Scotching the Eurozone

LONDON – Which of the following events is more likely to happen this year: Scotland votes to secede from the United Kingdom in its September referendum, or at least one country decides to leave the eurozone? Conventional wisdom suggests that Scottish independence is possible, albeit not very likely, while any country’s departure from the single currency is fanciful.

But the decisions that Scotland would have to make about its monetary arrangements in the months following a vote for independence are at least as likely to be confronted by some eurozone countries over the next couple of years. In fact, there is a natural link between the two situations.

An independent Scotland’s continued use of the British pound – the Scottish government’s official position – could be approached in two ways. The first possibility, which First Minister Alex Salmond appears to have in mind, would entail a monetary union under a central bank accountable both to Scotland and the rump UK.

But the UK government could – and undoubtedly would – veto any such adaptation of the Bank of England’s responsibilities for monetary policy, financial stability, and banking supervision. Any other conceivable model of monetary union – including one based on a central bank as unaccountable as the European Central Bank – would be subject to the same rejection. As the journalist Martin Wolf noted recently, “the rest of the UK has surely not escaped the horrors of the eurozone only to create similar horrors for itself at home.”