Friday, 28 March 2014


The medieval castle of Cochem was destroyed by the troops of Louis XIV and lay in ruins until it was bought by the rich businessman Louis Ravené in the 1860's. Our guide suggested to us that Ravené must have consumed a fair quantity of the local wine before paying 300 marks for the place.

This being the height of the 19th century romantic period, apparently Ravené set out to restore the castle and make a fairytale summer home for his family, including a wife who was 22 years younger than he was. The work was to be in the Gothic Revival style.  Possibly he neglected his wife whilst supervising it, because before it was completed she left him for another man who was their house guest.

Ravené himself did not live to see the interior restoration completed, but his son did. The castle remained in private hands until the Second World War and now belongs to the town.

Like many towns along the Moselle, Cochem is well supplied with half-timbered buildings, despite suffering extensive war damage.  Its main industries are wine and tourism.  It must have  fit schoolchildren since they have to climb a very steep path up from the town towards the school which is situated high on the castle hill.

Friday, 21 March 2014

Currency unions are like joint accounts

I really did not intend to devote so much space on my blog to the economics of Scottish independence.  I feel obliged to do so because political spin doctors have been engaging overdrive in an apparent attempt to obscure the issues and reduce popular understanding. I have no problem with people making an informed choice.  I do have a problem with people being misled.

In my letter published in yesterday's Falkirk Herald I used the same metaphor that I have previously used on this blog.  When I compare a currency union to the joint bank account of a married couple, I do not of course mean to suggest that they are the same thing, merely that they have a number of helpful similarities.

Not many non-economists have a clear grasp of the nature of currency unions.  Indeed the history of the Eurozone suggests that either a fairly substantial number of economists did not understand these principles either, or that political confidence overwhelmed economic objections.  The disparate economies that were enclosed in the straitjacket of the common currency were simply not sufficiently closely aligned.  A certain number of conjuring tricks were employed to make the figures look reasonably convergent in the qualifying year, but everyone should have realised that the important issue was not the statistics but the underlying reality.

A decade of growth camouflaged the problem; it did not make it go away.  The long rolling series of near defaults was always going to happen. The fact is, that  two divergent macroeconomic policies cannot be accommodated within a single currency zone.

Non-economists will, I hope, find the problem simplified by my analogy.  Like our divorcing couple separating their bank accounts in order to prevent one party from spending the other's money, two countries each need their own currency in order to operate any approximation to an independent monetary policy.  The Eurozone went for the joint account first and  loveless political marriage seems bound to follow if they will not reconsider their mistake.

Scotland is a tenth of the size of the UK and any currency union between the two would never result in her being able to underwrite UK debts.  The UK would have no partners in underwriting Scotland.  In return for taking on unlimited liability the UK is offered freedom from exchange costs that at most would amount to a little more than 1% of what it cost the UK to bail out RBS alone.  Can anyone seriously claim that represents a good deal for the UK?

There is no economic justification for divorcing London in order to marry Berlin.  The Eurozone is going to tighten its political integration.  Unofficial use of sterling can only be a short term stratagem since it would deprive Scotland of any effective monetary policy at all. 

Independence means a new Scottish currency.  There.  It wasn't so hard to say it after all.

Sunday, 9 March 2014

Read My Lips ...

I vaguely remember learning about the South Sea Bubble of the 18th century. Apparently back then there was such enthusiasm for floating new joint stock companies that people would even buy shares in 'a company to do something, nobody to know what.'

We are far less gullible today. I mean, no-one would vote for 'a country to have a currency, nobody to know what,' or 'a country to be in the EU, nobody to know how,' would they?

In the news this week:
  • The Yes campaign's response to the refusal by all three UK parties and the UK Treasury to contemplate a currency union with Scotland is not to devise an alternative currency scheme. Instead they claim that nobody except the Yes campaign can do sums properly.
  • They also point out that we may be dragged out of the European Union against our will by the 2017 in/out referendum. Safer to vote for independence and be sure, eh?
Since you couldn't make it up, it's just as well we don't have to.

