Scotland wants to Keep the Pound in a (somewhat) Independent Scotland

Posted by PITHOCRATES - March 8th, 2014

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.

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Britain and Scotland disagree over Scottish Currency in an Independent Scotland

Posted by PITHOCRATES - February 16th, 2014

Week in Review

The Eurozone was a grand idea to make an economic zone that could compete against the United States.  A United States of Europe, if you will.  But the Eurozone has suffered a sovereign debt crisis that was unavoidable.  As many analysts have identified the problem causing the Eurozone all its sovereign debt woes.  The lack of a political union.

The solution they say is for member states to give up some of their sovereignty and allow a Eurozone government have more control.  Like the United States of America has.  Which means putting even stricter controls on member states when it comes to their spending.  Which, in turn, would limit their deficits.  And their borrowing needs.  Which brought on the sovereign debt crisis in the first place.  Excessive spending beyond their ability to pay for with taxes.  Normally not a problem for other countries when another country spends itself into oblivion.  Unless, of course, there is a currency union with that country.  Which makes their problems your problems.  Problems that are impossible to solve without a political union.

The Eurozone sovereign debt crisis illustrates that a currency union without a political union will not work.  Which makes the movement for Scottish independence very interesting (see Britain warns Scotland: Forget the pound if you walk away by Belinda Goldsmith, Reuters, posted 2/13/2014 on Yahoo! News).

Britain warned Scotland on Thursday it would have to give up the pound if Scots voted to end the 307-year-old union with England, declaring the currency could not be divided up “as if it were a CD collection” after a messy divorce…

The message was aimed at undermining the economic case for independence and one of the Scottish National Party’s (SNP) key proposals – that an independent Scotland would keep the pound…

The debate has intensified in recent weeks with Bank of England chief Mark Carney cautioning that a currency union would entail a surrender of some sovereignty…

The SNP [Scottish National Party] has indicated that if London prevented a currency union, an independent Scotland could refuse to take on a share of the UK’s 1.2 trillion pounds ($1.99 trillion) of government debt which Britain has promised to honor…

Osborne said the nationalist threat to walk away from its share of UK debt would mean punitively high interest rates for an independent Scotland and was an “empty threat”.

“In that scenario, international lenders would look at Scotland and see a fledgling country whose only credit history was one gigantic default,” Osborne said.

Currently there is a political union between Scotland and England.  The United Kingdom (UK).  And Scottish independence would go contrary to what some analysts say is needed to save the Eurozone.  Political unity.  The problem in the Eurozone is that no one nation wants to give up any of their sovereignty and have some distant power tell them what they can and cannot do.  The way some in Scotland feel about London.  That distant power that governs the United Kingdom.

The British pound is one of the world’s strongest currencies.  A product of the powers in London.  Because they have political control across the UK.  If they lose their political control over Scotland will it damage the British pound?  If the Eurozone is any measure of a currency union without a political union, yes.  So it will be interesting to see what happens between these two great nations.  Whose people made the world a better place.  People like the great Scotsman Adam Smith.  And the great Englishman John Locke.  To name just two.  So whatever happens let’s hope it’s in the best interest of both countries.  For countries everywhere enjoying economic freedom and human rights can thank these two countries for their contributions to the British Empire.  Which helped spread the best of Western Civilization around the world from the United States to Canada to Australia to Hong Kong.  And beyond.

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The Problems in the Eurozone may Influence Scottish Voters in their Independence Referendum

Posted by PITHOCRATES - April 27th, 2013

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.

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The Solution to Europe’s Debt Crisis may be as ‘simple’ as the Eurozone Nations surrendering their Sovereignty

Posted by PITHOCRATES - June 24th, 2012

Week in Review

The solution to the Eurozone debt crisis is easy.  All the European nations have to do is surrender their sovereignty (see The eurozone’s long reform wishlist by Laurence Knight posted 6/24/2012 on BBC News Business).

A US-style federal budget may be needed to cover the cost of recessions, so that individual governments don’t risk going bust when their national economies get into trouble. For example, the cost of a minimum level of social security – especially unemployment benefits – could be permanently shared across the eurozone, paid for by a common income tax.

Welcome to the new world order.  At least the new country of Europe.  Made up from the former European nations.  And, unsurprisingly, the answer to all their problems is a new tax.  Not just any tax.  But a European income tax paid to a distant central power.  The kind of thing that embroiled Europe in wars to prevent going as far back as the Roman Empire.  And beyond.

The European Central Bank may need to have its mandate changed so that it has an explicit dual target to support employment as well as price stability, just like the US Federal Reserve does, as proposed by the new French President Francois Hollande.

Because it has worked so well in the United States.  The Fed was in charge during the Great Depression.  The Fed was in charge during the stagflation of the Seventies.  The Fed was in charge during the irrational exuberance of the Nineties.  And the Fed was in charge during the great housing bubble that gave us the subprime mortgage crisis.  Few people in the US think the Fed should be supporting anything these days.  For they feel they’ve done enough damage.

All Europeans (and especially southerners) are having to implement structural reforms that will increase their long-term growth and strengthen government finances, including removing restrictions on market competition, raising the retirement age, laying off (over many years) a lot of state employees, and making it much easier to hire and fire employees.

