How Scotland could lead the way on currency in Europe

THE independence movement has been going through a debate on what currency Scotland would use after leaving the UK. This has generally centred on two main ideas; sterlingisation or a new currency. However, on the periphery is the euro. Scotland would be able to join the euro after our currency had participated in the exchange rate mechanism for at least two years.

But is the eurozone something we should aspire to become apart of?

When a government spends money, it creates that money and adds it into the economy to increase productivity without encouraging inflation. Greece, as a member of the eurozone, is not monetarily sovereign and is unable to issue its own currency. Thus, for Greece to spend money into its economy, it must raise income.

There was a strong trend of oligarchy in Greece prior to joining the eurozone. Those involved hated the drachma, as their assets would devalue whenever the drachma was devalued. For them, the deutschmark was more valuable, and the euro, was the deutschmark in all but name.

Membership of the eurozone brought restrictions on national governments’ capacity to spend. For Greece, this was a disadvantage to its trade deficit. This creates an imbalance between eurozone members, separating the strong countries and weak countries.

Greece was the weakest country, and as such, was the first to crumble under Europe’s financial collapse. French and German banks owned Greece’s growing debt. When Greece sought a bail-out in 2010, it was France and Germany which had most to lose if it had defaulted, as the repayments provided them with stability.

Had Greece continued with the drachma, it would have been able to devalue its currency exchange, making its export market cheaper, and increasing the balance of trade.

Under the eurozone, Greece cannot do this as devaluing the euro would have had a negative effect in most northern European nations. Instead, the Troika extended credit to Greece with strict conditions of austerity, which means it is now workers who feel the effects of austerity most strongly.

This would inevitably lead to a voter base which voted more radically. Syriza were coerced into accepting the terms the Troika dictated. If Syriza made any attempt to leave the eurozone or run a parallel currency, the Troika threatened to shut down Greece’s banks.

The austerity forced on Greece saw labour laws relaxed and the forced sale of national assets. Its creditors demand fiscal surpluses in a country with a persistent trade deficit. What Greece needs is investment, especially demand-led investment. However, this demand is high, which is unsuitable for the Troika as this would require an even larger unsustainable debt burden. It would be wrong to characterise this as a failure in the euro.

The eurozone is designed to remove national control over currency, preventing a government’s ability to produce Keynesian monetary and fiscal policy which would affect trade balances across Europe. Through the euro, the marketplace has been saved from its greatest threat: democracy. In this regard, the eurozone has been a success. It has strong-armed Greece into conservative fiscal policy under a radical left-wing government.

The Troika has ensured the economy works for the rich and the bankers and ignored popular sovereignty. Greece was supposed to serve as a warning to other nations like Italy. Yet, this has only strengthened the resolve of the anti-EU parties. If Italy had fallen into crisis, the European Central Bank would have needed to purchase unlimited quantities of Italian bonds, reducing interests rates and resolving the crisis.

However, these bond purchases come with a risk – the ECB would sustain larger losses if Italy defaulted on its debt. Northern eurozone countries, particularly Germany, would ultimately bear these losses.

An Italian recession could create far greater pressure on the country’s banks, which are still labouring under the burden of non-performers’ loans, and cracks in Italian banks could create unbeatable pressure for the eurozone as a whole.

Yet, under the lira, Italy could make the fiscal and monetary policies it needed to sustain its own country and act as a positive force for the European economy as a whole. The EU will continue to face crises so long as the eurozone continues its conservative fiscal policy and its intrinsic imbalances.

If the EU is to survive, it has two options: it can either democratise the EU and further centralise the monetary and fiscal policies; or it can end the eurozone and decentralise fiscal and monetary policy through monetary sovereignty of the member states. Europe can either have a democratic euro, or a union of currencies.

Yanis Varoufakis and his Democracy in Europe Movement 2025 are making a decent case for the former, but who in is making the case for the latter? Scotland, with its own currency, could show eurozone members the strength of having your own currency running an investment-led economy.

The PIIGS countries are in dire need of economic development and that is evidently not going to happen within the eurozone so long as it runs as it was intended. Scotland can show the advantages of monetary sovereignty as the eurozone continues to fail for democracy.