An overwhelming majority of respondents to the third monthly survey of the Centre for Macroeconomics dismissed the move. As the Scottish electorate prepares to vote on independence in September, a smaller majority of the CFM experts agree that the UK would be acting in its own economic interests by ruling out a monetary union with an independent Scotland.
The Centre for Macroeconomics is an ESRC-funded research centre including the University of Cambridge, the London School of Economics, University College London and the National Institute of Economic and Social Research.
This is the first survey of independent professional economists specifically to address economic issues in the Scottish independence debate.
On 18 September 2014, the Scottish electorate will be asked the following question: “Should Scotland be an independent country? Yes/No.” In the event of a ‘Yes’ vote, the plan is that Scotland would become an independent country in March 2016, and thereby no longer a constituent nation of the UK after 307 years. The CFM survey asked two key questions about the potential economic consequences of a ‘Yes’ vote:
Question 1: Do you agree that that Scotland would be better-off in economic terms as an independent country?
Twenty eight of the 46 CFM experts replied to this question. Three quarters of the respondents said that they either disagree or strongly disagree with the proposition. Only one of the 28 respondents either agrees or strongly agrees. Excluding the six respondents who say they neither agree nor disagree, 95% of respondents either disagree or strongly disagree that Scotland would be better-off in economic terms as an independent country.
The CFM respondents’ main concerns are over the fiscal outlook for an independent Scotland. George Buckley (Deutsche Bank) describes an independent Scotland as being exposed to weaker tax revenues from depleting oil resources and a worse demographic profile than in the rest of the UK. John Driffill (Birkbeck) notes that an independent Scotland could set its own policies to suit preferences in Scotland, but may lose out because some things that are done better jointly by Scotland and the rest of the UK will become more difficult to coordinate. Both Michael Wickens (York) and Martin Ellison (Oxford) say that Scotland might pay higher borrowing costs than the UK.
Several respondents question the wisdom of unpicking many institutions when the effectiveness of the institutions that will replace them is unknown. David Cobham (Heriot-Watt) asks whether pulling apart the members of well integrated nations makes sense; Jagjit Chadha (Kent) raises the possible risks if the new political and economic settlement is not robust; and Michael McMahon (Warwick) thinks that there would be significant transition costs.
Several respondents are concerned at the uncertainty over the time it might take an independent Scotland to (re)-join the European Union (EU). Marco Bassetto (UCL) says that in his view the process of accession to the European Economic Area (and the EU) are more important than the issue of monetary union. Richard Portes (LBS) and Nicholas Oulton (LSE) also express concerns that the uncertainty over the EU could be detrimental for the economy.
Question 2: Assuming that Scotland becomes an independent country, do you agree that the UK government's position of ruling out a monetary union is in the economic interests of the continuing UK?
Thirty four respondents answered this question. Views are much more evenly split than for the first question: 53% agree or strongly agree that ruling out a monetary union is in the economic interests of the continuing UK while 41% disagree or strongly disagree. Excluding those who neither agree nor disagree (two respondents), the share who agree is 60% when weighted by respondents’ confidence in their answers. A majority of the CFM experts believe that the UK is acting in its own interests by ruling out a monetary union and the responses reveal uncertainty over whether a robust supporting framework is viable.
The differences in views between the CFM experts in large part depend on whether they believe that credible and robust fiscal arrangements to support a monetary union could be implemented.
Martin Ellison (Oxford) says that the recent euro crisis shows how challenging a monetary union is without a fiscal, political and banking union. David Cobham (Heriot-Watt) thinks than any satisfactory constraints for the UK would preclude anything that could be called independence for Scotland. Luis Garicano (LSE) considers that any commitment not to bail-out an independent Scotland would not be credible with the world or the Scottish government. Therefore, the UK would end up with the worst of both worlds: a lack of market discipline and moral hazard.
Other respondents think that the taxpayers of each sovereign state could be isolated from the risks or the other. Andrew Mountford (Royal Holloway) considers that it should be possible to agree such arrangements. Wendy Carlin (UCL) and Simon Wren-Lewis (Oxford) are of the view that the UK could introduce conditions that would insulate it from risks, although they may prove problematic for an independent Scotland. Two respondents, Sir Christopher Pissarides (LSE) and John Driffill (Birkbeck), think that the UK’s stance is purely motivated to influence the referendum.
Some respondents question whether a monetary union is appropriate, irrespective of fiscal constraints. Richard Portes (LBS) notes that there are already enough problems with regional heterogeneity for the Monetary Policy Committee setting a single policy rate; Jagjit Chadha (Kent) believes that a monetary union makes sense as a transitional arrangement only; and George Buckley (Deutsche Bank) thinks that any decision to form a monetary union should be put to the people of the continuing UK.