Really?  Something the individual European nations couldn’t do (cut back generous state benefits) a European country can?  Students in France took to the streets when they added a year or so to the retirement age.  Students took to the streets in Britain when they tried to make students pay for a part of their college education.  And Greece’s answer to austerity?  Riots.  It is easy to say what they must do.  Getting them to do it is another thing.  And they’ve clearly shown they don’t like doing it.  And so far have chosen not to.

In the same way that Washington has helped out struggling US states, the southern European governments may need to be given money (given, not lent) by the rest of the eurozone via direct fiscal transfers, so that they can afford to prop up their economies until they have regained competitiveness. These transfers could end up taking the form of bailout loans that are never repaid.

The US government can’t afford to bailout any states.  The state of California is in trouble.  As are some of our big cities.  Such as Chicago.  And New York City.  They have the same problem Greece has.  They have far more spending obligations than they can afford to pay.  As did the state of Wisconsin.  Whose governor implemented the kind of structural reforms suggested for the new European country.  And the opposition party and the federal government attacked them for it.  Organized a recall drive to kick out the governor.  And undo those structural reforms.  But the recall failed.  The governor won the recall election by a large margin.  Showing the people are no longer going to pay for other people’s irresponsible spending.  As the European people probably won’t want to either.

To make a full banking, fiscal and monetary union work, the eurozone governments would need to hand power to a central authority (the European Commission) that can pay for and supervise all of the above, while national governments accept that in future they have to keep their own spending strictly within their limited means.

 As most of the above reforms involve Germany sharing its wealth with the rest of Europe (and all European nations handing power to Brussels), Berlin is insisting on the principle of no taxation without representation – in other words a move towards full federalism, with spending and regulation controlled by a directly elected presidency of the European Commission.

Few European governments like hearing Germany tell them to implement structural reforms.  They’re not going to like it any better coming from Brussels.  Federalism wasn’t easy in the US.  We had to fight a civil war.  Go through reconstruction.  To this day we’re still fighting regional conflicts.  The Midwest is strongly union while the southern states are not.  And the federal government recently intervened on the side of the unions when Boeing tried to build a new aircraft manufacturing plant in the South.  In fact, those in the federal government refer to those states as flyover country.  Which is all they want to see of that country.  Flying overhead as they go between the east and west coasts.  Where the big government people live.

The 13 original American states had only about 200 years of history before they joined the federal union.  The European people have over 2,000 years of history.  It is unlikely that they will willingly choose to become flyover country.  No, there isn’t any easy solution to their problem.  If there was they would have already done it.  A currency union without a political union may just prove to have been a bad idea.  A political union isn’t likely.  Unless the people of Europe are more willing to give up their 2,000 years or so of history than the Americans were willing to give up their 200 years or so of history.  And if they’re not they should really think long and hard about creating something even bigger than the Eurozone.  That may be even more difficult to fix.  Should it follow US history too closely.  Where that first hundred years proved to be a bitch.

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The Greeks give their Answer to the Latest Bailout Package – Violent Protest

Posted by PITHOCRATES - February 12th, 2012

Week in Review

And the saga continues.  The ever elusive solution to the Greek debt crisis grows ever more elusive (see Greece reels after leaders agree to harsh spending cuts by Michael Birnbaum posted 2/10/2012 on The Washington Post).

Greeks clashed on the streets of Athens and in the halls of government Friday, as protesters grew violent and one after another cabinet minister resigned, a day after the nation’s leaders accepted foreign lenders’ demands for tough austerity cuts to try to stave off bankruptcy.

By late evening, six cabinet members had resigned and Prime Minister Lucas Papademos went on state television to threaten members of his shaky coalition government with expulsion if they opposed making sweeping spending cuts in exchange for a bailout that would keep Greece from defaulting on its debts by mid-March. A Greek bankruptcy could shake the euro zone and potentially wreak havoc throughout the global financial system…

But protests over the austerity plans were already paralyzing the capital, as thousands marched during a demonstration led by the country’s two largest unions. The new mandates will reduce the minimum wage to $780 a month from $1,000 a month, slash social entitlements, freeze salaries for years and cut 150,000 workers from government payrolls by the end of 2015. Greek unemployment already stands at 20.9 percent.

Some protesters threw gasoline bombs and stones at riot police, who responded with tear gas, the Associated Press reported. Police said that eight officers and two protesters were injured. The unions called for a 48-hour general strike, the second this week, and much of Athens was shut down…

“Of course we do not want to be outside the E.U., but we can get by without being under the German jackboot,” Karatzaferis [head of a junior partner in Greece’s coalition government] said at a news conference. “I would rather starve.”

This is the problem with the Eurozone.  There’s a currency union.  But no political union.  While the Germans were being responsible (for they have a history of hyperinflation they don’t want to repeat seeing that it gave the world Adolf Hitler) the Greeks were spending beyond their means.  And may have fudged their numbers to join the monetary union.  And now the Greeks are broke.  And they need someone to bail them out.  And guess who is the richest in the Eurozone?  That’s right.  Those responsible Germans.  And what do some Greeks call the only people who can bail them out?  Jackboots.  A not so veiled Nazi slur.  With love like that they’ll never be a political union in the Eurozone.  And perhaps no Eurozone when countries start going bankrupt.  Starting with Greece this March.

