28/05/2014 11:23 BST | Updated 28/07/2014 06:59 BST

The Costs of Independence

With the publication of HM Treasury's paper 'Scotland Analysis: Fiscal policy and sustainability' the people of Scotland have a clearer insight into the personal costs of Scottish independence. The headline figure of an average of £1,400 over 20 years is calculated factoring in reasonable, although perhaps on the conservative side, estimates for a number of key variables, such as Scotland's project fiscal deficit, the interest premium on its debt, projected revenue from oil and gas, demographics and the costs of setting up a new state.

Much mischief-making has focussed on the latter cost, with HMT being accused by the First Minister of Scotland of imputing a charge for the set up costs of 180 institutions when in fact some of these are already in place and should not appear in the headline figure. A closer look at the figures given in the Treasury document, however, reveals that using the 180 number would have given a total start up cost of £2.5billion and the Treasury has chosen a figure of £1.5billion.

But there can be little doubt that the figure of £1,400 for 20 years given in the Treasury paper greatly underestimates the costs that are facing the people of Scotland if they vote for independence. This is because the Treasury paper implicitly assumes in calculating these costs that there is a back-drop of a stable monetary and exchange rate regime in place, appropriately designed to absorb the various shocks that will hit the Scottish economy post independence, such as asymmetric oil shocks.

As I have pointed out in a number of articles, and other economists concur, a sterling zone currency union, even if it could be achieved post independence, is unable to offer protection against asymmetric and other shocks and will therefore not be stable. Indeed, given the way financial markets operate, such a system will very quickly unravel at very great cost to all participating countries. With no appropriate Plan B in place on currency, the economic chaos that would result from this would be very costly indeed: those lucky enough to still have employment would be paying a much higher price than £1,400 per year; those who loose their jobs as a result of the economic negligence to build an appropriate currency regime, would of course pay a much higher price which in all likelihood would be generational in its impact.

I daresay some will respond to my point by saying I am scaremongering. To those I would say: take a look at recent UK economic history. In the late 1970s the then monetary regime led to a real overvaluation of sterling with the consequent loss of competitiveness this entailed. It is now widely accepted that this wiped out between 20-25% of the UK manufacturing base, a result that has clearly been generational in its effects.