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Scotland and the Centrifugal Force of Globalization

The possibility that Scotland may vote this Thursday to withdraw from the United Kingdom threatens to upset some of the most basic economic and political structures of the current world order. It is remarkable that this tumult could emerge from a region with a population just over half that of metropolitan Chicago. It is also ...

Jeff J Mitchell/Getty Images
Jeff J Mitchell/Getty Images
Jeff J Mitchell/Getty Images

The possibility that Scotland may vote this Thursday to withdraw from the United Kingdom threatens to upset some of the most basic economic and political structures of the current world order. It is remarkable that this tumult could emerge from a region with a population just over half that of metropolitan Chicago. It is also remarkable that this could happen at a time of supposedly inexorable globalization.

As the Scots think about moving beyond the pale, one can think back to early uses of that term and what a union had to offer. An individual settler living beyond organized civilization needed to worry about challenges such as food and self-defense. If a settlement was subsumed into a more powerful union, those needs could be met by others, so the offspring of the settlers could turn to engineering, law or medicine. Under the comforting umbrella of civilization, life was not as daunting as it had been outside.

This might seem an odd argument to describe the dynamics of Scottish secession. After all, isn't the whole idea that they will venture back outside and risk losing the comforts of membership in the UK?

The possibility that Scotland may vote this Thursday to withdraw from the United Kingdom threatens to upset some of the most basic economic and political structures of the current world order. It is remarkable that this tumult could emerge from a region with a population just over half that of metropolitan Chicago. It is also remarkable that this could happen at a time of supposedly inexorable globalization.

As the Scots think about moving beyond the pale, one can think back to early uses of that term and what a union had to offer. An individual settler living beyond organized civilization needed to worry about challenges such as food and self-defense. If a settlement was subsumed into a more powerful union, those needs could be met by others, so the offspring of the settlers could turn to engineering, law or medicine. Under the comforting umbrella of civilization, life was not as daunting as it had been outside.

This might seem an odd argument to describe the dynamics of Scottish secession. After all, isn’t the whole idea that they will venture back outside and risk losing the comforts of membership in the UK?

Perhaps, but the world beyond the pale has changed. If Scots look around, they probably do not see small, lonely, bedraggled states in search of shelter.  Instead, they see regions such as Slovakia or Croatia readily finding a place within the European Union. (Note that each was once part of a union that split — Czechoslovakia and Yugoslavia, respectively.) Since Scots are already EU members through their UK citizenship, this might seem like a free pass.

The European Union is wary of serving as a divisive force. In 2012, European Commission head Jose Manuel Barroso said that any region that split off from an EU member state would not have automatic EU membership upon independence.  EU members such as Spain and Belgium are particularly eager to quash any precedent that might inspire regions such as Catalonia or Flanders. It is not clear, though, how credible such discouragement would be in the wake of a Scottish secession vote.  Barring an ongoing dispute with the remainder of the UK (of the sort that keeps Macedonia out of the EU), it seems likely that the EU would welcome back its former citizens once the damage was done.

In the wake of polls last week that showed Scottish secession to be a real possibility, there has been an outpouring of economic analysis considering what an independent Scotland’s prospects might be and the challenges it would face. Paul Krugman is one of many who focused on the question of currency. Scotland currently uses the British Pound and the nationalist leaders have proclaimed their intention to continue in this tradition. Krugman and others are right to point out the myriad problems with this plan. While an independent Scotland could simply declare the pound its currency (as similarly-sized El Salvador did with the U.S. dollar), it would not have any say in monetary policy and would not be able to turn to the Bank of England for the other services a central bank provides, such as "lender of last resort." Krugman concludes:

In short, everything that has happened in Europe since 2009 or so has demonstrated that sharing a currency without sharing a government is very dangerous. In economics jargon, fiscal and banking integration are essential elements of an optimum currency area.

I agree with him on this point, but it is worth noting that this contradicts some fundamental tenets of the modern European Union. The euro zone has a currency union but has made only limited and inadequate moves toward fiscal or banking union. It is true that small countries who join the euro zone nominally have a say in monetary policy, but Malta cannot really believe it has that much sway. If the Scots buy into current European doctrine, they are unlikely to be dissuaded from leaving on currency grounds.

That said, there are plenty of other reasons for concern. Some important ones have to do with some subtle differences between EU and UK membership. One surprising one has to do with pensions: Companies that straddle Scotland and England currently follow one set of pension rules (those of the UK). If Scotland and England were to be separate countries within the EU, then EU regulation would apply and could face shortfalls of billions of pounds in pension funding. Financial arcana such as this may help explain why major companies have threatened to leave Scotland if the push for independence prevails.

Given the circumstances, it would be dangerous and foolish for Scotland to leave. But it does demonstrate a perverse implication of the push for ever tighter European integration: The creation of a continent-wide umbrella can make a national umbrella seem redundant and encourage a region like Scotland to step out from under.

Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy

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