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The IMF's subtle warning for Alex Salmond

The IMF's subtle warning for Alex Salmond

Buried away in today’s IMF World Economic Outlook is an intriguing section about what different kinds of currency arrangements have done for a country’s economic growth and stability in the past. Admittedly, it’s specifically focused on emerging economies, but it nonetheless provides some interesting food for thought for those prospective independent countries considering a currency union.

Though the Fund studiously avoids referring to Scotland, its message is that currency unions (it includes them in its category of so-called hard pegs on a currency) can expose a country to more economic risks than if it chose to float its own currency.

Screen Shot 2014-04-08 at 10.58.14

The point is made by the chart above. As the IMF explains it:

although countries with hard pegs have fewer banking and currency crises than those using most other regimes, they are more prone to growth collapses because hard pegs impede external adjustment and make it more difficult to regain competitiveness following a negative shock.

In other words, aiming for a currency union with Britain (if indeed that were to materialise) would help protect the Scottish banking system. However, it would leave the broader economy (and therefore jobs and incomes) far more vulnerable to crashes.

 

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