Economic Consequences of an Independent Scotland

Question 1

Do you agree that that Scotland would better off in economic terms as an independent country?

Question 2

Assuming that Scotland becomes an independent country, do you agree that the UK government's position of ruling out a monetary union is in the economic interests of the continuing UK? 

Summary

Would Scotland be better-off in economic terms as an independent country? Not according to an overwhelming majority of respondents to the third monthly survey of the Centre for Macroeconomics (CFM), summarised in this column. As the Scottish electorate prepares to vote on independence in September, a smaller majority of the CFM experts agree that the UK would be acting in its own economic interests by ruling out a monetary union with an independent Scotland.

September’s referendum on Scottish independence

On 18 September 2014, the Scottish electorate will be asked the following question: “Should Scotland be an independent country? Yes/No.” In the event of a ‘Yes’ vote, the plan is that Scotland would become an independent country in March 2016, and thereby no longer a constituent nation of the UK after 307 years. This would be a fundamental change for the governance of Scotland, and for England, Wales and Northern Ireland which together would become the continuing UK. Other countries with strong regional identities may also be influenced by the referendum and there may even be implications for the UK’s international relationships.

The opinion polls have shown a consistent majority against independence, but they have narrowed significantly since the turn of this year to only a 5% majority (excluding the "don't knows"). Both sides of the debate agree that economic issues are at the heart of the referendum. We therefore asked two questions which are absolutely central to this debate.

Economic benefits of independence

Scotland’s population is 5.3 million or 8.3% of the total UK population.[1] The value of output per head in 2012 was £20,571 in Scotland and £21,295 per head in the UK as a whole.[2] Labour productivity is exactly the same in Scotland and the UK, while unemployment is 6.4% in Scotland compared with 6.8% in the UK overall.[3] According to the Scottish government, the onshore fiscal deficit is estimated to have been 14% of output in 2012/13 compared with a 7.3% deficit in the UK overall.[4] If Scotland is allocated 84% (a ‘geographic’ share) of taxes from North Sea oil and gas operations, its deficit is estimated to have been 8.3% of output.[5] In 2012, both Scotland and the rest of the UK had the same old age dependency ratio of 26.8%, which is projected to rise to 40.5% in Scotland and 37.4% in the rest of the UK by 2032.[6]

Under the current fiscal arrangements, the Scottish government is responsible for allocating 60% of public spending in Scotland. Under the Scotland Act 2012, the Scottish government will be responsible for taxes (including part of income tax), which raise 16% of total revenue.[7] If Scotland becomes independent, its government would be responsible for all public spending, revenue raising and borrowing and current cross-border fiscal transfers would cease. The Scottish government has said that it will accept a fair share of the existing UK debt and that it intends to form a formal monetary union with the UK. The UK has ruled out taking part in a formal monetary union with an independent Scotland.

There is inevitably some uncertainty around what would be the final terms of a settlement between an independent Scotland and the rest of the UK. We invited the CFM survey respondents to answer the first question based on their understanding of what these terms are likely to be. We suggested that ‘economic terms’ includes income per capita and possibly other aspects of economic advancement.

Q1: Do you agree that that Scotland would be better off in economic terms as an independent country?

Summary of responses

Twenty eight of our 46 experts replied to this question. The raw results and the results weighted by the respondent’s confidence in their answer are presented in chart 1 below. Three quarters of our respondents said that they either disagree or strongly disagree with the proposition. Only one of our 28 respondents either agrees or strongly agrees. Excluding the six respondents who say they neither agree nor disagree, 95% of respondents either disagree or strongly disagree that Scotland would be better off in economic terms as an independent country.

Our respondents’ main concerns are over the fiscal outlook for an independent Scotland. George Buckley (Deutsche Bank) describes an independent Scotland as being exposed to weaker tax revenues from depleting oil resources and a worse demographic profile than in the rest of the UK. John Driffill (Birkbeck) notes that an independent Scotland could set its own policies to suit preferences in Scotland, but may lose out because some things that are done better jointly by Scotland and the rest of the UK will become more difficult to coordinate. Both Michael Wickens (York) and Martin Ellison (Oxford) say that Scotland might pay higher borrowing costs than the UK.

