Scotland and European Monetary Union: Constraints on Policy Discretion in a Globalised Economy

Abstract

In this paper we consider the implications of membership within a monetary union for local economic policies. We start from the position that specific economic policy instruments increasingly are unavailable to policy-makers as a consequence of a process of 'globalisation*. Here we define globalisation as the tendency for national economies to become increasingly integrated through the dismantling of the barriers to the movement of goods, services, capital and persons what in EU parlance tends to be described as the 'four freedoms', or the progressive integration of product and factor m a r k e t s ^ n that sense, European monetary union (EMU) has been rationalised as a further step towards the creation of a truly single market in that exchange rate movements constituted an obstacle to the four freedoms especially with regard to trade in (financial) services and the readiness for capital mobility to reflect genuine market opportunities.^At the same time, the shift to a monetary union between 12 of the 15 EU member states carried with it significant implications for the conduct of national fiscal policy and this resulted in the Stability and Growth Pact (SGP) being established. The consequence of EMU and the SGP is that national economic policy-makers have either wholly or partially lost independent autonomy (sovereignty) over the two levers of macroeconomic policy. Here we consider the underlying dynamics of the resulting situation, and consider how national and subnational governments most appropriately might respond to these developments. The relevance of this work to Scotland's probable future as a region participating in the euro-zone (either as a part of the UK or