Scotland Risks Eurozone-Style Crisis if Issues Surrounding Sovereignty and Macro-Imbalances Are Ignored


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.



About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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4 Responses to Scotland Risks Eurozone-Style Crisis if Issues Surrounding Sovereignty and Macro-Imbalances Are Ignored

  1. NeilW says:

    “so the decision would be left with the Bank of England whether to stabilise the Scottish bond market in the face of speculation.”

    That rather depends whether the Bank of England cares about the Scottish Bond market, and whether it is in fact legally entitled to care.

    Does the US Treasury care about the Ecuadorian Bond market, or in times past the Argentinian one. Does the Bank of England worry about Gibraltar or the Isle on Man. Did it care about the Irish bond market when Ireland pegged the Punt to Sterling?

    The key issue is whether Scotland simply pegs to Sterling, or whether the UK government is stupid enough to sanction some sort of Eurozone style disaster for Sterling – where there is a mismatch between the scope of the Monetary authority and the Fiscal Authority.

    If Scotland pegs to Sterling, rather than being brave enough to float the Scottish pound and take control of their own affairs, then it will likely follow the path of the Irish punt and the Irish economy prior to 1978.

    And for the same reasons.

    This obsession with fixed exchange rates in Europe, but without a sufficiently powerful federal fiscal authority, will rip the place apart. That is not something that should be replicated in the UK.

  2. philippe101 says:


    Krugman’s agreeing with you on the finance/inequality issue:

    “there is a clear correlation between the rise of modern finance and America’s return to Gilded Age levels of inequality.

    So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society”.

    • Meh. Who cares what Krugman says anymore? He doesn’t do any interesting work of his own and he operates with a serious lag.

      • NeilW says:

        What matters most is what people say. ISTM that the majority of economic ideas are truth by repeated assertion.

        The politics bit of ‘political economy’ always looms larger than many will admit.

        In this sense Krugman is merely using his acquired status to push a political line that sounds like he’s doing economics. Joining the furore over Piketty for example. He’s a terrible appeaser. You do wonder who is pulling his strings.

        But he will get his line into action long before anybody doing actual ‘interesting work’.

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