Why an independent Scotland must reject the Euro

The creation of the Euro was to bring a disunited Europe together under a more integrated continental economy. By sharing a single currency, countries would remove irritable currency conversions, reduce diverging banking systems, generate similar living standards, control growth, bring healthier competition and remove the risk of devaluation. The Euro, leaving behind the 20th century of two world wars and continuous European crisis, seemed like the most logical step forward.

Yet despite the aspirations of the Euro, it has fundamentally failed both in principle and its monetary design. Rather than creating stability, Euro-members often find themselves lagging behind their neighbors who enjoy the benefits of controlling their own currency. On top of that, Euro-members have become greater victims to political instability due to the growing threat of the far-right.

READ MORE: How fast would an independent Scotland need to transition to a new currency?

Let us start off with the Euro’s design. Europe works at its best when we accept the diversity that exists within it. This is true on a social, political, and economic scale. Each European nation has unique strengths and problems that are best addressed by the people living in these countries. This is the same argument the independence movement adopts when highlighting the differing policy problems and solutions between Scotland and the rest of the UK. Yet, rather than accept diversity, the Euro forces the same single fixed exchange rate and interest rate to all Euro-members. Whilst the Euro’s interest rate may work for some countries, or possibly the majority, many members will be left worse off if the rate does not meet their individual needs. Europe does not offer serious flexibility for Euro members to take differing monetary policy.

Further, the European Central Bank follows monetary policy that largely harms our most vulnerable. Central banks often allow people to remain unemployed to keep inflation low. Rather than support those suffering at the edge of the labour market, central bankers raised interest rates to deny them socially inclusive wage rises because of their exaggerated fear of inflation. Whilst developed countries with their own currencies have largely enjoyed lower unemployment rates, Euro members have seen unemployment rates between 7-12% over the last decade alone. For contrast, Scotland’s unemployment rate over the last decade has fallen from 8% to just below 4%. For Scotland to become independent, only to join a monetary system that would likely double our unemployment, is economic illiteracy on steroids. For the Euro currency to work, the European Central Bank must put focus on full employment, price stability, and inclusive growth. As of now, such a shift in priority is nowhere near the horizon.

With such poor monetary policy, one might think that Euro nations may simply create fiscal stimulus to support ordinary people. Yet once again the Euro’s design holds back governments from progressive fiscal spending – with members only allowed to maintain a 3% deficit or less and a debt to GDP of 50% or less. The reasoning behind this target is to “balance the books”, but this is simply austerity. Former UK chancellor George Osborne (below), who implemented some of the worst austerity levels in all of Europe, only managed to reduce the UK deficit to 2.8% after six years. Six years of increasing food banks, child poverty, deteriorating physical and mental health, failing infrastructure, growing crime, and increasing mortality. When Conservatives talk about “balancing the books”, what they mean is austerity for the poorest and normality for the top 10%.

So why 3% and 50% ratio targets? Surely the Euro’s design came from the continent’s greatest minds and was supported by years of intense research, right? Yet you would be wrong. The numbers were completely made up on the spot by two low-level employees at the French Ministry of Finance in 1981. This was done to limit the aspirations and demands of French ministers who wanted to expand spending. The rule that strangles one of the biggest currencies on the planet has zero expert analysis behind it – it is purely ideological.

If the creators of the Euro refuse to look at the evidence, then we will. In his groundbreaking paper “Balanced Budgets and Depressions” economist Dr Fredrick C Thayer researched hundreds of years of US economic data and analysed the trends around the debt and deficits. He found that every time the US attempted to balance its budget, an economic recession followed. Importantly, there were no exceptions in this pattern. These same patterns are true across Europe to this day and will be true for an independent Scotland if we self-impose these rules through the Euro.

READ MORE: How a new Scottish currency could affect mortgages and pensions

Some progressives may argue that Euro nations should simply dismiss the rules and spend to grow the economy. But once again they would be wrong. Article 126 of the Treaty on the Functioning of the European Union allows the European Central bank to fine Euro members for breaching their ratio targets. They can also refuse lending to Euro members if they are deemed fiscally irresponsible. But this rule does not apply to non-Euro members. Whilst Euro members are forced to accept the Growth and Stability Pact, non-Euro members go through a “Convergence Programme”. This programme is politically and economically meaningless. It simply encourages non-Euro members to reduce spending, but there is no consequence if the member state ignores this advice.

Even if such a draconian rule did not exist against Euro-members, spending without your own central bank is incredibly difficult. Recall our other article where we broke down the accounting model for the UK exchequer. There, we found that governments with their own currency and central bank create currency every single day to meet spending commitments and are only limited by real resources and inflation. A country like the UK does not rely on taxation or government bonds to spend because they serve other functions. But Euro members without their own central bank are limited in their spending with their levels of tax and borrowing. They can only collect currency to spend and thus their policy ambitions are limited. Whilst countries like the UK, Japan, Australia, New Zealand, the US, Sweden, Denmark, and Norway are all currency issuers, Euro-members are all currency users.

Let us turn to the financial crisis of 2008 and the Euro’s complete failure to tackle the recession. When the global financial system crashed, international and domestic lenders to Euro-members demanded higher interest rates on bonds because Euro-members could not guarantee a return. This is because Euro-members have no control of their own central bank or currency – thus they could literally run out of Euros. Countries such as Greece, Portugal, Ireland, and Spain were forced to raise taxes and implement austerity.

The opposite was true for countries with their own currency and central bank, enabling them to control the interest rate without malicious pressure from bond vigilantes. For example, the UK’s interest rate on 10-year bonds decreased from 3.6% to 1.8% in 2008, because the Bank of England set conditions. In Greece, 10-year bonds increased from 6% to 35%, because markets were able to bully the Greek government into submission.

I want Scotland to become independent so the people of Scotland can determine their own future - transferring power from the hands of the Westminster elite and devolving downwards to communities across Scotland. Independence is key to building a more sovereign, healthier, prosperous, and democratic society. Yet it is impossible to separate currency from these issues, as the monetary system will determine how much control we have to build a progressive society.

By surrendering all monetary powers to the European Central Bank, and therefore limiting our fiscal levers, an independent Scotland will struggle to meet its true ambitions. This is why progressives across the independence movement must reject the Euro and embrace a new Scottish currency.