Paul Krugman: Scots, What the Heck?

Spain provides a "cautionary tale" for the Scots:

Scots, What the Heck?, by Paul Krugman, Commentary, NY Times: Next week Scotland will hold a referendum on whether to leave the United Kingdom. And polling suggests that support for independence has surged..., largely because pro-independence campaigners have managed to reduce the “fear factor” — that is, concern about the economic risks of going it alone. At this point the outcome looks like a tossup.

Well, I have a message for the Scots: Be afraid, be very afraid. The risks of going it alone are huge. You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.

Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. ... And what the Canadian example shows is that this can work. ...

But Canada has its own currency... An independent Scotland wouldn’t. ..: The Scottish independence movement has been very clear that it intends to keep the pound as the national currency. And the combination of political independence with a shared currency is a recipe for disaster. Which is where the cautionary tale of Spain comes in.

If Spain and the other countries that gave up their own currencies to adopt the euro were part of a true federal system..., the recent economic history of Spain would have looked a lot like that of Florida. Both economies experienced a huge housing boom between 2000 and 2007. Both saw that boom turn into a spectacular bust. Both suffered a sharp downturn...

Then, however, the paths diverged. In Florida’s case, most of the fiscal burden of the slump fell not on the local government but on Washington... In effect, Florida received large-scale aid in its time of distress.

Spain, by contrast, bore all the costs of the housing bust on its own. The result ... was a horrific depression... And it wasn’t just Spain, it was all of southern Europe and more. ...

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...

I find it mind-boggling that Scotland would consider going down this path after all that has happened in the last few years. If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.