Can we please put this one to bed? Scotland will never join the Euro. End of. The choice is clear: keep the pound or use our own currency.
In this short post, I will explain why the Euro is not a currency option for an independent Scotland. Please send your pro-Euro Indy mates here!
In 2022, the Scottish government announced that the plan for a currency union with England, ‘Sterlingisation’, was no longer the preferred currency option for Scotland. The medium to long-term plan was to adopt our own currency,
“This would take place as soon as practicable through a careful and managed transition.”
In the same paper, “A Stronger Economy for Scotland,” there is no mention of joining the Euro area. The paper does picture Scotland back in the EU, but there is nothing about choosing to adopt the Euro. As we all know, it is possible to be a member of the EU without using the Euro—approximately 25% of EU countries don’t use the Euro.
1. The current strategy does not see us using the Euro;
2. All the evidence suggests that EU membership is possible without using the Euro.
So, surely, this should mean we are done with the debate.
However, the Euro option still remains on the lips of many supporters of independence and within the SNP administration.
Scotland and the Euro: What is the appeal?
There are perceived benefits of Euro area membership. According to the European Union, using the Euro makes it easier to compare prices between countries, boosts competition between businesses, supports price stability, facilitates safer transactions, and removes transactional costs across the Euro area and the rest of the world. This all adds to greater economic stability, growth, and influence on the global economy.
But in reality, the Euro is a more powerful political and cultural vehicle than it is an economic one. In his short essay, How the Euro Divided Europe, Yanis Varoufakis explains how Euro membership leads to economic divergence and stagnation, not convergence and growth.
So why does the Euro still tick so many boxes for Indy supporters?
My only thought is that many Indy supporters believe we can’t manage or cope without a powerful “partner” helping us. Too wee, too poor and too stupid is what I think this approach says to me: from within the independence movement! Even if the Euro was an option, it should be rejected.
Scotland’s Euro membership would raise five significant economic challenges. How would Scotland achieve its progressive wellbeing economy:
- Without an overarching fiscal authority in Europe to help lead to convergence
- Within a solidly neoliberal economic framework
- While keeping to the restrictive debt and deficit rules
- With a centralised interest rate policy and
- Lacking the ability to affect the price of its currency
I want to hammer that final nail into the Euro coffin.
1. The lack of a Westminster or Washington (I promise this is not a good thing)
There were obvious design flaws in the Euro area, which heterodox economists highlighted in the early years of the Euro project. They are all still there. Wynne Godley (1926 – 2010) main criticism was the lack of fiscal authority to balance the monetary role handed over to the new European Central Bank. Godly suggested that the plan would leave an institutional hole in the entire enterprise that would one day become undone.
French economist Jean-Paul Fitoussi (1946 – 2022) suggested that a currency without fiscal authority was the “original sin” of the Euro area project. An “incomplete currency” was how another French economist, Michel Aglietta, referred to this lack of a full suite of government institutions.
So, in summary, using the Euro would be like using the Pound but without the Block Grant, which is the current tool needed to balance spending across the UK. At least, in theory, the UK is supposed to work!
2. Neoliberal at its core
The Euro’s neoliberal nature is best demonstrated by the lack of a “growth model” for nations within the Euro area. Does this sound familiar to Scots?
I am baffled by the idea that the EU would be any more interested in Scotland’s growth model than Westminster seems to be.
According to mainstream economists, individual nations do not need growth models. Without barriers to capital and labour throughout the currency union, “regions” would quickly rebalance and recover simply by attracting capital owing to lower production factors. This internal market, directed by an ‘invisible hand’, was supposed to be the rebalancing actor in currency unions. However, we only find theory in the EU (as with the UK).
Let’s just briefly look at how unemployment across the Eura area continues to show significant divergence.
Chart one. Full unemployment gap of selected northern Euro area states.
Chart two. Full unemployment gap of Southern Euro area states.