The Greeks are well on their way on the Road to Serfdom.  The public sector has grown so large that those left in the private sector can no longer pay for them.  Which gives them a very unfortunate choice.  Either shrink the public sector by slashing costs.  Or kill the private sector entirely.  And make all Greeks serfs in a new state economy of subsistence.  Where everyone will be equal in their suffering.  Except, of course, those in the ruling class.  Who will be more equal than others.  And will be able to enjoy their lives.  Much like in North Korea.  Where Kim Jong il carried a few extra pounds while his people suffered famines.  Of course, before that happens there will be a great exodus as Greeks flee their country.  Which will inundate other countries with refugees.  And cheap labor.  As refugees typically are.  Throwing their economies into turmoil.  Spreading the Greek contagion throughout Europe.

There is no easy way out for Greece.  And it’s going to get worse before it gets better.  This should be a lesson in the growth of state spending.  But will anyone learn?  Let’s hope so.  Because if Germany or the United Kingdom or the United States goes down this Road to Serfdom the Greek problem will pale in comparison.

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The Eurozone to fail because they will Never have the Fiscal or Political Union Required to make a Currency Union Work

Posted by PITHOCRATES - December 11th, 2011

Week in Review

The Eurozone is doomed.  For the things they say they need to do they just can’t agree to do (see Like it or not, the euro is doomed by Hibah Yousuf posted 12/9/2011 on CNN Money).

European leaders, particularly from France and Germany — the eurozone’s two largest economies — have had very different views on the ultimate role of the fiscal compact, and the latest proposals are just “too little, too late, and miss the structural problem,” said Leach.

Germany has been strongly opposed to sending the ECB down a path of printing money to stabilize Europe’s economy.

“Printing money is associated with hyperinflation, the collapse of the Weimer Republic, and the rise of Hitler,” noted Leach. “From a German perspective the question is that, once the ECB has lost its virginity printing money, just how promiscuous could it become.”

Hyperinflation and the collapse didn’t happen when they started printing money.  These happened after they printed a lot of money.  It was a progression.  For it takes time to make your currency worthless.  Which is something the Germans don’t want to experience again.  Because it didn’t end well for them the first time.

Afseth said the fiscal union needs to focus more on boosting economic growth, rather than just pushing for budgetary discipline and fiscal austerity. And it needs to advocate for pooling the eurozone’s debt together, so the region can issue eurobonds, another highly contentious topic among Europe’s political leaders.

Despite the multitude and extent of the political disagreements that could lead to the eurozone’s crumble in the near-term, more optimistic experts say Europe’s leaders will likely find a middle ground to avoid the severe economic consequences.

“The political arguments are strong, but they come against a hard economic reality,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, Scotland, noting that the costs for a single country leaving the eurozone could amount to at least 15% or 25% of its economy, if not more.

There are those who want the European Central Bank (ECB) to assume the debt of the member states.  Like the U.S. did in 1790.  But the Americans already had a currency union.  And a political union.  As well as a common language.  A common heritage.  Common institutions.  A national post office.  And a lot of other common things.  With only about 100 years of history.  And despite all of this the idea of assumption did not go over well.  It took a fight.  And some wheeling and dealing.  Europe, on the other hand, has only a common currency.  And they’ve been around for about 2,000 years of history.  So chances are all they will have is a common currency.  And they may not be able to save that.

The Eurozone was the answer to the United States.  The world’s number one economy.  Because within her borders was the largest free trade zone in the world.  Which exploded her economic growth to the top spot.  The Eurozone was to replicate that in Europe.  A united states of Europe.  And it worked.  But it probably won’t last.  If only one nation drops out of the Eurozone it could reduce the economy of the united states of Europe by 25%.  And if one goes more will probably follow.  This economic powerhouse will be united no longer.  And it will probably plunge Europe into recession.

“A break-up could result in very major recession in Europe, and so it’s hard to imagine how any politicians and governments could possibly make a conscious, voluntary decisions to leave the eurozone,” said Milligan.

So clearly the Euro failing will be too painful to endure.  So painful that the member states will try everything within their power to prevent that.  Including trying to get the ECB to issue Eurobonds.  And print money.  Much like Richard Nixon did when he abandoned the gold standard in 1971.  Saying he was then a Keynesian, too.  And the U.S. spun out of control with double digit inflation rates.  High unemployment.  Stagflation.  And it wasn’t Keynesian economics that finally fixed this mess.  It was the anti-inflation policies of Paul Volcker of the central bank.  He raised interest rates.  And stopped printing money.  This fixed the inflation problem.  Then Ronald Reagan fixed the economic problem.  By cutting taxes.  Something the Europeans may not be physiologically able to do.

So it really doesn’t matter what they do.  For the end will be the same.  It may be sooner or later.  But the Eurozone will most probably dissolve.  Because they will never have the fiscal or political union required to make a currency union work.

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