Week in Review
The Greek crisis happened because there was a currency union without a political union. The Eurozone set some pretty strict limits on deficits and debt to join. Why? Because people in the Eurozone would all be using the same Euro. So they didn’t want one country running up deficits or their debt. Because if they did they wouldn’t just be messing with their economy. They would be messing with the entire Eurozone economy.
Well, that’s what Greece did. They were spending so much money that they had large deficits that added to a large debt. A euro-denominated debt. Which meant a default would raise borrowing costs for other euro-denominated debt. Raising the borrowing costs for the Eurozone. So to avoid that required other Eurozone nations to help Greece with their debt. Requiring higher taxes in the more responsible countries of the Eurozone to pay for the irresponsible spending of Greece. Neither option (default or rescue package) being a popular option. Especially for the Greek people. For the rescue package came with strings. And the big one was austerity. They had to stop spending so much. Which meant a lot of people lost some of their government benefits. Making them very unhappy. Leading to some rioting in the streets.
Had there been a political union this would not have happened. For there would have been only one entity borrowing and spending Euros. One entity taxing the Eurozone nations. And one entity printing money. Much like the federal government in the United States. And London in the United Kingdom (see Scotland’s referendum: Salmond says independence will benefit whole UK posted 3/4/2014 on BBC News Scotland Politics).
An independent Scotland with a strong economy would benefit the whole of the UK, First Minister Alex Salmond has told a gathering in London…
“I believe George Osborne’s speech on sterling three weeks ago – his ‘sermon on the pound’ – will come to be seen as a monumental error.
“It encapsulates the diktats from on high which are not the strength of the Westminster elite, but rather their fundamental weakness.
“In contrast, we will seek to engage with the people of England on the case for progressive reform.”
But Tory MP Mr Mundell said that Mr Salmond was saying that a choice to leave the UK and become independent “means staying exactly the same as we are now”.
He added: “By definition, that simply cannot happen.
“No one should be under any illusion that voting for independence means getting independence, which means becoming a new country outside the UK.
If the Eurozone sovereign debt crisis has taught us anything it’s that a currency union without a political union is not a good thing. An independent Scotland would eliminate the political union there is now. And the reason why England does not want a currency union with an independent Scotland is because of what happened in the Eurozone. It doesn’t work. At least, it doesn’t work well. Which begs the question why do they want independence but not complete independence (keeping the pound)?
One can only surmise so they can have more autonomy over their taxing, borrowing and, of course, spending. Perhaps to spend more. Creating larger deficits. And a greater pound-denominated debt. Which would be of great concern to other holders of pound-denominated debt. The rest of the United Kingdom.
It is unlikely that independence would lead to a stronger Scottish economy. Or a stronger UK economy. If it did then the whole point of the Eurozone would be a lie. To create a larger economic zone to compete with the large economic zone that is the United States. Because bigger is better. At least in terms of GDP. The British Empire was bigger than the United Kingdom is now. And the United Kingdom is bigger than a United Kingdom without Scotland. And an independent Scotland would be smaller than all of the above. So if you want to maximize GDP you would want to maximize the size of your economy. Not shrink it. Which leads one to believe that the reason for independence is something other than economic. Because the UK is too English? Perhaps. Whatever the reason let’s just hope everything works out for the best. For the United Kingdom did make the world a better place. With great people like Adam Smith from Scotland. And John Locke from England. To name only two of the greats to come from the United Kingdom.
Tags: borrowing costs, British Empire, currency union, debt, deficits, economic zone, England, euro-denominated debt, Eurozone, GDP, Greece, independent Scotland, London, political union, pound, pound-denominated debt, Scotland, spending, taxes, UK, United Kingdom, Westminster
Week in Review
During the Roaring Twenties the American economy was giving the economies of Europe a run for their money. The Europeans, accustomed to running the world for so long, looked at the economic prowess of America with concern. And began to talk about a United States of Europe to compete with the economic juggernaut across the pond. But when Calvin Coolidge chose not to run for a second term the progressives got back into power. And Herbert Hoover put an end to that surging economy. Causing a stock market crash. And throwing the country into recession. Which FDR turned into the Great Depression.
So there was no United States of Europe. But there would be a European Union one day. And after that, a currency union. The Eurozone. To compete against the economic prowess of the United States. But a currency union without a political union. Without a single fiscal and monetary policy to support that currency union. Which turned out to be a problem. For without that political union the currency union was only as strong as its weakest state. In the Eurozone that state was Greece. Whose unrestrained government spending caused a debt crisis that threatened to bring down the entire Eurozone. Unless the other members stepped in to bail out Greece. Which they have. But the crisis hasn’t gone away. For the central governing authorities can only ask Greece to cut their spending. Which there is a lot of opposition to in Greece. Putting a lot of pressure on the Euro.
