Unless you've been living under a rock I'm sure you've no doubt heard that Scotland want independence. Well, the SNP wants an independent Scotland. They currently hold a majority of seats in the Scottish Parliament. Mr. Salmond, leader of the SNP, believes that this gives him a mandate to try and get independence, seeing as this was the idea they ran their election hopes on.
Personally I would be sad to see Scotland leave the United Kingdom. I feel that both Scotland and England have benefited greatly from the partnership. In the long run I feel we are better united than divided. Putting this aside I think there are serious questions that need answering before Independence is ratified.
Mr. Salmond's SNP has said that Scotland would continue to use the Sterling as its currency. This poses certain issues with regards to financial sustainability in my opinion.
First let's consider the U.K. as it currently stands. We are a sovereign state with our own central bank, namely the Bank of England. The central government, located in Westminster, handles the fiscal policy. They decide how much public debt we have. It is important to note here that this public debt is denominated in Sterling. We have an unlimited supply of Sterling. In theory at least, the Bank of England can just 'print' off as much money as is necessary. Obviously this leads directly to inflation and is therefore not the best way to pay off debt. It helps nobody. The point is, however, that the option of simply inflating our way out of debt is there. So technically speaking the U.K. cannot default. Being unable to default makes a government a very safe investment, we shall ignore the situation in the eurozone. Financial institutions with money, e.g. pension schemes, private banks etc., therefore like investing their money in governments. This point is acutely made when we look at the interest rates on U.S. debt. They have real negative interest rates. People are paying America in order to lend America money!
If Scotland leaves the U.K. and remains on the Sterling currency they will be in a position where they take on debt in a denomination they have no control over. They cannot simply inflate there way out of tricky situations. Yes, that last sentence does grossly oversimplify things; but look at the eurozone. The smaller countries are suffering and their situation is in no way being helped by being on the Euro. Greece are the prime example of this. Their economy is not competitive and with the demands being put on them by the rest of the eurozone they are genuinely suffering.
This is the kind of situation Scotland could see themselves in. Staying on Sterling hinders their ability to influence the bond market. So called because if I lend money to a state, they then give me a bond with an interest rate and a maturity date. They have effectively sold me a bond, or debt if you want to call it that. Thus we have the bond market. This is a free market. A government does not decide the interest rate they pay on the debt. The people buying the bonds do. That's how free markets work. If investors think Scotland may default, they won't buy debt unless they get a satisfactory interest rate. If we look in the eurozone we can see the political pressure this is putting on countries like Spain and Italy. An effective tool against this is to buy up some of the debt with the central bank. This doesn't solve any problems directly, it merely delays having to deal with it. If you can get your economy to grow in the meantime you may be able to solve it later.
This is why politicians are always harping on about economic growth. With a bigger economy you can support more debt, which allows us to service the debt we have now. It may seem a weird idea, but that's how our government debt works. Its a bit like musical chairs, though we have seen over the last few years what happens when the music stops playing.
I am simply suggesting that the ability to service debt through the bond market will be of the utmost importance in questioning whether Scotland can exist independently. This is something I think will be made harder by Scotland either staying on the Sterling or joining the Euro.
It is not a question that I am seeing asked.