Several respondents question the wisdom of unpicking many institutions when the effectiveness of the institutions that will replace them is unknown. David Cobham (Heriot-Watt) asks whether pulling apart the members of well integrated nations makes sense; Jagjit Chadha (Kent) raises the possible risks if the new political and economic settlement is not robust; and Michael McMahon (Warwick) thinks that there would be significant transition costs.

Several respondents are concerned at the uncertainty over the time it might take an independent Scotland to (re)-join the European Union (EU). Marco Bassetto (UCL) says that in his view the process of accession to the European Economic Area (and the EU) are more important than the issue of monetary union. Richard Portes (LBS) and Nicholas Oulton (LSE) also express concerns that the uncertainty over the EU could be detrimental for the economy.

Currency arrangements

In the event that Scotland becomes an independent country, the remaining nations of England, Wales and Northern Ireland will constitute the continuing UK state. All current institutions of the UK state, except those physically located in Scotland, would automatically continue to be institutions of the continuing UK. This includes the Bank of England, which, as an institution constituted under the UK Parliament, would become the central bank of the continuing UK with no responsibility for an independent Scotland, unless otherwise agreed.

Exports from Scotland to the rest of the UK are estimated to have been £48bn or 38% of estimated Scottish GDP in 2012 (excluding oil and gas). The rest of the UK is estimated to have exported between £50bn and £60bn to Scotland or around 4% of the rest of UK GDP in 2012. Both Scotland and the UK have large financial sectors with banking sector assets estimated to be many times their GDP. If an independent Scotland takes on a population share of the UK’s gross public debt, its debt-to-GDP ratio is projected to be 86% in 2016.[8]

The Scottish government has proposed that if Scotland becomes an independent country, it would seek a formal monetary union with the rest of the UK, which it says would also be in the interests of the rest of the UK.[9] Bank of England Governor Mark Carney has argued that successful monetary unions require fiscal and banking unions and some ceding of national sovereignty.[10] The Chancellor and Chief Secretary in the UK coalition government and the Shadow Chancellor have all firmly ruled out entering into a monetary union if Scotland becomes an independent nation.

Q2: Assuming that Scotland becomes an independent country, do you agree that the UK government's position of ruling out a monetary union is in the economic interests of the continuing UK?

Summary of responses

Thirty four respondents answered this question and the results are presented in chart 2 below. Views are much more evenly split than for the first question: 53% agree or strongly agree that ruling out a monetary union is in the economic interests of the continuing UK while 41% disagree or strongly disagree. Excluding those who neither agree nor disagree (two respondents), the share who agree is 60% when weighted by respondents’ confidence in their answers. A majority of our experts believe that the UK is acting in its own interests by ruling out a monetary union and the responses reveal uncertainty over whether a robust supporting framework is viable. 

The differences in views between our experts in large part depend on whether they believe that credible and robust fiscal arrangements to support a monetary union could be implemented.

Martin Ellison (Oxford) says that the recent euro crisis shows how challenging a monetary union is without a fiscal, political and banking union. David Cobham (Heriot-Watt) thinks than any satisfactory constraints for the UK would preclude anything that could be called independence for Scotland. Luis Garicano (LSE) considers that any commitment not to bail-out an independent Scotland would not be credible with the world or the Scottish government. Therefore, the UK would end up with the worst of both worlds: a lack of market discipline and moral hazard.

Other respondents think that the taxpayers of each sovereign state could be isolated from the risks or the other. Andrew Mountford (Royal Holloway) considers that it should be possible to agree such arrangements. Wendy Carlin (UCL) and Simon Wren-Lewis (Oxford) are of the view that the UK could introduce conditions that would insulate it from risks, although they may prove problematic for an independent Scotland. Two respondents, Sir Christopher Pissarides (LSE) and John Driffill (Birkbeck), think that the UK’s stance is purely motivated to influence the referendum.  

Some respondents question whether a monetary union is appropriate, irrespective of fiscal constraints. Richard Portes (LBS) notes that there are already enough problems with regional heterogeneity for the Monetary Policy Committee setting a single policy rate; Jagjit Chadha (Kent) believes that a monetary union makes sense as a transitional arrangement only; and George Buckley (Deutsche Bank) thinks that any decision to form a monetary union should be put to the people of the continuing UK.