Greece isn’t the only problem. There was Ireland. Spain. Portugal. And Cyprus. All sovereign nations. Sharing a common currency. Making it all but impossible to maintain a uniform fiscal policy throughout the Eurozone. Like they can in the United States. Because the United States of America is a political union. With one central government. One central fiscal authority. And one central monetary authority. Making it hard for any one state to undermine the currency. (Though California is making a valiant effort.) Which is the problem they’re having in the Eurozone. Many of the states are threatening to undermine the common currency. Making a very strong case against future currency unions without a political union. Which is something they are considering with an upcoming referendum on Scottish independence (see UK says “no clear reason” to let independent Scotland use the pound by David Milliken posted 4/23/2013 on Reuters UK).
The euro zone’s experience of countries sharing a currency but not a government shows there is no clear case for an independent Scotland to use the pound, the Treasury said on Tuesday.
The nation of 5 million will hold a referendum on September 18 next year to decide whether to split from the United Kingdom, at the instigation of the Scottish National Party that runs the country’s devolved government.
Pro-independence campaigners want Scotland to keep sterling, at least in the early years of independence, and then to decide later whether to switch to its own currency.
But in a report on Tuesday, the Treasury said there was no clear case for the United Kingdom to agree to a formal currency union with an independent Scotland, which would have an economy of a similar size to New Zealand’s…
“The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties,” it added.
Scotland and England have a long history. Not all of it good. But if we’ve learned anything from history it is that large economic blocs do better than smaller counties. As the United States demonstrated. And as the Eurozone tried to duplicate with their currency union. But as that experiment showed us a currency union without a political union is a recipe for disaster. If Scotland breaks from the United Kingdom they will have to go all of the way. And leave sterling. Which will make independence more difficult. Having to set up a new currency with everything else they will have to do. (Such as dealing with separating their military forces from the UK’s. And providing for their own defense. Or forming a military union with the UK. Which will tie them closely to the UK. Something many Scots no doubt will consider before voting in the referendum.)
Of course if they do and they devalue their new currency it would make their exports cheaper to those nations with a stronger currency. But that weak currency will make anything they import more expensive. As Scotland exports and imports a lot of stuff they won’t get a clear advantage in devaluing their new currency. So they may peg their new currency to sterling. The next best thing to keeping sterling. Which will tie them closely to the UK. Something many Scots no doubt will consider before voting in the referendum. Perhaps choosing to stay in the UK. As Quebec chose to stay in Canada in their past referendum. Who had less in common with the rest of Canada than the Scots have with the UK. For they don’t even speak the same language.
They could join the Eurozone. But recent events in the Eurozone does not make that option as appealing as setting up a new currency. Or staying a part of the UK. It would probably be best for the rest of the world if Scotland remained part of the UK. For the world will need at least one strong reserve currency. As the Euro is making itself less attractive by the day. The U.S. dollar may hit the wall soon with the amount of debt the Americans are racking up. And the Chinese are likely to go the way of Japan before the decade is out. And have their own Lost Decade with all their malinvestments. The ultimate cause in the fall of state-capitalism.
Now the UK has its problems. But their decision to stay out of the Eurozone was clearly sound as a pound. And pound sterling may grow even more attractive as a reserve currency as these other countries continue to rely on easy credit and debt to pay for their burgeoning welfare states. And/or their malinvestments. But one thing the UK is doing that none of these other bloated states are doing is making real cuts in spending. Even in their venerated NHS. Giving the UK the edge in responsible governing these days. And really making a strong argument against Scottish independence at this time. Even for those who hate England. For it is better to deal with the devil you know than the devil you don’t. Especially during uncertain times.
Tags: currency, currency union, debt crisis, England, European Union, Eurozone, Greece, political union, pound, referendum, reserve currency, Scotland, Scottish independence, sterling, UK, United Kingdom, united states of Europe, welfare state
Week in Review
According to the polls the Scottish people want to remain part of Britain (see Just one in three Scots wants independence from Britain, poll shows by Simon Johnson posted 5/25/2012 on The Telegraph).
