Quora Question: Why did Britain vote to exit the EU?

EU organisation diagram

I must reduce the number of questions I answer on Quora. One of these days I need to write something somebody will pay for. But meanwhile:

I can’t speak for my country.

I personally think the proximate cause was the unwillingness of the EU during Cameron’s negotiations to offer even minimal gestures towards reforming those policy areas that raised concern in the UK. They did this in the full knowledge that Cameron needed a deal he could sell to the electorate. Instead, he was humiliated. After a widely-derided effort to suggest that he’d obtained worthwhile concessions, he effectively had to drop the whole subject of the supposed reforms from the referendum campaign.

In respect of immigration, the critical issue was the way the economically-unsound idea of free movement of people had quietly replaced the economically-sound idea of free movement of workers in EU treaties. The latter is about allowing factors of production to move to areas of gainful employment; the former only makes sense as part of a political project and throws intolerable burdens on to the public and social services of richer member countries. It’s worth noting that other members subsequently adopted restrictions they’d refused to Cameron.

Let us also for a moment consider the alternative to the UK leaving. Remainers argue their position was the status quo; it was not. The EU has two major projects that define its objectives; these are the Schengen Agreement on open borders and the Euro single currency. The UK had already decided to opt out of both. We had no influence on these two central issues. Hence we could only ever have been a fringe member going forward.

In particular the Eurozone members collectively outvote the non-members in the EU. They meet together, without the non-members, in order to agree a common position before EU Council meetings. One Eurozone meeting even decided to commit EU funds to a bailout scheme despite the UK, a major contributor to EU funds, not being present at the table.

In summary, I rather think the EU left the UK.

Enemies at Home and Friends Abroad

Setting Sail

One might have hoped the UK's  triggering of  Lisbon Article 50 would at least put a stop to Cassandra-like prophecies of doom at home. Surely the country would come together to make the best of the situation, like it or not?

Too much to hope for, I fear. The Scottish Government still wants to undermine the UK's negotiators with plaintive noises off, while many Remainers seem far more anxious to be proved right than they are for the country's wellbeing.

It might help if Remainers remembered the referendum campaign featured a dodgy prospectus on both sides and that Leavers weren't all ignorant and gullible; in fact we included several high-powered economists. The surging exports and solid economic growth since last June don't really resemble the catastrophe Remainers predicted, nor was a punishment budget required.

Moreover it would make more sense complaining about the Brexiteers' failure to deliver if the Brexiteers actually controlled the government, which they don't.  When did Theresa May promise loads of money for the NHS?

Let us consider the two biggest projects of the EU. (Since we opted out of both of these, we could only ever have been peripheral members henceforward anyway.)

• The Euro is an economic disaster which can't be admitted because of the political fallout that would result, so they just let it cause thirty percent unemployment and chronic financial crisis in southern Europe instead. If we lived in Greece we might learn what it really means to have something to feel pessimistic about.

• The Schengen Agreement is collapsing under the weight of uncontrolled migration and frontier fences have gone up all over Eastern Europe.

I have said before that political will is not enough to support a project to link so many economies by a common currency. The fudging of membership criteria did not begin with Greece, it goes right back to the foundation of the single currency when Italy's debt was almost twice the permitted percentage of GDP and France only qualified for the fiscal deficit criterion by a one-off privatisation of Thomson.

The point politicians failed to appreciate then and now is that the Eurozone membership criteria were not mere inconveniences to be circumvented but genuine economic convergence indicators. If you link divergent economies by a single currency you deprive weaker economies of the disequilibrium-corrective possibilities offered by the balance of payments and by currency devaluation, leaving only rising unemployment to provide a quite inadequate escape valve.

This is why it is not just Greece that has experienced severe dislocation but also Cyprus, Italy, Spain, Ireland etc. Even France has suffered. Although Germany has seen benefit from an undervalued currency it is now paying the price in terms of ever-increasing transfers to the hopelessly indebted zone members.

Does anyone really think the EU will return to being an economic powerhouse anytime soon? On the other hand outside the EU we have huge potential to develop new trading relationships with parts of the world that are enjoying rapid growth. The UK is not trying to make enemies or wishing ill to the continuing EU. We are simply seeking a wider circle of friends.