[1] As Scotland is a constituent nation of the UK, all of the economic data and projections are published by the Office for National Statistics (ONS) unless otherwise stated.

[2] Measured by Gross Value Added (GVA) per head.

[3] Labour productivity is measured by GVA per hour worked in 2011.

[4] Estimates of Scotland's fiscal accounts are published in Government Expenditure and Revenues Scotland (GERS) http://www.scotland.gov.uk/Publications/2014/03/7888/downloads

[5] The allocation of UK offshore assets including oil and gas fields depends on what would be the agreed maritime boundary of an independent Scotland. The median line principle creates a so-called ‘geographic’ share, which the GERS report shows would allocate 84.2% of the related tax revenue to Scotland. 

[6] Defined as the ratio of those aged 65 years and above divided by those aged between 16 and 65.

[7] If Scotland remains within the UK, the Scotland Act 2012 will come into force in April 2016.

[8] Based on Office for Budget Responsibility (OBR) projections of the level of gross debt at the end of the fiscal year 2015-16, and assuming that Scotland receives a geographic share of the GDP from North Sea oil and gas, and that Scottish and rest of UK GDP grow at the same rate until independence.

[9] Scottish Government’s White Paper, pages 110-111 http://www.scotland.gov.uk/Publications/2013/11/9348.

[10] Mark Carney, http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech706.pdf.


 