An opinion poll published by Alistair Darling, the former Chancellor, showed only 33 per cent of voters in Scotland want independence and 57 per cent are opposed…
Mr Salmond will be joined in Edinburgh this morning by celebrities and the leaders of minor left-wing parties to formally start his bid to end the 305-year-old Union between England and Scotland…
Mr Darling’s publication of the The YouGov poll, which also showed more people think a separate Scotland would be worse off financially, was timed to undermine their message…
Nearly half of respondents (47 per cent) said they thought Scotland would be financially worse off after separation compared to only 27 per cent who said it would be wealthier. Thirteen per cent said independence would make no difference.
The finances of an independent Scotland would depend on a couple of things. First of all there’s Britain’s debt. Trying to apportion Scotland’s share of that would be more an act of politics than accounting. And what about the military? Would the Scottish units in the British armed forces return to Scotland? If so would Scotland pay to outfit replacement units in the British armed forces? Or would Scotland just enter into an armed forces agreement with Britain to carry on as if they didn’t become an independent nation? And what about the currency? Would they still be part of the Bank of England? Or would they join the Eurozone? And be a part of it when it finally implodes? Trade agreements? How would this affect treaties negotiated by Britain for Scottish interests? What about environmental regulations? Would they exit the emissions trading scheme? Would they exploit their coal and oil resources? Or build more windmills?
Interesting questions but moot. For based on a recent opinion poll it appears the Scottish are not in favor of altering 305 years of history.
Tags: Britain, independence, Scotland, Scots, Scottish, United Kingdom
Week in Review
Putting up windmills in the country is one thing. Sure, the famers may hate not being able to get a decent night’s sleep because of the incessant noise from the windmills but what are they going to do about? They’re poor farmers. It’s not like they’re rich (see Angry Donald Trump blasts plans for Scottish wind farm near his luxury golf resort by Associated Press posted 2/10/2012 on The Washington Post).
Trump has launched a blistering attack on Scotland’s First Minister Alex Salmond over plans to build a “horrendous” wind farm off the coast of his luxury Scottish golf resort. In an open letter, Trump accuses Salmond of being “hell bent on destroying Scotland’s coast line and therefore Scotland itself…”
He ridicules the Scottish National Party’s renewable energy policies, claiming the economic benefit is going to China and other countries, not Scotland.
“Jobs will not be created in Scotland because these ugly monstrosities known as turbines are manufactured in other countries such as China. These countries, who so benefit from your billions of pounds of payments, are laughing at you!” Trump said.
Trump isn’t alone. The late Ted Kennedy felt the same way. Back when they were trying to install windmills in Nantucket Sound that could provide three-fourths of Cape Cod’s power cleanly without any carbon footprint Kennedy said whoa now, just wait a minute. This champion of green energy said windmills are all well and fine when they spoil someone else’s view. But not ours. We’re rich. Put them someplace else.
It just goes to show you that rich people don’t like green energy. At least, not when it’s in their own backyard. But at least Trump notes an economic argument as well. And then there’s the fact that sometimes the wind doesn’t blow. Which is why windmills have a pretty low capacity factor (only 20-40% of the installed capacity is typically generated). A lot of money for little benefit to combat the lie of man-made global warming. If Trump knows anything it’s return on investment. So not only will they spoil his view they’ll do so for a bad investment. Which must just add insult to injury for an investor like Trump.
Tags: Carbon, carbon footprint, Global Warming, golf resort, green energy, Kennedy, rich, Scotland, Trump, windmills
Week in Review
Scotland is part of the United Kingdom. It has been for some 300 years. But that may change (see UK to say if Scots’ independence vote result binding by Adrian Croft posted 1/8/2012 on Reuters).
The pro-independence Scottish National Party (SNP) won a majority in Scotland’s devolved parliament in an election last May – 304 years after the English and Scottish parliaments were united – and pledged to hold a referendum on independence within five years.
Some great people came from Scotland. And great thinking. Which greatly influenced and shaped the United States. Just look at some of these Scots. Adam Smith who influenced modern politics and economics. Robert Dinwiddie, Lieutenant-Governor of Virginia, who helped a young George Washington to prominence. James Watt who improved the steam engine that launched the Industrial Revolution. And Andrew Carnegie who’s steel empire built America. To name just a few.
That said independence may not be in Scotland’s best interest. As the Eurozone clearly demonstrates. An economic union does not work without a political union. The point of the Eurozone was to produce a large economic zone. Like the United States. Which has survived for 235 years and counting. Whereas the Eurozone is barely 12 years old and desperately struggling to survive. In large part because there is no political union.
Economically speaking, being part of the United Kingdom will probably benefit Scots better than independence. At least, based on what’s happening in the Eurozone.
Tags: economic union, Eurozone, independence, political union, Scotland, Scottish National Party, union, United Kingdom