Though peevish voices in Europe may declare the UK must suffer 'pour encourager les autres' it is to be hoped that economic sanity will be allowed to prevail over political pique. Beggar your neighbour is not a good strategy for a continent that needs all the boost from trade it can get. 

And really - can they think of no better arguments for membership of the EU than to show how horrible they can make it for those who want to leave?

Listen to Ben

"We are all born ignorant, but one must work hard to remain stupid."  -  Benjamin Franklin

Since the introduction of the Euro in 1999, of  the main Eurozone economies Germany and France have grown by less than a quarter, while the economy of Italy has barely grown at all. Meanwhile the economy of the UK, outside the Eurozone, has grown by more than one third.

As a consequence of the Eurozone's sluggish performance, its unemployment rate remains almost 10% and youth unemployment is very much higher.

Since the EU's common currency has caused this economic meltdown, it is ironic to hear the continuing chorus from the Brussels elite that the solution is more Europe, not less.

It is doubly ironic that UK Remoaners are engaged in a last ditch battle to overturn the result of the Referendum so that our country can continue to be shackled to a moribund system.

Utterly failing to understand the popular vote, they continue to claim the majority were ill-informed and worse-advised. Leave voters didn't know what they were doing, poor things, and really need to be protected from their own folly by right-thinking people who truly understand these matters.

The best course now, they claim, is to hang on to an inferior version of EU membership rather than boldly turning our eyes towards the great opportunities outside Europe.

To that end every effort must be made to sabotage the government's negotiating position by placing it all before parliament first. It's only fair, after all, to put your cards face up on the table, otherwise how would your opponent know whether to raise or fold?

One more time please, Ben.

The EU Referendum - A Neglected Issue

It seems to me that a fundamental issue of the EU referendum has been barely touched upon in all the sound and fury of debate.

I consider the economic arguments pretty finely balanced and the immigration problem harder to settle, even after Brexit, than is generally supposed.

But during the so-called renegotiation conducted by the Prime Minister an issue far more important than any of the trifles gained was conceded: this was the UK's veto on further integration of the Eurozone.

If we remain in the EU we shall no longer have the power to block measures that favour the Eurozone, even if they are not in our interest. We may simply draw attention to the problem, following which the in-built majority of the Eurozone can press ahead regardless.

I have explained in previous posts why the political project of a single currency was always a pipe-dream in the absence of fiscal consolidation and the sort of mechanism for transfers to poorer regions that cannot long survive outside the borders of one country.

The inhabitants of the Eurozone may or may not want it to become a single country. No-one has asked them and the Brussels elite will try to avoid doing so.

However history shows us that whenever a measure of further EU integration has been rejected by referendum the country concerned has been required to vote again and this time get the answer right.

To the disastrous unemployment and indebtedness across the southern member states, Brussels knows only one answer – More Europe. Never mind that the single currency caused most of the problems; the single currency is by definition good and all steps necessary to make it work are therefore also good.

To the calls for Britain to lead rather than leave the EU, I say - How can we lead from the fringes? The single currency is at the core of the project and we have vowed to have nothing to do with it. The Schengen Agreement is the second biggest undertaking and we have vowed to have nothing to do with that.

There is no choice available between having the EU consider or not consider UK interests. To me a vote to Remain is a vote to be permanently outvoted and our interests ignored anyway. However, unlike after Brexit, we should not be allowed to remedy the situation by negotiating freely on our own account with the rest of the world.

Meanwhile we shall be allowed to continue paying the bills.

And if you think the only bills are financial, you might just ask our fishermen what the EU has done for them.

Is there anybody out there who can count?

Those of us who, following the projections contained in the celebrated White Paper Scotland's Future, were not already convinced of the SNP's collective inability to count, should have been convinced by the First Minister's contention that losing her overall majority at Holyrood could be described as winning convincingly.

True, the SNP got more votes than anyone else, but that still left the anti-SNP majority very little changed from the Referendum almost two years ago. It would be nice to think that in the not too far distant future the nationalists' claim to a monopoly of Scottishness would be seen for the nonsense it is and attention could instead be returned to the delivery of public services. Health, education and law & order cannot indefinitely play second fiddle to the demand for constitutional change.

Meanwhile we can all turn our attention to the EU Referendum next month, where we are told by the SNP that it will be an outrage if Scotland is taken out of the EU against its will.