Sunday, 2 March 2014

Scotland's Currency Options

There has been much talk of the four currency options for an independent Scotland. Much that I have seen suggests that not everyone understands what the options are, let alone what advantages and disadvantages each has. Perhaps, leaving aside political issues for the moment, I might be allowed to outline them.

1. A sterling currency union means that both the UK and Scotland continue to use the pound by agreement. Between two economies of such unequal size as Scotland and the UK such an arrangement has little to recommend it except familiarity, (which was not enough to preserve the currency union of The Czech Republic and Slovakia after their political split.)
  • It is not possible for a single central bank to operate two monetary policies. Market forces would oblige the central bank to pursue the monetary interests of the larger partner, even if political factors did not.
  • Likewise neither partner could pursue an independent fiscal policy, because each government's borrowing would increase the common money supply. Agreement would be required.
  • The UK would therefore have to cede a degree of its own monetary independence to Scotland. It has previously resisted doing this for the Eurozone, which is a much bigger market.
  • An additional disadvantage would be each partner taking on an obligation to underwrite the finances of the other without the multinational burden sharing that is possible within the Eurozone.
  • This is the option that the UK has ruled out. There are good economic reasons for ruling it out and no advantages for the UK that would come near to compensating for the loss of independence.

2. Informal use of sterling by Scotland means Scotland continuing to use the pound without the UK's agreement. This is the kind of arrangement used by Ecuador and Panama in respect of the dollar. It could not be prevented by the UK. It would avoid the introduction of exchange costs for trade within Britain, but is far from meaning that nothing would really change. Effectively it would take most of the so-called 'levers' of economic influence out of the hands of the Scottish government.
  • It would not allow Scotland to create its own money supply.
  • It would prevent a Scottish central bank from operating a meaningful monetary policy.
  • Although this would also remove the need for UK government agreement of Scotland's fiscal policy, the same sort of constraints would be imposed instead by the need to obtain sterling through trade etc.
  • It would remove the guarantee provided by the UK underwriting Scottish finances. This would imply a higher government borrowing rate for Scotland.

Thus neither formal nor informal currency sharing would allow a great deal of economic flexibility to the Scottish government.

Both formal and informal currency sharing would remove from the Scottish government's economic armoury the possibility of adjusting its exchange rate with the UK in order to absorb any imbalances that might develop.

3. A new Scottish currency is the only other option likely to be immediately available to an independent Scotland.
  • This has a lot of short term costs and risks, including the introduction of exchange costs with the UK.
  • However a more serious problem would be the need for the new currency to be underwritten by a Scottish government with no track record of debt management and which has incautiously flirted several times with the option of not taking on its share of UK National Debt. Possible lenders will remember perfectly well that a lot of the UK debt was incurred in bailing out Scottish banks and threats to walk away from responsibility for that debt can only raise the cost of borrowing by an independent Scotland.
  • It might take some time to reassure foreign exchange markets that the new currency was 'hard', (i.e. it can be trusted to hold its value.)
  • The new currency would also be a 'petrocurrency', (i.e. volatile and vulnerable to oil shocks.)

4. Joining the Eurozone is not a immediate option, because the entry conditions require two years' stable management of the domestic currency, a qualification which a Scottish government would lack. There may or may not be separate problems associated with Scotland's admission to the EU itself.
  • It needs to be borne in mind that the Eurozone is just another currency union and that Scotland would be even less influential within this much larger zone than it would be in a sterling zone.
  • Effectively monetary policy would be determined centrally and fiscal policy would be subject to the EU's Stability Pact.
  • Even this has not been enough to preserve stability in the Eurozone of late and it seems likely that more political integration within the zone will be required in order to cement the stabilisation of the Euro as a currency.

Those, very briefly are the options. None of them are as advantageous as the present arrangement, but of course the present arrangement cannot be combined with independence.