Contact us for more information

How the experts responded

Economic Benefits for Scotland

Participant Answer Confidence level Comment
Francesco Caselli London School of Economics Strongly Disagree Confident
Ethan Ilzetzki London School of Economics Disagree Confident
Richard Portes London Business School and CEPR Strongly Disagree Extremely confident
Scotland would lose substantial net transfers from the rest of the UK. It could use the pound sterling as its currency, but there would be no monetary union, hence no influence over its own monetary policy and exchange rate. Conversely, recent research suggests that the shock-absorbing benefit of floating exchange rates for a small open economy have been exaggerated, in the face of the 'global financial cycle'. It might succeed in (re-)joining the EU, but that is by no means certain, and the EEA, with again no influence over its own policies in many domains (having to accept Single Market legislation), is decidedly second-best. The Edinburgh-based financial institutions would suffer, and some might move. And so on.
Wendy Carlin University College London Disagree Confident
There are no clear fiscal benefits to Scotland from independence. However, benefits for Scotland could emerge if the UK government were to adopt policies damaging to the economy on immigration or EU membership that an independent Scotland could choose to avoid.
Patrick Minford Cardiff Business School Disagree Confident
Scotland would only be better off independently if it was imbued with a strongly free market approach to its problems, so that it became another 'Celtic Tiger'. However as its approach is essentially socialist, it would face a vey bad outlook until this changed from poor experience (much as occurred with Ireland).
Jonathan Portes National Institute of Economic and Social Research Disagree Confident
An independent Scotland, if economic policy were broadly sensible, would probably be slightly worse off than as part of the UK; if both lucky and well managed, it might be slightly better off. However, the downside risks (both exogeneous and arising from the quality of policy making) are quite large.
Sir Christopher... London School of Economics Neither agree nor disagree Not confident
I would have agreed if the question asked if Scotland could be better off. So much depends on what policies are followed immediately after and how much foreign investment it attracts. As an independent nation it will lose the transfers (or possibilities of transfers) from the UK. But if it adopts innovating investment policies it could attract large foreign investments that make it better off (as Ireland did)
Paul De Grauwe London School of Economics Neither agree nor disagree Confident
John Driffill Birkbeck College, University of London Disagree Not confident
There is a wide range of possible outcomes centred around a zero overall effect. Scotland will be able to set its taxes and public spending and arrange more of its laws to suit the preferences of the electorate in Scotland. Of course they may be able to do this in any case in the future with greater devolution. They may lose because some things that are better done jointly by Scotland and the rest of the UK will become more difficult to coordinate (defence, some aspects of transport, monetary arrangements, and so on). There will be short-term dislocation. So economically it could go either way. But does it matter? The Scots might want indpendence even if they have to pay for it in terms of future economic prosperity.
John VanReenen London School of Economics Strongly Disagree Very confident
Higher currency risk; more commodity based economy so more volatile; aging population
Michael McMahon University of Warwick Disagree Confident
At least initially I think there will significant economic transition costs. However, in addition to the exact economic terms with the UK, the extent of the adjustment costs depend on the issue of EU membership. Any prolonged period outside the EU could be costly in terms of attracting FDI and keeping the existing businesses that could otherwise be attracted to remain inside the EU for ease of trade reasons. Related to that, those hoping for independence will have welcomed the recent European Policy Centre report that states that EU membership could be resolved very quickly.
Andrew Mountford Royal Holloway Strongly Agree Confident
I do not know the specifics of the Scottish case but in general terms I would expect a government of a smaller state in an advanced democratic economy to set its fiscal arrangements better in line with its own needs and this should help economic growth in the long run. Thus if I were a citizen of Scotland, or indeed Catalonia, I would vote for independence. I am aware of some empirical analysis on the benefits of country size for growth but this is not a strong enough literature on which to base policy and the success of Denmark, Finland and Norway is at least as strong evidence for the potential success of small open advanced economies.
Simon Wren-Lewis University of Oxford Strongly Disagree Very confident
My only caveat is if the UK left the EU, in which case an independent Scotland that was an EU member could be better off.
Wouter Den Haan London School of Economics Disagree Confident
I don't see how economic conditions in Scotland would improve with independence other than that Scotland would possibly get a larger share of oil revenues. In contrast, I definitely see some downside risk factors. First of all, there would quite a bit of uncertainty regarding institutions, redistribution, business climate, and the political landscape. This will harm economic growth at least in the short run. As a small independent country it may be more affected by negative events such as industries leaving the country.
Martin Ellison University of Oxford Strongly Disagree Very confident
Oil taxes account for about 15% of total tax revenues in Scotland, which creates significant risks and uncertainties for an independent Scottish Exchequer. These will inevitably be reflected in higher risk premium and borrowing costs. The financial sector is also important in the Scottish economy, which creates further risks in periods of financial market turbulence. Experience in Switzerland tells us that sovereigns struggle to stand behind troubled financial institutions that have balance sheets many multiples the GDP of the home country - RBS alone is therefore an obvious concern.