Let us leave aside for the moment the uncomfortable fact that Scotland as such is not a member of the EU, the UK is, and that if Scotland had voted to leave the UK it would therefore have been voting to leave the EU even more briskly.

What is interesting, given the tied opinion polls, is the prospect that a Scottish Remain vote might very well end up obliging the rest of the UK to remain in The EU against its will. Will this also be an outrage? I await enlightenment from the First Minister but I'm not holding my breath.

Although only a few months ago David Cameron told us we could prosper outside the EU and he would himself lead the Leave campaign if he failed to get reforms, we are now presented with the unedifying daily spectacle of (mostly foreign) experts and bigwigs lined up in an orchestrated fashion by the government to prophesy everything up to and including the Third World War if we are foolish enough to think of leaving the EU.

For some reason they have not yet got round to the plagues of frogs and locusts, but I expect they will if the poll numbers remain stubborn.

None of these foreign experts appear to appreciate the perverseness of the British character, which tends to make us more likely to do something, not less, when lots of people with a vested interest are all telling us not to do it.

For my part the key issue is the crippling burden of supporting the ill-starred Eurozone, of which the UK is fortunately not a member.

The Eurozone countries have an in-built majority in the EU and can out-vote the UK permanently, especially since Cameron's renegotiations gave up our right to veto Eurozone measures that are not in the UK's interest.

Already during the Greek crisis last year we have seen the Eurozone vote to use EU funds when non-Eurozone EU-members such as the UK were not even present at the table. In other words they voted for us to share a payment without bothering to consult us. Although a fudge was found to get round this when their abuse of power was exposed, it seems very likely to be a taste of things to come if we vote to remain.

No-one should be under any illusion that a vote to remain is a vote for the status quo. The status quo in the EU is not sustainable as the recurrent national insolvencies show. Despite the lack of a democratic mandate, the EU elite have no option but to pursue further integration, including political integration, for the Eurozone.

Woe betide those EU members who do not see this integration as being in their best interests.

The EU Referendum and Scotland

I am disturbed by the glibness of the prevailing assumption that if Scotland votes to remain in the European Union and the rest of the UK votes to leave, it will be appropriate to hold a second independence referendum.

Some time ago I pointed to the damage inflicted upon inward investment to Quebec by the determination of defeated separatists to hold a referendum re-run. Political instability deters investment no matter how often the SNP claims otherwise. Since the European polls are evenly balanced and the Scottish polls not much clearer, we now have the worst of all possible worlds.

The fallacy of the assumption that Scottish enthusiasm for the EU will lead to the break-up of the UK lies in the conflation of these two questions. Just because a voter favours remaining in the EU it does not follow that he or she would vote for independence rather than see that wish thwarted.

So far as I am aware, no-one is being asked at the moment whether they would prefer to be in the EU or the UK. Even that would be a fraudulent question, since Scotland is not a current EU member and would not be accepted as such even if the UK withdrew. A breakaway Scotland would still be a new applicant for EU membership, as was repeatedly explained during the independence referendum.

Therefore the actual question should be: Would you like to leave the UK and take a chance that our subsequent application to join the EU would not be vetoed by Spain and other member states anxious to avoid giving encouragement to restless ethnic minorities?

Does it make any sense at all to erect a border against our largest export market, the UK, in order to retain free trade with much smaller markets in the EU?

Is it remotely credible that the UK would leave the EU in a bid to cut immigration and then allow freedom of travel across the border with an EU Scotland?

Bearing in mind the chaos of the currency question during the independence referendum, does anyone seriously believe the UK would exit the EU and allow Scotland to take sterling straight back in?

EU rules require new members to join the Eurozone. How many people really want to join a system that has strangled economic growth, plunged its poorer members into impossible debt and obliged its richer members to bail them out?

Simply to state these issues is to show the foolishness of the assumption noted in my first paragraph. I do worry however that Europhiles will harp upon this refrain until more and more people in Scotland assume that it must be true.

The Euro makes you sick

If anyone still believed in the community spirit of the European Union they should have found themselves roundly disabused this week.

I have discussed in earlier blog posts the fundamental flaws of the Eurozone system. In brief, by removing the economic safety valves of devaluation and balance of payments effects, a single currency drives countries of unequal efficiency further and further apart by reducing the GDP and employment levels of the weaker.

