From Voting on Scottish Independence to Taming Speculation

In a dead heat and with three days to go before the Scottish referendum on independence, most media and economist arguments - beyond those regarding emotional debates of identity, heritage and autonomy – are increasingly fear-driven. 

For those advocating Scotland embrace its status quo, the panic-inducing exchange goes like this:  if Scotland votes for independence, it will become a debt-saddled wannabe player with no control over its currency or means to raise extra funds during financial crises, the EU will close its doors and NATO will balk at membership unless Scotland continues to house nuclear arms within its borders.

Many mainstream articles, including the recent New York Times op-ed by Nobel laureate, Paul Krugman have poured added more economic panic to the fire. Writing “Be afraid, be very afraid” Krugman promoted a big brother as protector argument. The UK may not make decisions, or allocate tax or resource revenues along the majority of Scottish people’s desires, but when the financial excrement hits the fan, it will save its sidekick. This the UK has done through measures like bailouts and quasi-bank-nationalization (aka Northern Rock), not necessarily on behalf of the population, but for the banks. The Royal Bank of Scotland (RBS) was a recipient of the UK government’s generosity during the 2008 crisis.

Ironically, having received a 46 billion pound bailout from the UK government, RBS has now threated to move its registered headquarters to the UK for fear of higher taxes, greater regulations, or lack of future bailouts, in the event that Scotland votes for independence. This, to me, is a point in favor of independence.  Iceland did well deploying its independent status to divert monies to benefit its citizens rather than foreign banks.

If an independent Scotland does embrace strategies for broad-based economic stability and reduced income inequality, it could become a stronger country. This would be a positive outcome, even considering the limitations of currency-setting control that Krugman mentions. Protection from the most risky capital flows and practices is a cheaper crisis preventative measure in today's complex, private-bank driven global financial system, than the ability of a central bank to manipulate currency levels anyway.

As far as Krugman is concerned, an independent Scotland would be saddled with similar economic pain to Spain, but without the sunshine. Having just spent several weeks in Spain, and many in Scotland during the 7 years I lived in London, I am an enthusiastic supporter of sunshine and Scottish deerhounds,  but it must be said that both countries enjoy stunning landscapes. But first, Scotland isn’t seeking to give up use, or proportionate control, of the pound; it is merely seeking a more autonomous position from which to influence the pound. Plus, its resource revenues dwarf those of Spain, so its footing would be stronger in that regard. Secondly, Spanish banks, kneecapped by bad real estate debt, certainly suffered in recent years. The Spanish economy and public suffered more.  But this was mostly due to the flow of foreign speculative capital that had no allegiance to Spain or any country. Unlike Scotland, Spain had fewer reserves to make up for the financial shortfalls that followed these aggressive capital movements.

It seems Krugman's contends that if Scotland severs politically from the United Kingdom, it will face trouble trying to control its currency and all hell will break loose. But the situation in Spain wasn’t about currency control or lack thereof. Government choices and risky banking policy hurt Spain. After the collapse of its real estate bubble that German banks (along with UK banks) helped to inflate, Germany pressed the ECB to bail out certain big Spanish banks in which Germany had a financial interest. The public was not a consideration. The Euro was an excuse.

A “freer” Scotland would have the opportunity to better monitor rogue capital flows and foreign bank practices in a more stable manner for its population. It could find ways to direct longer-term funds bound to the future of the country, rather than embrace short-term bets bound to nothing. 

There’s no economic reason, given current guidelines, for an independent Scotland to be sidelined from the EU, NATO, or the pound, so those fears seem far-fetched. But, perhaps if the September 18^th vote supports independence, Scots will feel more empowered about having a say in their country, rather than feel disenchanted due to their economic needs not being met by Westminster’s choices. That could in turn shape the tenor of ongoing compromises. The possibility of such greater individual engagement is an exciting prospect, no matter what road bumps come along the way.