Sushil Wadhwani Wadhwani Asset Management Disagree Confident
The precise economic effects are a 'known unknown'. However, it is extremely likely that it will lead to much greater uncertainty which will probably significantly weaken economic activity in the next two years.
Nicholas Oulton London School of Economics Disagree Confident
I think that an independent Scotland would suffer a one-off negative shock due to uncertainty about its currency and EU membership. I do not think it likely that an independent Scottish government would be able to follow policies which would raise the Scottish growth rate. The best bet for Scotland would be to follow Ireland's earlier strategy. But it is very unlikely that the EU would permit Scotland to cut corporation tax to Irish levels, assuming that Scotland was able to join. Salmond's record of promising everything to everybody does not inspire confidence that policy will be growth-promoting in practice.
Silvana Tenreyro London School of Economics Disagree Confident
Alan Sutherland University of St. Andrews Strongly Disagree Very confident
Jagjit Chadha University of Kent Disagree Confident
Neither the continuing UK nor Scotland would be better off in the short run, as economic and financial risk sharing has evolved in a reasonably satisfactory way over time (in this case three centuries). The current set up will take time and resources to unpick and may also involve the creation of new risks if the new political and economic settlement is ill-founded or not robust.
Luis Garicano London School of Economics Strongly Disagree Very confident
George Buckley Deutsche Bank Strongly Disagree Very confident
Scotland may be slightly better off in the very near-term in the event of it securing, in independence negotiations, a geographic share of the UK's oil. However, the Scottish government's forecast of oil output remaining constant (at worst) seems optimistic given trends in the industry over the past 15 years. As a result, and with worse demographics north of the border, Scotland's deficit could easily become worse than that of the UK over a relatively short time horizon.
Marco Bassetto University College London Neither agree nor disagree Confident
As long as Scotland remains part of the European Economic Area, I do not think that independence would have a major impact, either way. Questions about the process of accession to the EEA (and the EU) are in my opinion more important than monetary union.
David Cobham Heriot Watt University Neither agree nor disagree Very confident
There are so many unknowns (some of them unknown unknowns) that it is not sensible to argue that Scotland will be better or worse off in economic terms; but in any case the difference is likely to be small. More importantly, as an economist I want to stress that people should in fact make their decisions on non-economic grounds, in particular this: given that Scotland and the rest of the UK and their peoples are so well integrated, would it be right to pull them apart?
Jan Eeckhout University College London Neither agree nor disagree Extremely confident
Michael Wickens Cardiff Business School & University of York Strongly Disagree Very confident
This will depend primarily on the conduct of fiscal policy. My understanding of the main reasons for seeking Scottish independence is to be able to increase public expenditures which are currently constrained by UK fiscal transfers to Scotland. To be sustainable in an independent Scotland this would require raising tax revenues. Even assuming that all North Sea oil tax revenues are impounded by Scotland - which would apparently be a precedent in the redistribution of national natural resources - this would not raise sufficient additional revenues to pay for the higher public spending. It follows that higher taxes would need to be imposed on the Scottish tax payer. Failing to do this would result in rising Scottish sovereign debt which, due to a higher risk premium, would cost more than at present. Higher public spending is also likely to cause higher inflation. This is where using sterling has relevance. Higher inflation implies that Scotland would steadily lose competitiveness if it retains the pound. This is why the Treasury has argued against forming a single currency with Scotland: it doesn't want higher Scottish inflation to disrupt RUK monetary policy. If Scotland goes ahead and uses sterling anyway but without representation on the MPC it gets the worst of both worlds. Using sterling without a sustainable fiscal policy would ultimately therefore result in Scotland losing the very independence it seeks. If Scotland introduces its own currency then it will be steadily devalued unless Scotland has a sustainable fiscal policy. So if fiscal policy is unsustainable Scotland will almost certainly be worse off. If higher public expenditures are matched by higher tax revenues then the issue is whether the balanced budget multiplier is greater or less than unity. The evidence suggests that in a fully employed economy it is well less than unity. Once again, therefore, Scotland would be worse off. This may be why the SNP is stressing the importance of North Sea oil revenues - even though it is likely to be a chimera - and downplaying higher taxes. Finally, if Scotland gives up on having much larger state expenditures than at present then why bother with independence in the first place?
Tim Besley London School of Economics Neither agree nor disagree Not confident
Costas Milas University of Liverpool Disagree Confident
Whether (or not) a currency union is in place, Scotland should not be better off on its own. Yet, if Scotland goes on its own, Mr. Salmond is telling us that Scotland will find it "easy" to renegotiate EU entry. So, if BREXIT occurs in 2017, will Scotland continue its currency union with the rest of the UK (assuming there is one) at the same time while remaining in the EU? In other words, will Scotland be an independent country sharing monetary policy with the rest of the UK while diverging in terms of fiscal and “external relations” policies? How attractive...