In single currency areas such as the USA and the UK relatively little fuss is made about arranging compensating financial flows because the members are all parts of a single political state. The Barnett Formula exists to provide this compensation to Scotland (despite imaginative claims for the alleged strength of the Scottish economy.)

In the Eurozone there is no such political unity. This week has seen economic liberalisation measures forced on Greece as the price of its third bailout in six years that are too extreme even for the strong economies such as Germany to stomach themselves.

Yet as the leaked IMF paper reveals, the measures proposed will not allow Greece to pay off its mountainous debts. For all its ineptitude, the Syriza government has been correct about one thing; the so-called remedies are making the situation worse by increasing Greece's debt to GDP ratio.

The common cliche describes the Eurozone as kicking the can further down the road. I prefer to describe them as treating the symptoms (badly) whilst denying even the existence of the disease. Something is rotten at the heart of the single currency and no amount of name calling and blame allocating will put it right.

Full Fiscal Autonomy?

During the Scottish Referendum campaign, the question of a sterling currency union was controversial. There were claims that the pound was as much Scottish as English, which were true but which cunningly sidestepped the fact that the pound is not English either. It is the currency of The United Kingdom.

In previous posts on this blog I have discussed the difficulties that are bound to beset two economies of disparate size and structure that attempt to share a common currency. I concluded that the Chancellor was right to rule out a currency union between the UK and an independent Scotland.

Current discussion about Full Fiscal Autonomy for Scotland has so far failed to recognise the same currency problem dressed up in different words. What will happen when a single UK monetary policy is undermined by a fiscally autonomous Scotland adopting a borrow-and-spend stance whilst UK policy is still following a strategy of deficit reduction?

The answer is to be seen in the continuing Eurozone crisis. Under the monetary aegis of Germany, Greece, with Full Fiscal Autonomy because nobody respected the European Stability and Growth Pact, borrowed excessively because borrowing was far too cheap relative to the performance of the Greek economy.

In consequence for Greece the financial crisis of 2008 speedily became a debt crisis. This week's efforts are but the latest attempt by the Eurozone leaders to kick the can down the road one more time, still without addressing the fundamental absurdity of linking Germany and Greece within the straitjacket of a common currency.

It should not have escaped anyone's attention that the Greeks blame the Germans for not lending them more, whilst the Germans are tired of what they see as Greek profligacy. Is it really very difficult to look a little way into the future and see insults being traded between the Scottish and UK governments in remarkably similar circumstances?

The oil revenues that were to be the foundation of Scottish solvency now look like pie in the sky and no-one has much idea how to plug the huge pending revenue shortfall. Vague appeals to the extra revenue that economic growth might yield in the longer term, even if they turn out to be more than just wishful thinking, cannot hide the fact that in the short term Scotland must either tax or borrow heavily, or more likely both.

Full Fiscal Autonomy is incompatible with a common currency. Before our half-baked, less than half thought-through devolution process goes anywhere near it we need a clear, written federal settlement and firm fiscal constraints upon the budgets of all UK member states.

Wizard of Oz Election?

A column in The Times this week suggested the forthcoming election was like a contest between the Wizard of Oz characters Tin Man and Scarecrow; a party with no heart versus one with no head.  It went on to suggest the SNP was exploiting these mainstream shortcomings.

In my judgement, the SNP takes to even more egregious lengths than the mainstream parties the art of promising the manifestly undeliverable before wrapping the whole package in the mawkishness of a pledge to  deliver the victims of non-existent oppression from their imaginary chains. If ever there was a political grouping careless of its own shortcomings it is the SNP.

In democratic practice however practical shortcomings do not matter. The electorate are not going to check your sums; they are not likely to understand that today's over-consumers are stealing from future generations. They will even perceive unpalatable statistics as lies generated by a conspiracy. They feel that once upon a time we seemed to be able to afford things we allegedly can't afford now. The only possible explanation for this is government mean spiritedness.

Before the crash the Blair/Brown years delivered statistical growth by bloating the public sector and encouraging reckless borrowing; the coalition has restored statistical growth on the back of domestic consumption. (Though to be fair the Eurozone debacle has hardly provided them with a feast of export potential.) It's all done with smoke and mirrors.