Source: (Gökten, et, al. 2024)
The two charts show that Europe is still not ‘marching in step’ regarding unemployment.
However, there is little awareness that the Eurozone’s structural design is very similar to the unsustainable structure of the UK. This economic blindspot suggests that Scottish indy supporters could push a newly independent Scotland to sleepwalk from one unsustainable currency union into another.
The euro area’s experience has shown that a single currency without a fiscal authority has not led to greater convergence; there is, in fact, greater polarisation.
3. Debt and deficit rules
The Stability and Growth Pact (SGP) approach has become increasingly difficult as prominent and consistent levels of debt across the Eurozone have restricted countries’ fiscal space to respond to specific shocks.
The response to the COVID pandemic differed from the refusal to support member states a decade earlier and demonstrated that in a modern economic setting, especially considering the need for regions to respond to the climate crisis, these arbitrary rules focus on the wrong metrics. However, the EU will maintain these rules.
These limits and the overall approach will stunt Scotland’s recovery from decades of underinvestment. When Scotland becomes independent, a new government will likely hear calls for help from every sector and every part of the country.
Independence will be the time to deliver Scotland’s core economic mission of a Just Transition to a wellbeing economy and to come to terms with the climate and biodiversity crisis.
To address these multiple issues, an increase in government spending will be required. Using the only available tool, GERS, Scotland’s current deficit for the last decade has been nearly 10% of GDP.
A new Scottish Government would likely need to spend a higher percentage of GDP to remain afloat, and never mind catching up with our European neighbours. With such a gap between its current budget deficit of 10% and the SGP limit of 3%, if Scotland were to join the EU and adhere to the stability and growth pact, it would almost certainly lead to an extensive austerity programme.
4. A centralised interest rate policy
The ECB sets one interest rate to cover all 20 countries using the Euro with 341 million citizens. Like other central banks, the ECB raises interest rates to affect price rises and output. With such a difference in economic performance, higher interest rates may be required to cool a booming housing market in Germany; at the same time, they must fall to ease the pressure of high unemployment in Italy.
Owing to the significant influence of the German economy within the ECB, it is difficult to conceive an optimum policy level for the periphery nations. The interest rate policy across the Euro area was too high to ensure full employment during long periods.
As noted earlier, with fiscal space limited by the SGP, a lack of monetary control further restricts government sovereignty. In sum, nations in the Euro area accept all of the pain of a loss of monetary policy for little of the gain of fiscal support.
5. Lack of currency control
In ceding sovereign currency, Euro area members gave up,
“the main thing which defines national independence”
(Godley, 1992 p 1).
They started to issue debt in a currency they had no control over. This significantly limited their ability to control their own monetary system. Having more ‘monetary sovereignty’ gives a country more flexibility to achieve policy goals. Individual members of the Euro area forgo these options, such as being able to devalue the currency to deal with an economic crisis. Unable to devalue and without significant fiscal transfers, each nation is left to deal with shocks.
The only option is internal devaluation, or austerity, as the government shrinks private and public spending. Evidence also suggests that the EU’s centralised exchange rate policy pressures member states to adopt structural reforms. This was the fate of the “PIIGS” countries during the early 2010s. And we all know that austerity ultimately leads to a fall in overall economic activity.
(The only) Conclusion
The Euro area’s neoliberal underpinning, including limiting fiscal space, does not support a framework for progressive policies.
Its centralised, one-size-fits-all central bank interest rate and exchange rate severely hamper nations’ ability to use monetary policy to affect positive change.
The decision to forgo monetary sovereignty and join another currency union could be understood if this would likely lead to a significantly better economic position. However, there is evidence that joining the Euro area would maintain the status quo. Scotland’s periphery economy would be forced into austerity while maintaining its role as a source of its largest neighbour’s exports.
The conclusion is that Scotland can achieve its progressive aims by acting only as a monetary sovereign government with its own currency. The Euro? Enough already.
