As we all know, thanks to our being safely outside of the Eurozone, the majority of members in the European Union have one set of interest rates and one currency. This economic shackling together of many nations has created a 16-member, 17-legged race that is causing all sorts of skints and bruises for those involved.
Greece, Spain and Ireland are unable to see their currencies devalued which would boost exports and neither can they drop interest rates to boost their struggling economies more generally. Germany on the other hand is motoring ahead with phenomenal growth of 2.2% in a single quarter this year and a rate rise should be taking place there to ensure money isn’t too cheap and new problems do not arise.
This balancing of economic requirements across the Eurozone may well be the European Union’s greatest challenge in the near future so can the UK watch on in splendid isolation safely enjoying its own arrangement with Sterling and the Bank of England?
To an extent, yes, but the UK also has a varied economy and different regions have different needs. Interest rates in this country may not be the one size fits all solution that we would like to hope that it is.
Scotland went into the recession in comparatively better condition than the rest of the UK but has now fallen some way behind. Were this trajectory to continue, which is regrettably easy to envisage with the bloated public sector, political wrangling and banking problems north of the border well known, then perhaps an unavoidable increase in interest rates at a UK level will serve London and the South but harm business north of the border if Scotland just needs a little bit more time to boost itself back to stability.
When the Monetary Policy Committee at the Bank of England does increase interest rates, probably near the end of this year or at the start of next year, there will be an almighty political fall out, particularly in light of the cuts that will be in the process of biting. The ‘Left’ will be against and the ‘Right’ will be broadly in favour and it is not difficult to see how this ideological split could quickly develop into a cross-border argument.
No-one wants to see unemployment rise and an economy falter but, were that to happen specifically in Scotland, may there be a case for devolving interest rate setting from the Bank of England to Edinburgh?
#1 by James on October 6, 2010 - 1:51 pm
Absolutely, I always argued against Euro membership on precisely these grounds. If it applies within the UK, as it does, with the diverse needs of Knightsbridge and Kirkintilloch, it’s all the more extreme between Ireland and Italy, or Latvia and Luxembourg.
Thank goodness the Blairites, the Cleggites and the Salmondites didn’t get their way and deliver the UK or Scottish economy into this additional level of mess.
#2 by Malc on October 6, 2010 - 1:54 pm
Just out of interest, is it just places which begin with the same letter which have diverse economic needs, or could we have compared Greece with Spain… oh, I see.
#3 by Stuart Winton on October 7, 2010 - 6:32 am
“…may there be a case for devolving interest rate setting from the Bank of England to Edinburgh?”
So you want Scotland to have its own currency, Jeff?
Well I suppose that would at least be consistent with fiscal autonomy and independence generally, but of course the SNP want to keep sterling and/or join the euro, depending on the which way the wind is blowing at any particular time.
Of course, the Nationalist’s counter to the argument you articulate is that the problem would be solved with greater economic convergence across the eurozone, but as I argued in a letter earlier this year to SoS in response to an article by Duncan Hamilton:
“He acknowledges the eurozone economies have not converged sufficiently to withstand the stresses caused by a single interest rate, and thus advocates “greater convergence” as the solution.
“But the UK has enjoyed currency union for significantly longer than the eurozone, yet the SNP argues interest rates set for the South-east of England may be inappropriate in Scotland. Thus, presumably, insufficient convergence here then? And how long would EU convergence take in view of UK experience?”
Of course, given the eurozone tensions evident in recent months, “euro” seems to have become a bit of a four letter word with the SNP recently, if you get my drift.
#4 by Jeff on October 7, 2010 - 9:40 am
I get your drift, nice one Stuart.
The SNP arguments are of course more general and with something very different in mind, namely independence. All things being equal it would be best if Scotland had a roaring economy and had something akin to Germany’s problem rather nudging closer, if still a very long way from, Ireland’s or Spain’s.
Going from Sterling to A.N. Other currency makes perfect sense if independence is the name of your game and your economy is thriving. Some sort of interest rate (or currency devaluing) mechanism is something Scotland doesn’t have but may need.
I guess it’d be interesting to see how a small country would do if it diverged further from Europe (as opposed to the convergence you point out D Hamilton is in favour of) but Scotland as a guinea pig? Yeah, maybe not, you’ve called my bluff there!
#5 by Chris on October 7, 2010 - 2:38 pm
You simply can’t devolve interest rates without creating a new currency. If the Scottish parliament paid 1.5% in the pound and the UK parliament 2.5% why would anyone lend to Edinburgh? A higher return for the exact same risk!