I'm not sure about heads and hearts. Perhaps we should remember that the central government of Oz was also based on a populist fraud.

David in Euroland

A Tale for Children

David had to go to Euroland for a big meeting in Brussels. This is where sprouts come from and sprouts, as every child knows, are horrid tasteless vegetables resembling solid green ping-pong balls that adults won't let you leave on the side of your plate after Sunday dinner. Instead you're told they're good for you and made to sit there at the table until you've eaten every last one.

David was The Prime Minister of Britain and normally he quite liked sprouts but sometimes even Prime Ministers who like sprouts just feel that they've had enough and would rather have something else for a change.

Strangely enough the meeting that David had to go to wasn't about sprouts like most of the other meetings but about another kind of animal altogether called Eurocats - or maybe it was Eurocrats, he couldn't quite make out the foreign accent over the telephone - but in either case it had as usual been decided that all of them should be exactly the same, all green and all perfectly round with great grins on their faces because they'd skimmed off so much of the cream.

Once upon a time if you wanted to go to Euroland, which very few people in Britain usually did, you had to get on a cross Channel ferry. Nobody really knew why the Channel ferry was so cross, but as long as they could remember it always had been. Most people thought it was probably because it had to go to Euroland every day and they all sympathised.

Anyway that was before they dug a big tunnel under the Channel. It was officially considered much better to go by train because Euroland had long ago started running on rails. David was pretty sure of this because the papers continually published stories about how the European train had departed from the station leaving him standing on the platform. Some of the newspapers considered this a great shame, whilst others said that the train was on the wrong track anyway and would most likely end up in the United States.

David wasn't very good at geography, but the United States sounded like completely the wrong direction to him. The editors explained they meant the United States of  Europe. Now David knew perfectly well this didn't exist and he thought it was a pretty silly idea for the Eurocrats to have built a railway line going there, let alone got on a train and started on the journey.

However, he saw things a little differently after he got a telephone call from his girlfriend Angela to ask why he hadn't come over. Angela was a German lady who had grown up wanting to be an engine driver and had been so successful that she was nowadays known in her own country as 'Der Steamroller'.

Angela told David that all the leaders agreed their destination was sure to exist by the time they got there. David didn't really find this very reassuring. All things considered, he thought, he would probably rather stay at home and eat sprouts. But Angela told David that if he didn't come on the train with all the rest then he'd have to follow behind on a bicycle and that sounded like an even worse idea to him. So David reluctantly agreed to go over.

Well of course by the time he got to Brussels everybody else had been on the train for some time and whilst they were waiting they had all been eating and drinking and playing cards. Angela was playing the Queen of Hearts but François was playing the field. Since all of the leaders were such terrible gamblers, the Eurocrats had carefully concealed all the real money in a big black box and handed out some imitation cash called Euros so that their chiefs could do what they liked with it and it wouldn't matter.

Unfortunately first the Greek leader and then the Irishman and then the Portuguese and then the Spaniard and then the Italian lost all the Euros that they had been given to play with. Every time this happened Angela had to give them some of her Euros in order to prevent them getting off the train.

So that when David arrived nearly everyone already owed Angela a lot of make-believe money. As if that wasn't a bad enough start to the meeting, the others all told David that whilst they were waiting they had already chosen a new driver for the train and his name was Jean-Claude. David didn't like the sound of this. He pointed out J-C rhymed with K-C and people called Casey were famous for crashing trains.

Angela said that this didn't matter ein pfennig because they had also decided that on the Eurotrain all the passengers could go at different speeds except those who had paid for their tickets using her money and they would have to go at the same speed as her so that she could keep an eye on them.

"Look at it this way," she said to David. "We had an election and nearly three quarters of the people in Europe said they wanted anybody but Jean-Claude, so obviously Jean-Claude has to get the job."

"I scarcely see why," said David, quite mystified as usual in his typically British way. The British are terribly bad at foreign languages and have never really understood Eurospeak.

"Because of the democratic deficit of course, dummkopf!" said Angela. "In Euroland we have a system that people should never get what they want because it only spoils them, so since hardly anybody wants Jean-Claude it follows he is the perfect choice."

"What experience does he have driving a train?" asked David.

