Scottish Economy on the Rocks

Tomorrow, Scottish voters will determine if they separate from the United Kingdom.

If the “yes” sweeps, it’ll reverse a union dating back to 1707. Few pundits are making positive comments about this separation and though I disagree with New York Times economist Paul Krugman on several issues… I have to agree with him on this one.

If Scotland goes on its own, the situation ahead will be problematic at best.

When you look back at the history of the world, strong and powerful leaders have conquered smaller nations and dictated the law of the land. There are some notables… Genghis Khan, Alexander the Great, and Darius of Persia, just to name a few. And then there are countries that decide to join a union in order to become part of something more powerful.

These days it happens more through political means and unions like NAFTA and the EU. The problem with this is people like to have their own heritage, traditions and governance.

Our individual and cultural egos get in the way of progress…

And that’s what’s happening now. The Scots want to do their own thing even at the cost of creating new currency and at the great cost to their banking system. That is followed by higher costs of government and an increase in their vulnerability to global threats.

It’s not a rational way of thinking. But it is rational to their cultural ego… it wants to control its own destiny in today’s uncertain world full of change and turmoil.

Great Britain chose not to join the single euro currency, despite the fact that they’re a major part of the European Union. It’s even considering backing out of that in the future. So, who are they to call the Scottish kettle black?

The EU has never been as coherent a trading zone in comparison to NAFTA. And the euro has never been as effective a currency as the U.S. dollar. The fact that the euro still trades higher than the U.S. dollar is as mysterious to me as when Spanish bonds trade at rates comparable to U.S. Treasury bonds.

This is what happens when governments take over free markets and try to manipulate them. As trends go, it doesn’t turn out well and the U.S. dollar will reach parity, or better with the euro before this crisis is over and keep an eye on Spanish bonds… they will tank.

The countries in Europe have much longer histories with deep-rooted cultures and traditions. They have different languages. They have different work ethics and practices. The creation of the EU and the euro has been a difficult and very political proposition from the beginning and it still is today compared to U.S. that had to fight a very bloody war in its efforts to become one nation with one currency.

Putting such different countries on the same currency created imbalances in trade that continue today and still threaten to break the euro and the EU in the end.

Germany and France became more productive and far more competitive. They saw their exports rise when compared to their southern neighbors because the euro was more affordable than the higher priced German deutschmark or French franc they used to have.

The southern countries were able to borrow at lower rates than those to the north because they didn’t have their own currency and weren’t part of the larger and more efficient EU. So, they obtained lower rates and were able to borrow and import more from the stronger northern countries.

In 2008, when everything started to fall apart, the stronger countries bailed out the weaker ones… they didn’t want to lose their exports. They didn’t like doing it, Germany especially, but they did it anyway.

I’ve written about Germany’s fast-declining demographic trends and the fact that they have the fastest-aging population, second only to Japan. At this pace, it’ll be difficult for Germany to keep bailing out these countries when its own economy fails despite its stronger work ethic and fiscal responsibility.

Can the EU last now that Scotland is seeking its independence, Great Britain says it’s considering leaving the zone and Germany is fed up with bailing out the slacking and debt-addicted southern countries?

If Scotland votes to leave the U.K., it’ll be a huge move toward the fall of Europe as a major economic region and an ultimate fading from world leadership.

While it may be by a narrow margin, let’s hope Scotland is smart and votes not to leave. If they do, we get one step closer to D-Day for Europe and for the global economy in 2015.


Harry

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Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.