In business Ive learned one thing....if someone cant explain clearly what they are trying to sell, then they dont understand themselves how it works. That in itself means there are underlying issues. Issues that they cant work out. Why would politics be any different. policyscotland.gla.ac.uk/wp-content/uploads/2014/09/cesifopaper.pdf This paper demonstrates that all of the currency options available to an independent Scotland come with the price tag of an austerity programme. This is due to the need to accumulate foreign exchange reserves. • The only currency option that maximizes the benefits and minimizes the costs of independence is that of a separate currency. All of the other options have none of the benefits but even greater costs than the separate currency option. • The ball-park cost of setting up a separate currency, purely in terms of the foreign exchange reserves required, is a minimum £40bn. This is the sum of money similar sized Nordic countries – such as Denmark, Norway and Sweden – need to run a variety of different independent currency regimes, from a float to a fixed rate, and a managed float. • In this paper we demonstrate that an independent Scotland, even including oil revenues, will have a balance of payments deficit of between 2-5% on its current balance; that is around £6bn. An independent Scotland is also projected to have a budget deficit of 5% of GDP. • Taken together these so-called twin deficits indicate that to have a separate currency an independent Scotland would need to run a fiscal austerity programme in terms of having a budget surplus of 5% of GDP just to balance the external books. To gather in the sums of money needed to run and independent currency regime would require an even larger fiscal surplus, perhaps up to 10% of GDP. • The Belgium Luxemburg Economic Union (BLEU) is given as an example of how Plan A might work. However the BLEU does not remotely resemble the sterling zone monetary union, future or present. There were no less than three changes in the exchange rate relationship between Belgium and Luxemburg during its life, they ran a dual exchange rate system with separate exchange rates for current and capital account transactions and a raft of controls on capital and trade run through the banking sector. Neither of the countries was a net exporter of hydrocarbons. • The retention of a sterling monetary union post-independence - Plan A- will not work because it does not allow an independent Scotland to adjust to changes in competitiveness as a result of becoming a petro currency, post-independence. • Our calculations show that because of the petro-currency effect the competitiveness of Scotland’s non-oil export sector will worsen by approximately 7% per annum. • This loss of competitiveness can only be addressed by a dramatic rise in productivity of around 7% or internal adjustment of wage cuts and a rise in unemployment much as what happened in Greece and Spain recently. • The competitiveness of firms trading in Scotland will be volatile and uncertain containing the same risks and costs as a separate currency with none of the benefits. • Since Plan A is now regarded as a transitory arrangement to an alternative currency regime, the government would need to accumulate the £40bn of foreign exchange reserves mentioned above, on top of wage cuts and unemployment. • Plan A is therefore a recipe for austerity +. Of course, such a policy would be extremely unpopular and the Scottish Government would be forced to abandon the fixed exchange rate relationship with rUK. • However, history shows that governments cling to fixed exchange rate relationships for too long when underlying competitiveness is changing and this eventually produces a classic currency crisis. • I estimate that a currency crisis would cost the Scottish taxpayer between £25bn to £35bn and could cost up to £100bn. If a banking crisis followed that could add a further £100bn. The cost to rUK will be much greater. Furthermore, a currency crisis would most likely lead to a further banking crisis which would dramatically increase these costs even further. full article This paper demonstrates that all of the currency options available to an independent Scotland come with the price tag of an austerity programme. This is due to the need to accumulate foreign exchange reserves. • The only currency option that maximizes the benefits and minimizes the costs of independence is that of a separate currency. All of the other options have none of the benefits but even greater costs than the separate currency option. • The ball-park cost of setting up a separate currency, purely in terms of the foreign exchange reserves required, is a minimum £40bn. This is the sum of money similar sized Nordic countries – such as Denmark, Norway and Sweden – need to run a variety of different independent currency regimes, from a float to a fixed rate, and a managed float. • In this paper we demonstrate that an independent Scotland, even including oil revenues, will have a balance of payments deficit of between 2-5% on its current balance; that is around £6bn. An independent Scotland is also projected to have a budget deficit of 5% of GDP. • Taken together these so-called twin deficits indicate that to have a separate currency an independent Scotland would need to run a fiscal austerity programme in terms of having a budget surplus of 5% of GDP just to balance the external books. To gather in the sums of money needed to run and independent currency regime would require an even larger fiscal surplus, perhaps up to 10% of GDP. • The Belgium Luxemburg Economic Union (BLEU) is given as an example of how Plan A might work. However the BLEU does not remotely resemble the sterling zone monetary union, future or present. There were no less than three changes in the exchange rate relationship between Belgium and Luxemburg during its life, they ran a dual exchange rate system with separate exchange rates for current and capital account transactions and a raft of controls on capital and trade run through the banking sector. Neither of the countries was a net exporter of hydrocarbons. • The retention of a sterling monetary union post-independence - Plan A- will not work because it does not allow an independent Scotland to adjust to changes in competitiveness as a result of becoming a petro currency, post-independence. • Our calculations show that because of the petro-currency effect the competitiveness of Scotland’s non-oil export sector will worsen by approximately 7% per annum. • This loss of competitiveness can only be addressed by a dramatic rise in productivity of around 7% or internal adjustment of wage cuts and a rise in unemployment much as what happened in Greece and Spain recently. • The competitiveness of firms trading in Scotland will be volatile and uncertain containing the same risks and costs as a separate currency with none of the benefits. • Since Plan A is now regarded as a transitory arrangement to an alternative currency regime, the government would need to accumulate the £40bn of foreign exchange reserves mentioned above, on top of wage cuts and unemployment. • Plan A is therefore a recipe for austerity +. Of course, such a policy would be extremely unpopular and the Scottish Government would be forced to abandon the fixed exchange rate relationship with rUK. • However, history shows that governments cling to fixed exchange rate relationships for too long when underlying competitiveness is changing and this eventually produces a classic currency crisis. • I estimate that a currency crisis would cost the Scottish taxpayer between £25bn to £35bn and could cost up to £100bn. If a banking crisis followed that could add a further £100bn. The cost to rUK will be much greater. Furthermore, a currency crisis would most likely lead to a further banking crisis which would dramatically increase these costs even further.
Posted on: Wed, 17 Sep 2014 10:58:16 +0000
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