Mark Blyth in Foreign Affairs (photo: Paul Hackett / Courtesy Reuters):
An independent Scotland would have a massively oversize banking system, with assets possibly exceeding 1,000 percent of GDP. This would represent an Icelandic-sized risk to British taxpayers, who would have to stand behind the liabilities of the Scottish banks if they ran into trouble. As the Financial Times put it in a recent editorial, no British government would back those banks “unless Scotland were to accept very heavy constraints over its public finances.” In short, budgetary austerity and conservative policies would remain the only game in town, even after independence.
To get out of this bind, an independent Scotland would need its own currency, an option the Yes campaign has only recently acknowledged as a possible “plan B.” Without monetary sovereignty, a country can neither print nor devalue its way out of trouble. And if it doesn’t want to default, austerity is the only way forward.
Yet to establish an independent currency, Scotland would need three things: a central bank, a bond shop, and independent tax institutions. For now, Edinburgh has none of these. And it would take five to ten years to build them. In the meantime, the country Scotland just broke up with would be raising the taxes, paying the bond investors, and running the currency — and charging a pretty penny to do so. Joining the euro, the only other alternative, would simply mean austerity would come from another direction, from Berlin rather than London.
Given all this, if Scotland votes in favor of independence, the United Kingdom’s reaction would not likely be the velvet divorce the Yes campaigners envision. Nationalism, like most forms of identity politics, thrives only in the face of a foreign other. Far from safeguarding Scotland’s position in Europe, the United Kingdom’salready resurgent nationalism will likely grow fiercer. Edinburgh’s exit would probably make London’s withdrawal from the EU more likely, complicating the Yes campaign’s desire to protect European interdependence.
Yet perhaps the oddest thing about the Scottish debate has been its lack of concern for issues of language, culture, or past sins — all central features of Basque, Catalan, and other independence movements. On the surface, it’s been all about the money, which makes the recent turn at the polls all the more telling. Although the No camp has largely won the economic arguments, the Yes campaign has gained the upper hand. The question is why?