Scotland and Catalunya. The history will repeat itself?

Scotland and Catalunya the history will repeat itself

Scotland and Catalunya, the history will repeat itself?

04.02.2014

by Daniele Basciu with editorial assistance from Warren Mosler, to ho

I’

grateful.

Several regions (parts of sovereign nations) in Europe present a significant tradition of nationalism and tribal politics, of which Scotland and Catalunya are two examples.

These tendencies are deeply rooted in their history and culture. Scotland and Catalunya both have local governments with a high degree of legislative autonomy, and freedom from their central governments. Catalunya even has its own language which is officially recognized by the Spanish State. Neither, however, have their own currencies. Scotland uses the British pound, and Cataluny uses the euro.

Some data The Scottish GDP is about 150 mld £. The share of British pu li de t related to “ otla d i ase of secession from UK has been calculated in about 8.4% of British public debt: 153 mld £ (it would generate a 103% Debt/GDP rate), under the 'worst case' scenario featured in the "white book for the independence of Scotland", published by the Scottish prime minister Alex Salmond. From 2008 to 2013 the unemployment rate doubled, increasing from 4.5% to 8.5%, in contrast to the overall increase from 5.5% to 7.5% for UK. In case of independence, Scotland would attempt to receive its share of the oil revenues that today accrue to the UK. Catalu a’ GDP is a out 212 mld €, a d the Catala pu li de t is a out ld € ith the pu li de t/GDP at 25.9%. Catalunya is net exporter if Spain is included i the foreig se tor . The unemployment rate increased to 22.6% from 9% in 2008, while Spain's unemployment rate is currently 25%. Interestingly, Catalunya contributed about 15 mld € of fis al surplus to the e tral go er e t.

2014: referendum and scenarios During last several years, the nationalist pressures grew considerably in both regions, and there have been large popular demonstrations in Catalunya in September 2012 and 2013 . And while there are differences in the historic and cultural origins of the unrest in “ otla d a d Catalu a, it’s lear that the re e t gro th of these pressures is directly related to the economic crisis that in different measures hit both the UK and Spain. It is therefore likely today the independence is seen as a step toward economic recovery and prosperity. I there’ll e refere du s a out i depe de e i “ otla d “epte er a d Catalu a No e er , a d there’s a high probability that both regions will become independent states.

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Scotland and Catalunya the history will repeat itself

Resources and constraints In case of independence, the ability to capitalize on its real resources, including labor and intellectual resources, will determine the Scottish and Catalan real terms of trade and standard of living. A share of the crude oil revenues will be a direct benefit for Scotland, though natural resources are not a requirement for successful independence. With independence, both Scotland and Catalunya will have new responsibilities that today are undertaken by their central governments (the national army, for example). It’s possi le, a d e e pro a le, that “ otla d a d Catalu a ill also fa e fi a ial constraints. Unfortunately, even as they move towards independence, neither Scotland nor Catalunya has a credible plan for an independent monetary system. A d it’s ota le that t el e ears after the euro disaster, this fundamental part of the national sovereignty has been all but ignored, with only casual reference to a variety of monetary options.

For Scotland three options have been considered: 1. A new Scottish currency 2. Adopting the British pound 3. Entering the euro zone The European Commission has already published an informal commmunication stating that an independent “ otla d ould e out Europea U io a d Eurozo e, e ause it did ’t sig the Treaties. This removes option 3. The U ited Ki gdo a d “ otla d o 't e e gaged i a offi ial egotiatio , so e ha e to try to interpret some informal messages released by UK Government and Treasury, and the Scottish prime minister. The Uk Treasury stated that the UK would take full debt responsibility if Scotland become independent (the secession would be in 2016). However, the UK considers Scotland obligated to assume a proportional part of total UK liabilities. This means the 2nd scenario is currently the most probable, as suggested by the Scottish prime minister. Specifically, this implies Scotland: 1. Will be user and not issuer of currency, with Scotland engaging in pro-cyclical economic policies ased o sou d fi a e a d alanced public budget imperative; 2. Will start this new era with a high, problematic public debt/GDP ratio; 3. Will be required to fund itself with a currency it doesn't issue; 4. Will not set its interest rates, including bond rates and interbank rates; 5. Will lose (as independent State) fiscal transfers from UK; 6. Will lose central bank lending and guarantees of its bank deposits; Opting out of the Eurozone could save Scotland from Euro-austerity policies, but the UK could impose the same tiye of constraints. For example the approaching BOE rescue of the Scottish banking system might carry EU type 'terms and conditions'. After independence, the rate of private debt growth, or the inability to expand private debt, perhaps due to a slowdown in the economy, could lead to a solvency crisis with the usual symptoms of ad loa s a d all the rest that goes ith it, er u h as des ri ed Warre Mosler for the “tates e teri g Eurozo e i Rites of passage , i . www.retemmt.it

