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Goldman Sachs on Scottish Independence

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09/08/2014

A senior economist at Goldman Sachs has weighed in on the upcoming Scottish independence vote, and it's not pretty:

Goldman warned that public services would have to be cut if Scotland goes it alone, and that the country would face much higher borrowing costs. But the most worrying consequence, the bank predicted, would be that uncertainty over a currency union would cause a run on sterling and a capital flight with echoes of the eurozone crisis. "The most important specific risk, in our view, is that the uncertainty over whether an independent Scotland would be able to retain sterling as its currency could result in an EMU-style currency crisis occurring within the UK," wrote Kevin Daly, senior economist at Goldman.

Agnosticism is almost certainly warranted with respect to the politics of the referendum itself. The Scots will choose the yoke of London or the yoke of Brussels, the Pound or the Euro. A Scottish currency is neither discussed nor even considered. But it is a distinct pleasure to watch elite interests panic at the thought of losing even some degree of centralized control over a country of only 5.2 million people. And the endless push for centralization and control extends beyond currency:

"One of the main lessons from the euro area crisis is that a reasonably high degree of fiscal and/or financial integration is necessary, as a means of effective risk sharing, for a monetary union to work," Mr Daly wrote.

This brings to mind the late Harry Browne's famous quote: "Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, 'See, if it weren't for the government, you wouldn't be able to walk'". Browne's dictum applies perfectly to the Eurozone: first the ECB destroys any vestige of monetary sovereignty via the Euro, and effectively monetizes the sovereign debt crisis. Then it begins, via the loathsome European Parliament, to make demands for integration of fiscal policy as well. After all, once you've accepted the Euro it's awfully hard to argue for the continued ad hoc issuance of sovereign debt without regard to the impact on other Eurozone partners. One MEP has already warned poor Scotland (lacking its own central bank) that under "EU law" (sic) it must use the Euro if it votes for independence:

Olli Rehn, vice president of the European Parliament and former commissioner for economic and monetary affairs, said in a letter to chief secretary to the Treasury Danny Alexander the use of sterling in Scotland is prohibited unless Westminster grants explicit permission. All three main political parties have already refused to allow Scotland to retain the pound in case of a 'Yes' vote, making this option illegal under EU law, which requires a country to have access to an independent central bank to use a currency. Alex Salmond, Scotland's First Minister, argued this would not stop the country from using the existing currency, but Rehn has moved to prevent that option. He wrote: "As to the question whether 'sterlingisation' were compatible with EU membership, the answer is that this would simply not be possible since that would obviously imply a situation where the candidate country concerned would not have a monetary authority of its own and thus no necessary instruments of the EMU".

There is no happy ending here for the Scots, who regardless of the referendum vote are highly unlikely to become the "Singapore of the North."    

Jeff Deist is president of the Mises Institute. He previously worked as chief of staff to Congressman Ron Paul, and as an attorney for private equity clients. Contact: email; twitter.

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