Podium: Scotland is truly European

David Begg From a lecture by the professor of economics at Birkbeck College, London, to the Royal Society of Edinburgh

IT IS no accident that the centralisation of Europe is taking place at the same time as greater devolution. Both are products of the same set of forces that is slowly undermining the sovereignty of nation states.

EMU will mean permanently fixed exchange rates between member states, and a single interest rate, set by the European Central Bank. The ECB is committed to the use of interest rates to maintain price stability; despite the austerity of the rhetoric, it will of course pay some attention also to the state of the business cycle, as central banks usually do. EMU membership will also entail participation in the Stability Pact to avoid excessive deficits.

Since Scotland is already a member of the monetary union called the UK, whose government is committed to low inflation and fiscal prudence, it might appear that exchange of the pound for the euro would make little difference.

This presupposes that Scotland is as closely integrated with Euroland as it is with the rest of the UK, which currently is not the case. A single monetary policy works well when countries are similar, but creates stresses when countries have different structures and differing needs; this has, of course, fuelled some of Scotland's existing discontent.

A country out of kilter with the central monetary policy has essentially two resorts.

First, it can seek adjustment instead through labour market behaviour. This requires both flexibility and the skill to cope with change - not an easy combination; the competition that promotes flexibility in many cases also undermines incentives to train and invest.

Second, a country can rely on using its own fiscal policy to counteract its own problems. Many economists remain worried that the Stability Pact will prove too much of a straitjacket to make this easy; nor is Scotland likely to have much fiscal flexibility within the existing framework for devolution.

However, EMU membership would at least protect Scotland from gross errors of fiscal judgement, most recently by the Chancellor of the Exchequer, Gordon Brown.

Whatever the outcome within Euroland, the fact that for all European countries, including Scotland, trade mainly with one another would make effects via Europe's external exchange rate much less significant.

It is sometimes claimed that EMU is an ambush by euro federalists: an early crisis will spur moves of much deeper fiscal integration in order to reconcile national needs with the single monetary policy. This view is probably mistaken, for two reasons.

First, gains to fiscal federalism are greatest when countries differ; when one is up, the other is down, and sharing provides mutual insurance. Paradoxically, the Maastricht convergence criteria, while good for the single monetary policy, have reduced the gains to fiscal integration.

Second, EMU is not an act in isolation: it is the consequence of many deeper and ongoing forces of integration within Europe. These forces will not go away, and may in time, perhaps quite soon, foster greater fiscal integration, but that will not be caused by EMU per se.

What lessons for Scotland the brave?

First, any notion of a separate monetary policy for Scotland should quickly be rejected. In today's global financial markets, this would simply introduce a new and unnecessary source of currency speculation.

Second, in many respects Scotland is much more truly European than its Sassenach neighbour, being more deeply committed to education, thrift, investment, infrastructure and community. Paradoxically, Scotland to date has probably been hampered by English ambivalence, which has allowed the Irish tiger to benefit from English-speaking inward investment in search of a stepping-stone to Europe.

EMU entry, whether by the UK or by Scotland alone, would draw more effectively on some of Scotland's strengths.

Third, Scotland's peripheral geographic disadvantage, hitherto exacerbated by poor English infrastructure, will gradually diminish in importance as telecommunications develop further; and Scotland's environmental assets may become significant not merely in tourism, but also in attracting and retaining workers in other industries.

Finally, the mobility of goods, capital and even people makes true fiscal sovereignty an increasingly unrealistic aspiration for any small open economy within Europe.

Successful devolution must therefore be wise enough to pursue the transfer only of those fiscal powers over which sovereignty is feasible.