Monetary Union

Participant Answer Confidence level Comment
Ethan Ilzetzki London School of Economics Disagree Extremely confident
Richard Portes London Business School and CEPR Strongly Agree Extremely confident
We have enough problems with our 'one-size-fits-all' monetary policy. Scotland currently contributes to the regional heterogeneity with which the MPC and FPC struggle. From this narrow viewpoint, the rest of the UK would find it easier to set monetary and financial policy without Scotland.
Wendy Carlin University College London Disagree Confident
Since the UK government could impose stringent conditions on the membership by Scotland of a monetary union with the rest of the UK, it is hard to see that ruling out such a union would be in the UK's economic interests. Whether an independent Scotland would accept such conditions is a different question.
Patrick Minford Cardiff Business School Disagree Confident
It seems inevitable that the rest of the UK will agree to Scotland's joining the sterling union. This will be under tight fiscal restrictions. This will be in the interest of the rest of the UK because it will limit the potential fiscal turbulence coming from across the border.
Jonathan Portes National Institute of Economic and Social Research Agree Very confident
Ruling out a monetary union would probably have some costs in terms of trade and reduced economic integration with Scotland. However, the downside risks of a poorly structured or managed monetary union are sufficiently great to justify incurring these relatively small (for the continuing UK) upfront costs.
Sir Christopher... London School of Economics Strongly Disagree Extremely confident
Ruling out monetary union before we learn what policies will be followed in the new Scotland is silly (and politically driven). The UK does not like monetary unions but the situation vis-à-vis an independent Scotland is so peculiar that a monetary union could be in the interests of both. Given the size difference the impact on the rest of the UK will not be much either way but this does not justify ruling it out before the event
Paul De Grauwe London School of Economics Agree Very confident
John Driffill Birkbeck College, University of London Disagree Confident
Threatening non-cooperation is simply an attempt by politicians to discourage the Scots from voting for independence. Presumably they believe that independence will be bad for the rest of the UK. It is not a credible threat. After independence it will make no sense to rule out a possibly beneficial solution from consideration. This threat to rule out future monetary union will have no effect on the outcome. It will not affect the vote on independence, in my view, and it will not affect what happens afterwards. It is worthless political posturing.
Michael McMahon University of Warwick Disagree Confident
I believe that there could be gains to the whole UK of retaining a single currency in use within the island. In the respect of the optimal currency area criteria, a UK currency union probably makes more sense than the euro area. The two areas are clearly in a position to operate successfully with a single currency given that they already do. However, there are some complex details that would need to be sorted out (as there always are in forming new monetary unions). Of particular relevance in this case, given the size of the sector in Scottish GDP, is the extent to which the monetary union also entails a banking union despite the absence of a fiscal union. The arrangements for how supervisory responsibility would operate in any monetary union won't be made easier by the fact two of the major banks that are registered in Scotland have had serious difficulties in the last 6 years.
John VanReenen London School of Economics Agree Confident
Andrew Mountford Royal Holloway Disagree Confident
Clearly a poorly thought out currency union - where the banks of one country are de facto guaranteed by the tax payers of another - is in no-one’s interest. However it should be possible for UK and Scottish governments to agree to arrangements and regulations so that this does not happen.
Simon Wren-Lewis University of Oxford Disagree Confident
The UK government could set terms which would mean MU was of little risk to the continuing UK, although they might be a problem for Scotland.
Wouter Den Haan London School of Economics Disagree Confident
I don't think see substantial negative consequences if Scotland would be part of a monetary union with the continuing UK. The main reason is that Scotland is so small. One risk factor is that the continuing UK could be more sensitive to problems in the Scottish financial sector with a monetary union. But you don't need a monetary union to be exposed to another country's financial sector. Moreover, within a monetary union it may actually be easier for the continuing UK to make sure that Scottish banks are properly regulated.
Martin Ellison University of Oxford Strongly Agree Very confident
The recent Euro crisis shows that it is enormously challenging to have monetary union without fiscal, political and banking union. The question of who provides the ultimate lender of last resort function is also still unresolved in the Euro area, let alone in a possible monetary union between Scotland and the UK.
Sushil Wadhwani Wadhwani Asset Management Agree Confident
Nicholas Oulton London School of Economics Strongly Agree Very confident
As has been argued by many others, a currency union would require a fiscal and banking union as well to make it work. Otherwise the UK government would be on the hook for unquantified liabilities generated by the Scottish finance industry. I can't see an independ Scottish govenrment agreeing to make the necessary concessions to make this possible. .
Silvana Tenreyro London School of Economics Disagree Confident
David Smith Sunday Times Strongly Agree Very confident
Without fiscal safeguards, which are in any event unlikely to be binding, it would not be in the rest of the UK's economic interests to enter a monetary union with Scotland.
Paolo Surico London Business School Strongly Disagree Very confident
Christopher Martin University of Bath Disagree Very confident
