This September the people of Scotland will go to the polls to vote whether or not they should remain in the UK. One of the key motivations for this move is to gain greater economic sovereignty so that Scotland can restructure its economy.
This is much needed as the Scottish economy is currently dangerously dependent on North Sea oil and gas revenues. Not only is North Sea oil and gas a finite resource that will eventually dry up, but it is also subject to substantial price and quantity fluctuations. Swings in the price of oil and gas can have major deleterious effects on the balances within the Scottish macroeconomy. This is because both Scottish exports and tax revenues are heavily dependent on oil and gas revenues.
All of this puts Scotland in a very difficult position — one that is not currently recognised either by the Scottish government or their economic advisers. If Scotland do not take this into account when they move toward independence they risk provoking a Eurozone-style crisis.
Imagine for a moment that Scotland did leave the UK but decided to keep the sterling. Now imagine that the oil price fell substantially. Tax revenues in Scotland would dry up and the government budget would fall into deficit. But Scotland would not have its own currency and so the decision would be left with the Bank of England whether to stabilise the Scottish bond market in the face of speculation.
Does that sound familiar? Well, it should: it’s basically a mirror image of what has been happening in the Eurozone since 2008. The Bank of England — and the UK Treasury — could then demand that Scotland engage in extensive austerity as part of a deal to stabilise the bond market. And we all know where that would lead: unemployment, depression and political turmoil.
If we care to see these problems for what they are they can be dealt with. I have written an extensive report laying out this argument in detail and proposing a solution.
Whether you support Scottish independence or not is really secondary in this respect. The Scottish people will vote how they vote and even if they vote against independence it is unlikely that this issue will fade into the shadows completely. If they do vote to move toward independence these issues will be front and center. And anyone who cares about the general welfare of the Scottish people will have to confront them.
A copy of the report can be downloaded from here: A Sustainable Monetary Framework for an Independent Scotland
Let’s hope that Scottish policymakers can learn from the recent history of the Eurozone in this regard. If history were to repeat itself in Scotland because these issues were overlooked it would truly be a tragedy.