Britain and Scotland’s journalists have set a high bar for stupid today, but this might take the biscuit. Almost every half-cut hack and so-called expert who talks about the currency options open to Scotland casually mentions that Scotland “could join the Euro”. Whether such people are doing so through ignorance of the rules of the Eurozone or through malicious intent is for observers to decide, but either way, this particular piece of witless misinformation just will not go away.
So, let’s make it nice and easy for all the lazy people who can’t be bothered Googling “Eurozone Convergence Criteria”, shall we?
The Eurozone Convergence Criteria (aka the Maastricht Criteria, as they were defined by the Maastricht Treaty in 1994) state five conditions that a country must fulfil before it is allowed entry into the Eurozone. These are:
1. Price stability – the country’s Consumer Price Inflation (HICP) rate must not be more than 1.5% above the rate of the three best performing Eurozone member states.
2. Sound public finances – the government’s deficit must not be higher than 3% of GDP.
3. Sustainable public finances – the government’s debt must not be higher than 60% of GDP.
4. Durability of convergence – the country’s long-term interest rate must not be more than 2% above the rate of the three best performing Eurozone member states in terms of price stability.
5. Exchange rate stability – the country’s existing currency must have been part of ERM II (Exchange Rate Mechanism II) for at least 2 years without severe tensions.
Now, let’s just think about how many of those conditions Scotland would fulfil on day one of independence in March 2016, because unless we met all five in full on Day 1 of independence, then the Euro cannot be anything other than a medium-term solution for Scotland’s currency.
Whether Scotland could meet any of the first four as a brand new independent country is open to debate, quite simply because we’ll have a lack of history outside the UK to prove it. But let’s be generous for the sake of argument.
If Scotland was trying to join the Eurozone, it implies Westminster has rejected a currency union, which in turn implies we’ve said “Enjoy paying off the UK’s debt by yourself, then, chumps”. (If we’ve taken on a proportionate share of the debt, we’re instantly buggered on 3 and possibly 2.)
So Scotland would be starting with government debt equal to 0% of GDP. We’ll also have a budget surplus, never mind a 3% deficit. We could even argue that whatever the UK’s long-term interest rate is, that’s Scotland’s long-term interest rate too.
(This is the only one of the Maastricht Criteria the UK currently meets – even Bulgaria is closer to qualifying than we are. Who needs an explicit Euro veto when you can just put Alistair Darling and George Osborne in charge of your economy?)
So Scotland could maybe start off with criteria 2, 3 and 4 ticked off. Let’s also, again for the sake of argument, assume that Scotland could argue that it meets the first criteria, because the UK’s HICP inflation rate isn’t that far off the required rate at the moment, and we’re talking about 2016 rather than 2014. So with a following wind that’s four out of five potentially in the bag.
But the last of the five – essentially the last step before any country can join the Eurozone – is membership of ERM II for a minimum of two years. Now, unless the current UK government has a complete reversal in policy towards the Euro pretty much right now, Scotland cannot possibly be said to have been in ERM II for two years on independence day, because right up until then Scotland’s currency will have been Sterling, and so won’t have been in ERM II for two minutes, never mind two years.
There’s simply no way the EU would bend this rule either, as Sweden’s continued policy of failing this rule on purpose to give a de facto Euro opt-out shows. So just as Scotland cannot be forced to join the Euro, we are also prevented from joining it voluntarily – just like Bulgaria, Croatia, Hungary, Lithuania, Poland and Romania, all of whom want to join the Euro, but can’t because they don’t fulfil the five criteria (Sweden don’t want to, and the Czechs can’t seem to decide).
There is, of course, one other requirement which is not in the Maastricht Criteria, because to be bound by the Maastricht Criteria you must have one fundamental quality first – being a member of the EU (duh).
So every person who talks of Scotland “joining the Euro” is implicitly confirming that they believe Scotland would be a full member of the EU on day one of independence. No EU membership, no Eurozone entry. (Unless you think Scotland is a micro-state like Monaco, San Marino and the Vatican City.)
There is one way Scotland could use the Euro without meeting the Maastricht Criteria. It’s the same way Montenegro are able to use the Euro, despite not being in the EU and not meeting the criteria. That is to use the Euro without permission, in the same way Scotland can use Sterling if it wants to, because the Euro is a fully convertible currency. (Of course, that’s not joining the Euro, that’s using the Euro.)
But if this was the option that journalists were referring to, then why limit our options to the Euro? Why not include the Danish, Norwegian or Swedish Kroner? The Swiss Franc? The Canadian Dollar, even? More to the point, if Scotland goes down the road of using a fully convertible currency without permission, then it’d be absurd and pointless to use anything but Sterling.
So bearing all that in mind, is there any chance that everyone could shut up until they have at least the vaguest beginnings of a clue what the hell they’re talking about? Ta.