Economic theory suggests that a currency union benefits both parties so long as labour and capital markets are highly integrated, business cycles are synchronised and there is a mechanism to equalise wealth across areas. The residual UK and an independent Scotland seems as close as anyone to satisfying the first three conditions. No currency union between states has ever satisfied the fourth. At a less abstract level, Scotland would be a significant export market for the UK rump, similar in size to Belgium. Imposing a separate currency would damage this. This conclusion is contingent on it being clear that the UK rump is not responsible for the debts of an independent Scotland and on credible mechanism for the exit of Scotland from the currency union. A Scottish exit (Scexit?) would be unfortunate but probably not critical for the rest of the UK.
Alan Sutherland University of St. Andrews Strongly Agree Very confident
Jagjit Chadha University of Kent Strongly Agree Very confident
Other than as an interim or transitional measure, an Independent Scotland needs to develop its own currency because a monetary union between the continuing UK and an independent Scotland would undermine the very notion of Independence. The example of the Euro Area is fairly clear as it has had to develop a fiscal compact and banking union, as well as a lender of last resort function for the whole Euro Area, in an attempt to deal with its recent existential crisis.
Luis Garicano London School of Economics Strongly Agree Very confident
Commitment not to bail out scotland would not be credible either with the world or with the Scottish government and thus rump UK would end up with worst of both worlds.
George Buckley Deutsche Bank Agree Not confident
By ruling out a currency union, the continuing UK would be forcing Scotland down the route of either sterlingisation or usage of another currency (the euro or its own new currency). If the latter, this would increase the costs of doing business with the continuing UK on account of currency transaction costs. However, a currency union would probably require the continuing UK to agree a set of fiscal rules with Scotland and in the event of a crisis (oil or finance related, for example) the continuing UK may have to provide a financial backstop. At the very least, I would expect that such an important decision as opting to join a currency union with another sovereign state should be put to a referendum in the continuing UK.
Kate Barker Department of enterprise, trade and investment Neither agree nor disagree Not confident
Marco Bassetto University College London Agree Confident
The main benefits of a common currency come from reducing transaction costs and (perhaps) from more cross-country competition. Since the continuing UK would be much larger than Scotland, these benefits would impact Scotland much more than the rest of the UK. The costs of a monetary union stem from the need to set up complicated international agreements, and would be borne by both parties, and from the potential for fiscal spillovers. Being much bigger, the rest of the UK would be unlikely to receive a meaningful bailout from Scotland in a state of crisis, whereas the opposite would be more possible.
David Cobham Heriot Watt University Agree Very confident
I'm assuming that it would not be possible to negotiate satisfactory fiscal constraints or satisfactory financial regulatory arrangements to make a monetary union acceptable in economic terms for the continuing UK - because genuinely satisfactory constraints and arrangements would in effect preclude anything that could be called independence for Scotland.
Andrew Scott London Business School Agree Very confident
Jan Eeckhout University College London Strongly Disagree Very confident
Michael Wickens Cardiff Business School & University of York Agree Confident
The deciding issue is the experience from the euro zone. As Scotland cannot be prevented from using the pound, a crucial issue is whether or not to give an independent Scotland representation and a vote on the MPC thereby risking an inappropriate monetary policy for RUK. However, already UK monetary policy is inappropriate outside London and the South East of the UK and is only sustainable due to net fiscal transfers to the regions, something that Scotland would no receive. A second issue is that transactions costs in trade between RUK and Scotland would rise and harm RUK. This was given heavy emphasis when European Monetary Union was first discussed. A third, and probably the most important, issue is whether Scottish banks or a profligate Scotland could cause a debt crisis again though issuing sterling debt. To avoid this markets would need to price Scottish debt appropriately. Overall the argument is finely balanced but, in view of the eurozone's experience, I come down on the side of it being against RUK's interest to have a monetary union with Scotland.
Morten Ravn University College London Disagree Confident
I agree approximately with Carney's stance: A monetary union is feasible under common regulation of the banking sector, and under a possibly strict set of fiscal policy rules. To the extent that this was agreed upon, a monetary union would ex-post seem feasible and beneficial.
Tim Besley London School of Economics Neither agree nor disagree Confident
Francesco Caselli London School of Economics Strongly Agree Extremely confident
Costas Milas University of Liverpool Agree Very confident
You cannot have an effective union without common fiscal and monetary policy. The rest of the UK might also want to rule out a currency union due to the risk of a credit rating downgrade. This is indeed a worry but (in my view) not a big one. Let me elaborate. Moody’s credit rating agency noted (on May the 1st) the possibility of downgrading Scotland (in case of independence with a currency union in place) at the same time while placing the Rest of the UK on the "credit negative" monitor. Moody's appears tempted to downgrade both Scotland and the Rest of the UK on a matter of economic policies following from their very democratic agreement to hold a referendum. In such scenario, the Rest of the UK will NOT necessarily face increasing borrowing costs. Investors will hopefully turn their back to Moody’s (or any other rating agency) since they will realise that Moody’s is in effect placing democracy in action (the referendum) on the “credit negative” monitor.