Professor who predicted 2008 crash talks economics of independence

Hearing from someone who doesn’t have a "dog in the fight" is always worthwhile. So when Professor Steve Keen gives his unbiased views on the Scottish Government's economic plan for independence, the casual observer should pay attention.

Keen is an Australian economist widely regarded as the economist who most precisely predicted the 2008 financial crisis. He is a former head of the school of economics, politics and history at Kingston University and author of numerous scientific papers and books. Professor Keen has no apparent connection to Scotland or discussion on its economic destiny.

Seeking an outside view, Professor Keen shared his views on Scotland's post-independence economic strategies with me last week. Steve is broadly aware of Scotland’s independence journey and the current economic malaise in the United Kingdom. I needed to sum up the essential areas of the current vision for Scotland once it becomes independent. Using the 2022 paper “A Stronger Economy with Independence” as my touchstone, I asked Steve his opinion on

• Continuing to use sterling
• Adhering to the EU Stability and Growth Pact before becoming a member of the EU
• Voluntarily contributing to the UK's national debts

Professor Keen's insights offer a sobering perspective on these strategies.

Using sterling post-independence

Professor Keen's primary concern regarding Scotland's intention to use sterling post-independence revolves around the issue of monetary sovereignty.

He questions: "Can Scotland consider itself independent while it uses sterling?"

This highlights the fundamental contradiction in seeking independence while relying on another nation's currency.

"You're going to be losing money ... running out of pounds ... forced to borrow pounds to continue."

Professor Keen draws a tangible link between sterling and the “enforced austerity and dependency this strategy might entail”. This focuses on the decision to either pay interest on foreign debt or invest in public services, a decision all too familiar for countries with foreign debt.

“Is austerity baked in under these proposals?” I asked.

“I have assumed that Scotland runs a trade deficit. Does it?” He asks.

Scotland has a trade deficit, with figures floating between 10% to 2% of GDP. Professor Keen thinks that any trade deficit, given our poor balance of payments performance, will significantly impact how we manage our independent economy.

He suggests that this reliance on sterling could lead to a “precarious economic situation”. Professor Keen emphasises the importance of creating a separate Scottish currency to foster economic self-sufficiency and give Scotland the monetary autonomy essential for true independence.

Following the EU Stability and Growth Pact

Keen is unequivocally critical of Scotland's plan to mirror the EU's Stability and Growth Pact. He regards this decision as "outsourcing your management to a bunch of lunatics," highlighting the folly in adopting a policy framework without being a member of the EU.

Professor Keen points out the irony in the pact's name, which has led to the opposite of its intended effects; instability and stagnation rather than stability and growth.

He cites economists from diverse schools of thought who criticise the pact, emphasising that such policies could force Scotland into austerity during economic downturns, further amplifying financial crises.

Professor Keen's advice is clear: Scotland should avoid adopting external economic policies that have proven ineffective and instead develop tailored strategies that align with its unique economic context.

He stresses that government debt should not be the primary concern; instead, the focus should be on building non-financial assets like infrastructure, education, and healthcare. Keen suggests that by obsessing over fiscal rules, Scotland might neglect the development of these critical sectors, which are essential for long-term economic stability and growth.

Offering to pay off part of the UK debt

Keen reacted sceptically to Scotland's intention to pay off a portion of the UK's national debt post-independence. You can watch our short exchange here.

He questions the practicality and logic behind this move, likening it to a "classic case of thinking that the UK and Scotland are two separate households." Keen argues that this approach fails to understand the complex nature of national debt.

But we throw this idea around for a while. So, Scotland will have to earn pounds or borrow pounds to pay back pounds to the institution it has borrowed from? To pay off this debt, Scotland would have to give money back to someone who wants to save that money. Isn’t the UK national debt simply the amount of UK-denominated currency created that hasn’t been taxed back? How can you pay back something like this without drastically reducing the money supply in the UK?

Professor Steve Keen's critique of the Scottish Government's post-independence economic plan is a stark warning to the current SNP administration.

The path to independence is complex, but there are areas in which Scotland could strengthen its chances of success. Steve maintains that Scotland should have its own currency on day one of independence after a transition period, I must add. It should not follow the EU’s fiscal rules, EVER. And finally, the idea of somehow accepting and paying off a percentage of the UK’s debt is as impractical as it is foolhardy.

In summary, Steve’s advice urges re-evaluating strategies that might seem “pragmatic” but could lead to long-term economic dependencies and vulnerabilities.

Keen's central insight: Scotland needs to forge its own economic path that ensures monetary sovereignty and prioritises the development of a robust, self-sufficient economy. Independence alone does not create “economic self-determination.” The choices you make in that process do that. And the Scottish Government may be making the wrong ones.

MSPs can question Professor Steve Keen during our Economics of The Real World event at Holyrood. Steve is speaking at our public event in Leith on March 21. Professor Keen will also join us at the Scotonomics Festival of Economics in Dundee from March 22 to 24.