SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

Professor David Bell—Oral evidence (QQ 1–55)
labour mobility between Scotland and England than there is, for example, between Ireland
and England. There is clearly a uniform capital market across the UK, so there is pretty clear
capital mobility. There is also wage and price flexibility because both the UK as a whole and
Scotland in particular have fairly flexible labour markets. It is also the case that Scotland and
the rest of the UK share pretty similar business cycles. Maybe in the 1980s they did not, but
there was particular improvement in the early 1990s in Scotland’s unemployment rate,
relative to the UK as a whole. Since that point in time, it has been pretty difficult to show
any significant difference in the business cycles. That means that you are not in the situation
of, say, Ireland and Germany five years ago, when the Irish economy was booming and the
German economy was pretty much in the doldrums. Therefore, the difficulty comes in
defining an appropriate monetary policy that suits both areas. That would be less difficult
because of the synchronicity of the business cycles between Scotland and England. The fifth
condition is the one that is causing all the difficulty within Europe, and I suspect that you
would want to return to—fiscal transfer mechanisms. What we have established, at least in
the past few minutes, is that the fiscal transfer mechanisms, in the shape of the Barnett
formula, would not be there.
Q20 Lord Lawson of Blaby: You are obviously right to say that a common currency
between England and Scotland makes a great deal more sense than joining a single currency
within the eurozone. That is absolutely clear. Nevertheless, however sensible it is, the
precedents do not go that way, do they? Even when Ireland became independent, it replaced
the pound with the punt. More recently, when the Soviet Union broke up, all the component
countries decided that they wanted their own currencies. That may be highly sub-optimal,
but that is what happens. Have you looked into that?
Professor Bell: Yes, in a sense, but only to establish that that is entirely sub-optimal. It is
sub-optimal for England as well, because it has about £40 billion-worth of trade into
Scotland. Having a transactions cost when changing currency at Berwick is, I suspect, not in
the interests of English businesses, and it is clearly not in the interests of Scotland.
Lord Lawson of Blaby: It is a much bigger proportion of trade for Scotland than it is for
the United Kingdom.
Professor Bell: That is true.
Q21 Lord Forsyth of Drumlean: Is there not a difficulty here in that, in order to join
the European Union, it would be necessary for a new member to apply to embrace the
euro?
Professor Bell: It would be necessary under the current rules to embrace the growth and
stability pact or its now stronger version—the recent treaty agreed towards the end of last
year—which pretty much seems to suggest that fiscal balance is almost a requirement for
being a member of the eurozone per se.
Lord Lawson of Blaby: Lord Forsyth is right. Any country joining the European Union is
obliged to move to the euro. However, there is no time limit and, therefore, although in
theory they would have to do it, they could keep putting it off. That is my understanding of
the legal position.
Professor Bell: Yes, that is true. I think that Sweden is in that position, as is the Czech
Republic.
Lord Lawson of Blaby: The Czech Republic certainly is.
Professor Bell: Yes, the Czechs have just deferred in a kind of European way, I guess.
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