Similarities between Eurozone’s today problems and Scotland’s tomorrow problems

Nice article by Prof. Brigitte Granville of University of London. A while back I had pointed to this really interesting article on how Scotland is contemplating breaking from UK.

She compares how Scotland is likely to face problems of whether to maintain its monetary union with England. This is sinialr to the questuons the GIIPS are asking of the EZ monetary union.

She says despite the advantages of keeping Pounds as its currency, EZ crisis shows it is best to have your own currency.

All things considered, an independent Scotland would be best served by issuing its own national currency from the outset, empowering the National Bank of Scotland to set interest rates according to domestic economic conditions. By allowing for exchange-rate flexibility, this approach would also enable the central bank to avoid the twin hazards that arise in a currency union: undervaluation, which produces inflationary pressure, and overvaluation, which demands wrenching internal devaluations (driving down real wages).

To see just how difficult the latter can be, consider the eurozone. The agony of internal devaluation in the currency union’s weaker economies is increasingly driving voters and financial markets alike to call for a return to their national currencies – a trend that may well come to a head in May’s European Parliament election.

taly is perhaps the prime candidate to lead an exit from the eurozone, though a political shock could also arise in France, spurring it to negotiate with Germany the dissolution of the monetary union. But, regardless of who leaves first, any countries trading in the euro for their defunct national currencies would, like an independent Scotland, have to determine the right degree of exchange-rate flexibility.

For example, while a fully floating currency would create a beneficial combination of discipline and flexibility, it might best be delayed in favor of an adjustable (“crawling”) peg to some anchor currencies. This would buy time to build credibility and, more important, to help keep public debt under control.

Let’s see the choices Scots make…


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