Here’s a topic that brings together the debate about Scottish independence, and the problems of the Euro – the advantages and disadvantages of being part of a large currency area (like Portugal and Greece being part of the eurozone, or Scotland retaining the GBP).

The advantages are pretty obvious, even if they are not stated.  The transaction costs of paying international bills comes down, because you don’t have to pay charges to exchange your home currency for a foreign currency.  I travel in Europe often, and it’s great to tuck away your Euros after a visit to Portugal or Italy knowing they’ll be just fine when you next visit France or Germany.  It frees me from the rogues at the airport currency booths (who promise ‘fee free currency’ when they mean ‘we’ll sting you on the exchange rate’).  It frees everyone from the bankers who fiddle the exchange rate to their advantage and are just being found out.  There is also greater certainty about the money you’ll get (or have to pay) from foreign trade.  Remember, Rolls Royce folded and had to seek government rescue not because they were inefficient, but because they sold a whole lot of aero engines to the USA before the dollar collapsed.  If these factors encourage trade, there are gains from specialization and economies of large scale production that will make us wealthier.

What are the disadvantages, then ?  Well, it’s a more complex argument.  At any one time, the advantages outlined above come into play.  But as time passes, one region or country becomes more or less efficient than another, and so their products become more or less competitive.  As the sales fall, unemployment rises, leaving poverty and despair.  If you have a separate currency, you can devalue – that is, give more foreign currency for your currency.  If a bottle of whisky costs £10 and the exchange rate is £1 = $1.50, the bottle costs $15 in the USA.  If you let the £ drift downwards to £1 = $1.20, it cost $12.  The alternative would be to impose cuts in wages and costs on workers and suppliers, which may be theoretically possible as a way of bringing down the prices to a competitive level again, but in practice leads to years of bitterness and industrial strife.  Have a look at the thirties, when everyone from civil servants, sailors and miners had their wages cut.  Wages, as economists say, are subject to a ‘ratchet effect’, or are ‘sticky downwards’.

Coming to the modern day, Portugal or Greece could, if they had maintained the escudo and drachma, have devalued against the euro (or mark or franc, had they been retained), making their products and services (like tourist holidays) much more competitive.  But as they are locked into the Euro, they can’t.  Result – rising unemployment, falling government revenues, bitterness, cynicism and the rise of extremism.  You can even ascribe the problem of poor regions – North East of England, Kentucky, Corsica – to their inability to devalue against the national currency. Devaluation is not painless- there is a ‘terms of trade’ effect, reducing living standards because you’re having to send more actual exports abroad to get the same amount of imports – but this looks a better bet than endless recession.

So what should the Scots do ?  This was the topic of a recent talk by the Governor of the Bank of England.  My own feeling is that the Scots should stay in the UK,  partly to save the rest of us from years of Tory governments, but mostly because I loathe nationalism, the idea that what differentiates you from me is where you were born.  There is a wonderful, and more literate expression of this in the appendix to Dominion, C. J. Sansom’s recent novel about a Nazi Britain.  But if they choose to go it alone, then good luck to them.  I think they will have less need for luck if they have their own currency floating against the euro, pound sterling and US dollar.

Whilst I’m talking about foreign exchange, a brief look at some dishonest arguments about the Euro.  “You can’t leave the currency area once you’ve entered it”.  Oh, yes you can.  How do you think that Ireland or Australia (and many, many others) left the sterling zone at the end of Empire ?  “We won’t have the Queen on our currency any more”.  Yes, you will if you want.  The monarchs of Spain, Holland (etc etc) are on their country’s Euro coins. “But the Queen won’t be on our bank-notes”.  You’re right there.  But she wasn’t on UK banknotes until 1960.

And none of this is connected with the madness of the Gold Standard, which links the issuing of currency to the amount of gold governments hold.  Money has value because of what you can buy with it, not because of some mythical backing in precious metals.  Even if governments could control the volume of money (omits long argument about banking system), why should they hold it back if they have no gold, restricting trade, or expand it if they discover gold mines, causing inflation (as in Spain in the 16th century) ?

Footnote: this is getting a bit old, but I think I stand by every word.  For a 2022 take on Scotland’s currency options, have a look here.

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