Scotland and the Euro Convergence Criteria

Scottish euro coin
Scottish euro coin, a photo by viralbus on Flickr.
At the moment, most people seem to think that an independent Scotland should either stay in a monetary union with England, Wales and Northern Ireland or introduce its own currency.

However, very occasionally somebody suggests Scotland should adopt the euro (and of course, Better Together's ubiquitous scaremongers love to pretend Scotland will be forced to join the Eurozone immediately).

It's therefore perhaps worthwhile to examine briefly whether Scotland would actually be allowed to join. To introduce the euro, a country needs to fulfil the convergence criteria:

  • The inflation should be less than 2.5% (the exact figure varies from year to year -- it's based on the inflation figures of the EU member states). The figure for the UK is currently 2.6%, but there's no reason to assume this would be the same for Scotland -- it could be either higher or lower. I don't think we can determine this at the moment; it's possible Scotland will tick this box, but it's quite likely it won't.
  • The budget deficit should be less than 3% of GDP. The UK is currently running a deficit of 6.3%, and although Scotland's finances are better than the UK's, it would require exceptionally high oil prices to push the deficit under 3%. It's probably safe to assume Scotland would need a few years to bring the deficit under control.
  • The debt-to-GDP ratio should be under 60% or falling. The UK's ratio is 90% and rising, so if Scotland inherits its population share of the debt, this criterion will be very hard to fulfil. On the other hand, if the rest of the UK decide to keep all assets and liabilities, Scotland will have a ratio of 0%, so it'd pass this test with flying colours.
  • The country should have been a member of ERM-II (the exchange rate mechanism) for two years. This means that the country needs to have had its own currency for at least two years (using the Pound Sterling doesn't count), and it needs to have been linked loosely to the euro. If we assume that an independent Scotland would continue to use the pound for at least five years after independence day before creating its own currency, the earliest this criterion can be fulfilled is 2023.
  • Finally, the interest rate should be no higher than 4.81%. The figure for the UK currently is 1.62%, so it's likely Scotland's would be much lower than the threshold, too.

To conclude, the main issues are likely to be the national debt (unless the rUK decide to keep all of it in order to safeguard their permanent membership of the UN's Security Council) and the need to have been a member of ERM-II for at least two years. It seems unlikely Scotland would be able to introduce the euro before 2023, even if it became a political priority.

Of course, if Scotland decides not to introduce the euro, staying out of ERM-II is all it takes. This is what Sweden and many of the newer EU members are doing at the moment.

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