Letter from an Economist

Professor Ronald Macdonald of Glasgow University has written a letter to the Guardian about the economic options which would face an independent Scotland.

It includes the following.


"I would"  (question the claim), "that sterlingisation is a “feasible” option, particularly with Scotland’s fiscal deficit heading north of 25% of GDP due to the pandemic. 

Scotland persistently runs a deficit on the current account of its balance of payments of around 10% of GDP (£16bn). 

Currently this deficit is settled by the UK. 

With independence, Scotland would be responsible for financing its twin fiscal and current account deficits. Sterlingisation is a form of fixed exchange rate and therefore does not provide a balance-of-payments adjustment mechanism, and since an independent Scotland would also no longer have fiscal transfers from the rest of the UK, it would need large-scale borrowing to compensate. 

However, financial markets would not regard a fixed exchange rate system combined with large twin deficits as credible, and this would produce a classic currency crisis in which sterlingisation would have to be abandoned and replaced with a new separate currency at a sharply devalued rate. 

The combination of no external adjustment mechanism and large-scale borrowing in a foreign currency, along with a unitary probability of devaluation, is simply a recipe for national bankruptcy. 

Prof Ronald MacDonald, Adam Smith Business School, University of Glasgow

Comments

Post a Comment

Popular posts from this blog

Nick Herbert on his visit to flood hit areas of Cumbria

Please note that the post below was published more than ten year ago on 21st November 2009 Nick Herbert MP, shadow cabinet member for the Environment, Food, and Rural Affairs, was in Cumbria this morning to see the areas affected by the flooding. He writes on Conservative Home about his visit. Here is an extract. I’ve been in Cumbria today to see the areas affected by the floods. I arrived early in Keswick where I met officials from the Environment Agency. Although the river levels had fallen considerably and homes were no longer flooded, the damage to homes had been done. And the water which had got into houses wasn’t just from the river – it was foul water which had risen from the drains. I talked to fire crews who were pumping flood water back into the river, and discovered that they were from Tyne & Wear and Lancashire. They had been called in at an hours’ notice and had been working on the scene ever since, staying at a local hotel. You cannot fail to be impressed by the
Read more

Quotes of the day 19th August 2020

Image
"Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of fools, but fools do not imitate the successes of the wise."  ( Cato the Elder , who lived 234 BC - 149 BC, quoted in "Lives" by Plutarch.) There is a similar saying by Germany's Iron Chancellor, Otto von Bismarck: Benjamin Franklin is supposed to have put the same saying in a more humorous form: "Wise men profit by the mistakes of others, while fools will not learn even from their own blunders." See also this thread on the "Quote Investigator" website . Let us all be wise and learn from the events of the last few days.
Read more

Quote of the day 24th July 2020

Image
I was moved to put the passage below forward as a quote today when I saw a horrible post on twitter from someone writing that it was "excellent" that someone who took a different view from her about Brexit had died. I won't write which way round it was so that all the Remain supporters can assume the post was from a Brexit fanatic welcoming the death of a remainer and all the Leavers can assume it was a Remainiac welcoming one less Brexiteer. There's been plenty of nasty stuff on both sides but if you catch anyone of your own viewpoint  posting something like that who might listen to you, please do call them out on it - and point out that they're giving everyone on your side of the argument a bad name. Anyway, here's the quote from John Donne.
Read more