Paul Krugman, what the heck?

BweDXYHCcAAbS2d.jpg-largeIt is the UK’s parlous position, that is giving financial markets their ongoing jitters, not Scotland’s economic prospects argues James Meadway. Reading the media representation would make you think it’s the other way around.

Respected economist Paul Krugman, a vociferous opponent of austerity, has turned his attention to the Scottish independence debate. With less than two weeks to the vote, and with considerations over the economy at the forefront of the argument, there’s no doubt that his voice will be taken as an authoritative intervention. It’s a shame, then, that his brief analysis has a glaring hole in the middle: the UK’s trade deficit.

Krugman thinks that Scots should “be afraid”, reckoning that, without its own currency, an independent Scotland would be like Spain inside the euro. Spain’s housing bubble blew up early on in the crisis but, with a government unable to issue its own currency, it could do little to soften the impact. The housing bust turned into a fiscal crisis, dragging Spain into a slump.

But this is to miss the core feature of the eurozone crisis – one that applies not just to Spain, but all those southern European countries hardest hit by the slump. Stuck inside the euro, with their exchange rates effectively fixed on entry, they ran huge current account deficits – they imported more than they exported inside the eurozone, mostly from Germany. During the good times, this was fine; the gap between imports and exports was covered, in effect, by borrowing from eurozone banks, notably French and German. When the crash came, that lending dried up and, as it did so, the slump followed in train. (You can read more on this argument here.)

The critical element in the eurozone crisis is the international imbalance – that some countries had persistent current account deficits, and some had persistent surpluses. These, in turned, fuelled the debt bubble, and then helped cause the eventual crash. It’s a little odd for Krugman to miss this international dimension, not least because he won his Nobel Prize in part for his work on international trade.

But the international dimension is central to the UK story, too. As I blogged last week, and as Robert Peston confirms today on the BBC blog, the UK runs a persistent current account imbalance. Year in, year out, we import more than we export, and we have done for decades. (We’ve had deficit on trade in goods trade every single year since 1983!) Last year, the current account deficit hit 4.4% of GDP. This has caused us fewer problems than might be expected because we have relied on our financial system to mobilise borrowing from the rest of the world. The UK now has an external debt second only to the USA, at 406% of GDP.

However, that current account deficit is there even with North Sea oil. Oil is still an enormous export earner – accounting for £39.3bn of sales overseas last year. If Scotland takes its geographical share of North Sea resources, the UK will lose almost all of that revenue. Without North Sea oil, our current account deficit would have leapt from 4.4% of GDP, to 6.9%.

It is one thing to run 3-4% current account deficit, year after year, and expect to borrow to pay for it. But a near-7% deficit is another thing entirely. Either the pound has to fall in value, so we cut imports and sell more abroad, or we (as Peston suggests) start selling off overseas assets, or interest rates have to go up. Under these circumstances, it would be hugely to the remaining UK’s advantage to conclude a formal currency union with an independent Scotland as rapidly as possible. This need not be a long-term agreement; Krugman is right, over the longer term, that an independent country needs an independent currency. But it would do for now.

It’s uncertainty over the future, and knowledge of the UK’s parlous position, that is giving financial markets their ongoing jitters. If Whitehall wanted to end them, it could do so immediately, by making clear its plans for how a post-independence currency union might work and offering some proposals. Nicholas Macpherson, head civil servant at the Treasury, has admitted that “contingency plans about contingency plans” are being drawn up. But that sensible option appears to have been ruled out in the interests of political positioning.

We can return to Krugman’s analogy. It isn’t Scotland that’s like Spain. With its gaping trade deficit and its housing bubble, it’s the UK.


James Meadway is writing in a personal capacity.


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  1. iain t says:

    Couple of my No Thanks FB friends have leapt on Krugman’s word handed down from on high. They conveniently skip over the opinions of other equally worthy economists because they don’t suit their agenda.

    Krugman’s view doesn’t suit my agenda, but (unlike so many No voters) I do take such views into account.

