Excluding the hardcore pro-independence people, almost everyone seems to believe that an independent Scotland would be an economic disaster.
There are various reasons why Scotland would find itself economically disadvantaged. For one thing, it is likely it would see significant capital flight, as banks and other institutions took money out of Scotland, and brought it to the UK.
There would also be a currency problem. If Scotland keeps the pound — as the YES campaign claims to want — it would no longer have control over its monetary policy and could face a fiscal crisis. As an alternative, a Scottish currency would likely be very weak.
A new note from David Folkerts-Landau, group chief economist at Deutsche Bank, argues that Scottish independence would be an all-time great blunder.
Everyone has the right to self determination and to exercise his or her democratic rights. But there are times when fundamental political decisions have negative consequences far beyond what voters and politicians could have imagined. We feel that we are the threshold of one such moment. A “Yes” vote for Scottish independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill’s decision in 1925 to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression in the US. These decisions — well-intentioned as they were — contributed to years of depression and suffering and could have been avoided had alternative decisions been taken.
The essential argument is that Scotland leaving the UK would be something akin to a eurozone country being forced to leave during the eurozone crisis. Just the threat of that would lead to surging interest rates, higher taxes, and lower public spending.
Folkerts-Landau argues that it would take years for an independent Scotland to rebuild what’s been built economically by the UK:
The economic and financial policy making institutions of Whitehall, as imperfect as they may be, have nevertheless created stability and certainty for private economic decision makers. Scottish consumers and investors have benefitted from the credibility of the Bank of England’s monetary policy, financial institutions and their clients have benefitted from an equally credible supervisory and regulatory regime, while foreign investors come to Scotland because they rely on a predictable investment environment. All of this comes from a united Great Britain.
A Scotland on its own would not automatically inherit these hard-wrought characteristics of a democratic market environment. Until such time as Scotland has demonstrated a tried and tested ability to govern and administer a modern economy there would be doubts. Residents in Scotland would move their assets to England-based institutions for fear of a forced conversion to a new weaker currency. Financial institutions would move under the umbrella of the Bank of England, investors would, at a minimum, require a higher return of their investments in Scotland to compensate for the increased risk.
The note concludes by touching on geopolitics and pointing out that in the current day and age, it’s “incomprehensible” why a the choice would be made to leave one of the most powerful, wealthiest countries in the world.
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