"He's very popular in Luxembourg," said Angela, deftly changing the subject.

"That settles it," said David. "Do you know how much trouble the Labour Party leader in Britain got into trying to eat a bacon sandwich last week? You can't possibly expect me to swallow a Luxemburger."

"Look David, we're all agreed. Except for Viktor that is. He disagrees with everything that isn't in Hungarian."

"Good for him. I'll vote for Jean-Claude on condition he agrees to do everything in Hungarian too."

"Now be reasonable, liebchen. You don't want to be isolated, do you?"

"Actually, yes. That's the only way I'll ever be re-elected after all the austerity. You did hear UKIP topped the Euro-poll in Britain, didn't you? Now would one of you chaps mind pulling the emergency stop? I think I'll get off the train."

But liebchen," Angela wailed, "the Eurotrain is not moving."

"Excellent," said David. "I don't know if you've noticed but the British train on the other hand is moving along quite smartly. I might even manage to pull off another term in office. Toodle-pip, you chaps!"

And so saying David got off the train and took the bus to Calais for the ferry. Both David and the ferry were very happy about this because they were on their way back to England. In fact the ferry was so happy that it completely forgot to be cross and as a result it sailed to Southampton instead of Dover.

This was a bit unfortunate for David, since all the newspaper reporters were waiting for him at the wrong port and when he failed to arrive they naturally jumped to the wrong conclusion.

The next day all the British newspapers ran stories saying David had missed the boat.

Currency unions are like joint accounts

I really did not intend to devote so much space on my blog to the economics of Scottish independence.  I feel obliged to do so because political spin doctors have been engaging overdrive in an apparent attempt to obscure the issues and reduce popular understanding. I have no problem with people making an informed choice.  I do have a problem with people being misled.

In my letter published in yesterday's Falkirk Herald I used the same metaphor that I have previously used on this blog.  When I compare a currency union to the joint bank account of a married couple, I do not of course mean to suggest that they are the same thing, merely that they have a number of helpful similarities.

Not many non-economists have a clear grasp of the nature of currency unions.  Indeed the history of the Eurozone suggests that either a fairly substantial number of economists did not understand these principles either, or that political confidence overwhelmed economic objections.  The disparate economies that were enclosed in the straitjacket of the common currency were simply not sufficiently closely aligned.  A certain number of conjuring tricks were employed to make the figures look reasonably convergent in the qualifying year, but everyone should have realised that the important issue was not the statistics but the underlying reality.

A decade of growth camouflaged the problem; it did not make it go away.  The long rolling series of near defaults was always going to happen. The fact is, that  two divergent macroeconomic policies cannot be accommodated within a single currency zone.

Non-economists will, I hope, find the problem simplified by my analogy.  Like our divorcing couple separating their bank accounts in order to prevent one party from spending the other's money, two countries each need their own currency in order to operate any approximation to an independent monetary policy.  The Eurozone went for the joint account first and  loveless political marriage seems bound to follow if they will not reconsider their mistake.

Scotland is a tenth of the size of the UK and any currency union between the two would never result in her being able to underwrite UK debts.  The UK would have no partners in underwriting Scotland.  In return for taking on unlimited liability the UK is offered freedom from exchange costs that at most would amount to a little more than 1% of what it cost the UK to bail out RBS alone.  Can anyone seriously claim that represents a good deal for the UK?

There is no economic justification for divorcing London in order to marry Berlin.  The Eurozone is going to tighten its political integration.  Unofficial use of sterling can only be a short term stratagem since it would deprive Scotland of any effective monetary policy at all. 

Independence means a new Scottish currency.  There.  It wasn't so hard to say it after all.

Scotland's Currency Options

There has been much talk of the four currency options for an independent Scotland. Much that I have seen suggests that not everyone understands what the options are, let alone what advantages and disadvantages each has. Perhaps, leaving aside political issues for the moment, I might be allowed to outline them.

1. A sterling currency union means that both the UK and Scotland continue to use the pound by agreement. Between two economies of such unequal size as Scotland and the UK such an arrangement has little to recommend it except familiarity, (which was not enough to preserve the currency union of The Czech Republic and Slovakia after their political split.)