    Thanks for flagging up the crucial gap in it.

    1. sean mcgee says:

      Someone, I would like it to have been Keynes, once said that “if all the economists in the world were laid end to end they wouldn’t reach a conclusion…”!

    2. Just Sayin' says:

      It should also be remembered that Krugman is the man who wrote a pice called “In defense of sweatshops” so, although he has a firm grasp of economics he is not so solid on political positions.

  2. Douglas says:

    Krugman is on the record as saying he likes his countries “big and diverse”. So, he doesn’t like the idea of smaller states per se, which is what underlies his piece in the NYT I can’t help thinking…

    But the wider point, which Krugman cannot be unaware of: the Euro is proving challenging because it is a currency union involving 17 countries speaking maybe 25 languages with widely divergent economies and political cultures – the Greek economy has more in common with, say, Turkey than Germany – and it is now commonly accepted that the Euro project went too far too fast.

    But the problem is not so much with the principle of CU itself, as the vastly disparate nature of the Eurozone countries and their economies. And as you say, countries like Spain don’t export very much at all, their number one industry is tourism.

    In any case, the Eurozone doesn’t seem to be at all comparable with a currency union between two deeply entwined countries on one island of 60 million people where everybody speaks the same language and the economies are aligned and deeply inter-penetrated.

    Another issue – they call it POLITICAL economy, remember – and that is that the quality of governance is far superior in Scotland (and England) to Spain which has fundamental problem with political corruption – absolutely soul destroying for ordinary people – and a culture extremely hostile to entrepreneurship. Try setting up a business in Spain, it is a bureaucratic nightmare and corruption is widespread.

    There is no such thing as a 100 pound company there, and, like most Mediterranean countries, it’s all about who you know, people get jobs largely because they have “enchufe”, or know the right people, not because of their studies or experience… And then again, the labour force in Spain is much less educated than ours is.

    I could go on and on about Spain, whose problems are partly to do with the Euro, but which ALWAYS had very high unemployment rates even with the peseta too…

    And then, finally, Krugman ignores the fact that we have no say in what the Bank of England decides at the moment anyway…

    1. Zalacain says:

      Your ignorance of Spain’s economy is mind boggling. You confidently say that Spain doesn’t export, but as a percentage of its GDP it exports more than France, UK or the USA. It is, for example the second largest car producer in the EU behind Germany.
      You say that there aren’t large Spanish companies. So, Telefonica, Inditex (owner of Zara), Iberdrola, BBVA or Banco Santander are from what country? The list is much longer.
      Spain does have many problems, but coping with misinformed critiques is definitely one of them.

      1. Douglas says:

        I didn’t say that Spain doesn’t have big companies, of course it does, it’s Europe’s fifth biggest economy..

        And I think the export market has picked up of late, but it doesn’t have oil, it doesn’t have whisky, it doesn’t have financial services, it doesn’t have English language services, and above all, it doesn’t have a mature democratic political environment.

        I lived there for twenty years, I read the Spanish papers every day. If there is not a new anti-democratic draconian power being passed by this atrocious PP government, there is another corruption scandal emerging. It’s not a healthy business environment and the corruption is deeply entrenched, as it is in many countries in the world.

        Krugman takes the Euro and blames Spain;s woes entirely on that. Nobody who knows Spain well could accept such a simplistic argument.

        On the other hand, in Spain you live longer and enjoy life more than most north Europeans, according to most of the indexes…

      2. Douglas says:

        By the way, Zalacain, I’m not casting any doubt on the abilities of the people of Spain, quite the opposite, an amazing, highly talented and creative people. And very welcoming and kind too is my experience. Fantastic people.

        But bad governance affects economies, surely nobody can deny that – and Krugman doesn’t mention governance. He is fixated with the Euro.

