The Scottish government has also indicated that it would attempt to increase both productivity growth post-independence and also grow GDP per capita at 3% per annum. Part of the justification for a currency union is in terms of having similar levels of productivity and GDP per capita; if the Scottish government changes these, it would make Scotland inconsistent with the union and would mean that the currency area would no longer be optimum. It is presumably for these reasons that Hughes-Hallett has now abandoned the optimum currency area analysis used by the group and uses the lens of game theory to justify a sterling currency union. The nub of the argument seems to be that if Westminster did not accede to an independent Scotland being part of a sterling monetary union, Scotland could adopt the pound anyway along the lines of the way Ecuador uses the US dollar or Montenegro the euro. By doing so, he claimed, Scotland would be unambiguously better off: more policy instruments to reach the same targets. But an informal form of sterlingisation the Panama option is a vastly inferior option to a formal monetary union, as indeed the fiscal commission working group recognises. Yet it suffers from the same basic problem of exchange rate fixity and the inability to address changes in competitiveness. As Paul Krugman and others have argued , a key reason why currency unions, and other forms of fixed rate systems, break up is that such currency locks cannot cope with the competitiveness strains placed on them. Taking recent IMF numbers for the costs of currency crisis, it is straightforward to show that maintaining the sterling zone currency union would cost an independent Scotland in the region of 25bn-35bn, but could easily cost two to three times these numbers. The cost to the UK would be even greater.
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