Home > Economy, Politics > Are We Sleepwalking into a Pound Crisis?

Are We Sleepwalking into a Pound Crisis?

There is an awful lot of talk right now about the euro at the moment. Understandable since the euro is in the midst of a crisis at the moment.

The talking points and the reasons that economists and politicians give for the crisis are:

  • Nobody followed the rules. Wasn’t enough enforcement of the rules governing euro membership etc.
  • Not enough fiscal integration
Its this second point that is incredibly interesting.
The Conservatives and UKIPers pretty much all say that supra-national currencies are an intrinsically bad idea unless backed with common economic policy.
Iain Duncan Smith had this to say about a single supra-national currency and integration on BBC question time on the 27th of October:
The point is reality has struck in that you cannot have a single currency without full political union which is where you have centralised taxation, centralised control from a centralised organisation of government.
Now, Iain Duncan Smith may well be right when it comes to the eurozone that there wasn’t enough fiscal and political integration. If he is right then that poses an interesting question for us here in the UK.
Its not should we join the euro in the distant future when the present crisis is over and there is greater fiscal and political integration. I can tell you how that will go down with the country right now. Not well.
The interesting question comes from looking at the structure of the United Kingdom itself and where its heading.
From 1707-1997, we had exactly what IDS described on Question Time, a full political and economic union. Since ’97 though, this union is slowly becoming less and less centralised as we devolve more and more power to the home nations with the largest devolution of power to Scotland. The Scotland Bill currently going through parliament gives the Scottish Parliament even more power and significantly more financial powers.
The SNP sometime in the latter stages of this Scottish Parliament, will be holding a referendum on independence. Salmond has said that if Scotland were to go independent, that Scotland would keep the pound until it was in Scotland’s interest to join the euro so indefinitely.
An independent Scotland would have full tax and spend powers but they would be in a single currency either with the other eurozone countries or with the rest of the UK. How the euro will be controlled after the current crisis is resolved is anyone’s guess but the pound’s interest rates with an independent Scotland would still be controlled by the Bank of England.
The question I have is this: Is having interest rates, inflation controlled by the Bank of England enough fiscal integration to stop a pound crisis happening in the UK with an independent Scotland like that we are seeing unfold in the eurozone at the moment?
Thankfully, Scotland won’t vote for independence so we don’t have to worry about that, I hear you cry.
Actually, we still do need to answer the question because even without independence, there is a cry in Scotland for what is termed “devolution max” or full fiscal automony or independence lite or Home Rule.
These are names for a settlement which no one quite knows what it entails. What we do is that it does call for greater fiscal and economic powers to be devolved to Holyrood.
Whether we like it or not, the pound is a supra-national currency where there are calls for the fiscal integration of the countries economies to be significantly reduced.
The questions I have are:
  • Does this mean we are heading for a pound crisis if we continue down this path without learning from the eurozone?
  • How much fiscal and political integration is needed to prevent a crisis like the eurozone happening in the UK with the pound?
I support financial devolution especially at the moment with the Scottish economy lagging behind the rest of the UK’s we need Scottish solutions. I also don’t think its right for any parliament to exist on handouts from another.
The eurozone crisis has made me think though what are the consequences of devolving financial powers to Scotland. What mechanisms need to be in place to stop the pound going like the eurozone.
I think we need to tread carefully here so we avoid sleepwalking into a pound crisis.
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: