Lessons for Scotland from Greece's Euro Tragedy

Abstract

Scotland will soon decide whether to remain part of the U.K. or become an independent nation. Should Scotland choose independence, it may try to join a formal currency union with the U.K. or the E.U. This article focuses on the risks small nations can face in a currency union, as told through the prism of Greece’s experience in the Eurozone. Since the world financial crisis hit Europe, Greece has become the worst case scenario for small countries in a currency union. The austerity conditions the Troika requires in exchange for hundreds of billions in loans have caused a depression and unemployment crisis of historic magnitude in Greece, without reducing its debt. Greece would almost certainly be better off defaulting on its debt, but cannot do so in an orderly fashion because default would certainly mean a calamitous expulsion from the E.U. Greece is also something akin to a zombie democracy. All of the important decisions are effectively made by the Troika who have no electoral accountability to the Greek people. Joining a currency union always entails some loss of sovereignty and the benefits can certainly outweigh the risks. However, Greece shows that important aspects of national self-determination like tax policy, spending, interest rates, unemployment targets, pensions, work rules, etc., can be compromised if a country gives up its currency and is hit by financial calamity. These types of risks – ones that go to a newly independent country’s ability to function as a democratic state – are important risks to consider if Scotland chooses independence and chooses to join a currency union.