that Scotland would need time to gain an opt-out from the Euro and the Schengen space while avoiding a Spanish veto against secession.
Possible Brexit. According to Fabian Zuleeg (EPC), a feedback loop exists between a ‘yes’ win and the UK leaving the EU. The European institutions need therefore to determine what EU integration is: a all-or-nothing process or concentric circles (e.g. EMU, Single Market, etc.) where Member States evolve at their own speed towards common goals.
A fragmentation spiral (domino effect) to other areas facing independent movements (e.g. Corsica, Basque Country or even the Flemish in Belgium).
It is unclear what would be the implications in terms of exchange rates. While Chancellor of the Exchequer George Osborne explicitly rejected a proposed currency union, Harold James (Project Syndicate) looks at Scotland’s currency options in case of independence. Having its own currency would create another petro-currency, with risks of losing competitiveness. James Picemo (EconoMonitor) also assesses the macro risks of the vote—and compares Scotland to an asymmetric country within the eurozone, with lots of potential downside (with a reference to Lisa Tripp’s paper “Lessons for Scotland from Greece’s Euro Tragedy”). He also argues that adopting its own currency would come with a nest of potential troubles. Izabella Kaminska (FT Alphaville) uses the example of Montenegro to argue that Scotland could go down the unilateral adoption route in adopting the pound, though it would lose monetary independence and would need to cut public spending—opposite to the independentists’ aims.
Could Catalonia be next? Edward Hugh, in EconoMonitor, believes that spillovers to the Catalan situation could materialize soon—and calls on counter proposals: an approach going beyond the current arrangements but falling short of full independence, with an improved fiscal arrangement, and more autonomy—but this seems unlikely to be achieved. On November 9, a vote will be held to assess the size of the majority in favor of independence.
Marc Chandler (EconoMonitor) answers all your FAQs (for additional background) on the referendum.
Growth in Europe – Pieces of the Puzzle
For Stephen King (FT blog), the eurozone needs to deal with the growing divergence in living standards between the different nations within the single currency area with collective action principles rather than beggar-thy-neighbour policies (eg, behind the recent recovery in Spain). Such principles are institutional arrangements to prevent the “strong” from being able to impose all the costs of adjustment on the “weak” (fiscal union or, in the case of US states and municipalities, via occasional default and debt restructuring).
Ramon Xifre, in VoxEU, warns that despite some improvement in regional imbalances (e.g., improved current accounts of France, Italy and Spain), further progress, notably in reducing economic duality, requires relocation of resources towards the tradeable sectors and to those firms most prepared to grow and compete. He sees two important policy prescriptions: (i) a new generation of industrial policy covering industry-related and high-value added services, (ii) a specific policy program that targets companies most likely to experience high growth.
The role of policy still debated. For FreeExchange, monetary policy has a key role in supporting fiscal and structural reforms: higher inflation (higher nominal growth) will lessen the pain, and thus the political price, making it likelier the reforms can pass and succeed. Marcus Miller and Lei Zhang (VoxEU) argue that the divergence in macroeconomic performance since the crisis between the US and the UK on the one hand, and the Eurozone on the other, is because the ECB bases its policy on a poorly performing economic model. Could the central bank expand its role in fiscal policy? Roberto Perotti (VoxEU) stresses the conflict between the Eurozone’s macroeconomic malaise caused by austerity and the need for spending cuts to achieve fiscal sustainability. But he argues that the proposal for a temporary tax cut financed by unsterilised ECB purchases of long-term public debt, accompanied by a commitment to future spending cuts, is not credible.
The Short View…
The new Junker Commission has been announced, with seven Vice-Presidents to coordinate the Commission. The economic portfolio (French Socialist Moscovici to Economic and Financial Affairs and British Jonathan Hill on financial issues) will be reporting to two VPs, limiting initiatives (Open Europe).
By Elise Cachin
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