Imagining an Independent Scotland

Mr. King had a lot of interesting things to say — boy, is he hard on eurozone policy makers, and, as I heard him, surprisingly sympathetic to the current Greek leadership. But wearing my international economist hat, I thought the most interesting discussion involved the hypothetical case of an independent Scotland using the pound as its currency.

I’ve written a fair bit about this before, and given my background, my approach has been to view this issue through the lens of the optimum currency area theory.

This theory mainly focuses on the problem of responding to asymmetric shocks — a slump in Spain while Germany’s economy booms, for instance. We know, or we think we know, that when something like this happens, fiscal integration is crucial — Florida can count on Washington to pay for pensions and medical care, for example, but Spain has no comparable cushion. Europe’s experience since 2009 has also led us to focus on banking integration, or the lack thereof.

What Mr. King suggested, however (after I pressed him a bit), was that these issues are relatively unimportant in Scotland’s case. Scottish banks, he argued, aren’t really Scottish at this point — so much of their ownership and business is based outside of Scotland that they’re effectively English. So they would surely retain lender-of-last-resort privileges from the

Bank of England and be bailed out if necessary.

Mr. King also argued that Scotland’s business cycle is closely correlated with the rest of Britain, so that asymmetric shocks of the kind experienced by countries in the eurozone — or regions in the United States — would be minor.

Interesting. I do remember that back in the early 1990s many advocates for the euro assured us that asymmetric shocks wouldn’t be a problem. In reality, the boom and bust in intra-European capital flows gave rise to the mother of all asymmetric shocks.

On the other hand, Scotland doesn’t have a lot of warm beachfront real estate for people to speculate on.

A Sad Loss for Economics

Sad news: Jose da Silva Lopes, a Portuguese economist and government official who played a crucial role in shepherding his country into the community of democratic Europe, died on April 2.

I met Mr. Silva Lopes in 1976, when I was part of a group of M.I.T. graduate students who spent the summer working at the Bank of Portugal, of which he was governor at the time.

I’ve written about that experience in the past; let me just add that working with Mr. Silva Lopes — who must have been somewhat horrified at trying to deal with a bunch of uncouth students at the same time that he was coping with the chaos of a still unstable political system, but who showed unfailing good humor and intelligence — was one of the real highlights of the whole business.

Actually, here’s an anecdote: We were working in rented space outside the bank proper, and there was a Soviet trade mission just upstairs. Once we joked to him that the Russians might be bugging us, to which he responded: “I don’t care what the Russians find out, it’s the press I’m worried about!”

Another: His remark about the state of foreign exchange reserves — “When I have six months’ reserves, I will have no reserves” — was a key inspiration for my early work on currency crises.

And yet another: At the time, Portugal was a low-wage nation within Europe, so it exported a lot of apparel. Mr. Silva Lopes: “We are not a banana republic, we are a pajama republic.”
In the years that followed, he added further chapters to his illustrious career — more than I knew, I’m ashamed to say — leading tax reform efforts and more. I was honored and delighted to see him again two years ago, and have him deliver remarks when I received honorary degrees in Lisbon. If you read his remarks (here:, you’ll see that he was as sharp — and good humored — as ever.

The world has lost a great, incredibly likable man.