• It is not possible for a single central bank to operate two monetary policies. Market forces would oblige the central bank to pursue the monetary interests of the larger partner, even if political factors did not.
• Likewise neither partner could pursue an independent fiscal policy, because each government's borrowing would increase the common money supply. Agreement would be required.
• The UK would therefore have to cede a degree of its own monetary independence to Scotland. It has previously resisted doing this for the Eurozone, which is a much bigger market.
• An additional disadvantage would be each partner taking on an obligation to underwrite the finances of the other without the multinational burden sharing that is possible within the Eurozone.
• This is the option that the UK has ruled out. There are good economic reasons for ruling it out and no advantages for the UK that would come near to compensating for the loss of independence.

2. Informal use of sterling by Scotland means Scotland continuing to use the pound without the UK's agreement. This is the kind of arrangement used by Ecuador and Panama in respect of the dollar. It could not be prevented by the UK. It would avoid the introduction of exchange costs for trade within Britain, but is far from meaning that nothing would really change. Effectively it would take most of the so-called 'levers' of economic influence out of the hands of the Scottish government.

• It would not allow Scotland to create its own money supply.
• It would prevent a Scottish central bank from operating a meaningful monetary policy.
• Although this would also remove the need for UK government agreement of Scotland's fiscal policy, the same sort of constraints would be imposed instead by the need to obtain sterling through trade etc.
• It would remove the guarantee provided by the UK underwriting Scottish finances. This would imply a higher government borrowing rate for Scotland.

Thus neither formal nor informal currency sharing would allow a great deal of economic flexibility to the Scottish government.

Both formal and informal currency sharing would remove from the Scottish government's economic armoury the possibility of adjusting its exchange rate with the UK in order to absorb any imbalances that might develop.

3. A new Scottish currency is the only other option likely to be immediately available to an independent Scotland.

• This has a lot of short term costs and risks, including the introduction of exchange costs with the UK.
• However a more serious problem would be the need for the new currency to be underwritten by a Scottish government with no track record of debt management and which has incautiously flirted several times with the option of not taking on its share of UK National Debt. Possible lenders will remember perfectly well that a lot of the UK debt was incurred in bailing out Scottish banks and threats to walk away from responsibility for that debt can only raise the cost of borrowing by an independent Scotland.
• It might take some time to reassure foreign exchange markets that the new currency was 'hard', (i.e. it can be trusted to hold its value.)
• The new currency would also be a 'petrocurrency', (i.e. volatile and vulnerable to oil shocks.)

4. Joining the Eurozone is not a immediate option, because the entry conditions require two years' stable management of the domestic currency, a qualification which a Scottish government would lack. There may or may not be separate problems associated with Scotland's admission to the EU itself.

• It needs to be borne in mind that the Eurozone is just another currency union and that Scotland would be even less influential within this much larger zone than it would be in a sterling zone.
• Effectively monetary policy would be determined centrally and fiscal policy would be subject to the EU's Stability Pact.
• Even this has not been enough to preserve stability in the Eurozone of late and it seems likely that more political integration within the zone will be required in order to cement the stabilisation of the Euro as a currency.

Those, very briefly are the options. None of them are as advantageous as the present arrangement, but of course the present arrangement cannot be combined with independence.

Less Heat, More Light, Please.

Since last Thursday the currency issues in the independence debate have been, perhaps deliberately, obscured by emotional language. As I've said, we really do need to distinguish between a formal currency union and the informal use of the UK pound by an independent Scotland.

A currency union's price is financial interdependence because each member state may create new money. In the Eurozone we see a practical example. The short version of the lesson is: when some members overspend, those which do not overspend have no effective choice but to bail out their partners or risk the collapse of the whole system. 

The Eurozone is now being compelled by economics to pursue exactly the sort of political integration that is the opposite of the objectives of the 'Yes' campaign. 

The failure of the UK to agree a currency union with Scotland would not lead to exchange costs for UK businesses. Such costs would in fact result from a Scottish decision to adopt a currency other than sterling, as I discussed on 13 February.

Informal use of the UK pound by Scotland would be unlikely to lead to much greater financial flexibility however, since we could only obtain more money supply by means of a balance of payments surplus / net inward investment.

Quoting my article of 7 November 2013, "My judgement would be that a Scottish currency is the least of the evils, but that it requires preparation to start yesterday and much statesmanship from Scottish ministers."