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Scotland and Catalunya the history will repeat itself

Catalunya's options include the following: 1. Request entry to the Eurozone 2. Issue a new currency pegged to the Euro 3. Issue it's own new currency Catalunya seems not to be considering option 2), and the Catalan government has already explicitly declared its priorities are a balanced budget and austerity it’s ot a a of sa g , the use e a tl this word!). This makes sense in the context of Catalunya as a local administration using the currency, under the existing constraints of the EU. However, if Catalunya becomes independent and adopts the euro, it will continue being limited by the constraints that are typical of the other users of the euro. Considering that Catalu a o ’t e a le to e ter Eurozo e i ediatel , it’s ore likel that Catalu a ould issue a currency pegged to the Euro. In this case the limits will be the same, with the new State forced to act proli all a ordi g to the pri iples of sou d fi a e . This would mean the disastrous situation of unemployment (very similar to Spanish situation) would persist, even if Catalunya retains control the fiscal surplus that today is currently remitted to Spain. And much like the scenario described for Scotland, Catalunya could also face problems originated by the banking system, without a central bank able to deal with them. And without a central bank, there is the possibility that the Government could be forced to absorb the losses of the banks, as was the case for Ireland. Should Catalunya will become independent with a lower public debt/GDP rate than Scotland, there is no guarantee there won't be a crisis of the banking system. Ireland in 2008 had a Public debt/GDP rate of only 25%, ut as user of the urre had serious troubles absorbing the losses from its fi a ial risis, as it effe ti el e a e a olo of the Trojka. Also remember that should Catalunya (unlike Scotland) accept the burden of new public expenditures, these expenses would be partially offset by the Catalan fiscal surplus today collected by Spain. And neither Catalunya or Scotland will control their interest rates. And along with the dim prospect of improvement in the Catalan economy, the catalan financial system could become weaker and more exposed than the Spanish system today.

What are the similarities between Scotland and Catalunya in their road to independence?

1. They both rely on exports for future growth 2. Absolute nonchalance about the problems related to constrainsts of the users of a currency 3. Total lack of interest in full employment policy 4. Profound underestimation of the vulnerability of a banking system that is not based on a central bank issuing the currency under the control of the State All these points seem to suggest that the history will probably, and suddenly, repeat itself

Sardinia. Blinds that drive blinds?

I “ardi ia isla d italia regio i the Mediterra eo sea , se eral atio al parties are e ergi g. The ’ll participate in the next regional elections (February 2014), equally divided between the so- alled left , right , a d auto o ous parties. Ma of these parties ha e good relatio s ith i depe de t parties i Scotland and Catalunya, and see them as an examples to be followed. Unfortunately they seem to share www.retemmt.it

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Scotland and Catalunya the history will repeat itself

ith the the sa e isu dersta di gs a out the “tate a d the role of ta atio ; the do ’t sho a sig of recognizing the constraints inherent in the EU's institutional structure and how they relate to the economy. Many of them dream of “ardi ia as a i depe de t state i EU , ig ori g that the “tates i the EU have been declassified to local governments, users of currency, lead by a technochratic elite pursuing policies that are destroying their economies as they carry out what are best described as horrible crimes against humanity and the destruction of civilization.

But this point seems of no interest to them.

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