        Why are the foreigners resident in Spain flocking out the door? If you’re born there it;s different, but to choose to live in a country whose political class is so obviously corrupt – and where nobody ever resigns – and effectively govern for themselves, blatantly, before getting all metaphysical and turning back the clock on the rights of women, not to mention the right to protest, the right to freedom of speech – these are simply intolerable things to most North Europeans…

        And so, adios y buenas noches…

      3. I felt that Krugman, was using a ‘red herring’ comparison between Spain and Scotland. Geographers and Economists would certainly not agree about their similarity, any more than Spain’s and Scotland’s proximity. The Spanish economy, still has large state ‘monopolies’ rail, water, Iberia, Iberdola, Santander, Movistar where old politicos go to retire.

        Spain’s problems do not stem from autonomy, by they continue despite autonomy.

        On his Scottish credentials Krugman’s Wiki page loses him ALL credibility :
        “According to Krugman, Gordon Brown and his party were unfairly blamed for the late-2000s financial crisis.[178] He has also praised the former British Prime Minister, whom he described as “more impressive than any US politician” after a three-hour conversation with him.[179] Krugman asserted that Brown “defined the character of the worldwide financial rescue effort” and urged British voters not to support the opposition Conservative Party in the 2010 General Election, arguing their Party Leader David Cameron “has had little to offer other than to raise the red flag of fiscal panic”

        Or, currently, to disappear after raising the white flag of devo-max, leaving Brown centre stage!

      4. gonzalo1 says:

        I lived in Spain, I speak fluent Spanish and am well-familiar with the verb enchufar/enchufado. It basically means plugged-in, and can, yes, be interpreted as being well-connected. And that lends itself to endemic and systematic corrruption and it is far worse than anywhere in Northern Europe.

  3. Clootie says:

    Once again we have the focus on the nation or “the big boys” as the the money market tries to dictate the way forward.

    Keep it stable / don’t rock the boat etc

    Let Foodbanks continue. Let payday lenders ruin peoples lives / continue austerity cuts.

    Let someone else suffer!

  4. Scottie says:

    What’s very important here and to convey to your ‘no’ friends is krugman’s understanding or ‘lack thereof’ of the role banks in the economy. To me this undermines his credibility in the YES NO debate.

    Krugman still believes that banks are mere intermediaries in the economy and take money from savers and lend it to borrowers. This is completely untrue because when a bank makes a loan, new money is created. Loans create deposits, not the other way round. Prof Steve Keen (author of debunking economics) and Krugman have had an ongoing debate about this…

    Here’s a taster…

  5. Scottie says:

    Iain T, you might want to show your no friends this….

  6. richardjallen says:

    Couple of things, from a Yorkshireman who hopes you don’t leave…
    – I’m not going to dispute your details as I’m not that up on them, but isn’t there a hole in your argument too? You say a currency union will not be a long-term commitment for Scotland but will ‘do for now’. Your next sentence notes that markets hate uncertainty. Isn’t a short-term currency union that will ‘do for now’ almost the definition of future uncertainty? And why would rUK want to enter into such a union if Scotland plans to bail out when it suits them?
    – On a more general may not believe it, but a lot of people in rUK want the best for the whole of the UK, including Scotland. It’s part of being in a union I guess. But there does seem to be a fair bit of self-centredness and ‘we’ll be all right Jack’ from some Yes people. It’s a shame, but that’s part of nationalism I guess.

    1. gonzalo1 says:

      What about British nationalism?

  7. Barontorc says:

    Yes, Clootie, it’s about time national economies were run for the betterment of the populace and not for the money-men and their financial chicaneries to rule the roost. Thatcher, Brown, Darling, Blair and all the usual suspects created a monster and that monster is eating itself.

    As to the article, why does the author not balance the argument with even a nodding awareness of the absolutely huge oil and gas resource that is all Scotland’s to use. Skipping around this resource as many commentators strive pointedly to do merely zooms in even more to the elephant standing in the corner of he room.

  8. Don says:

    I think Douglas nailed it: ” two deeply entwined countries on one island of 60 million people where everybody speaks the same language and the economies are aligned and deeply inter-penetrated.” Thanks!

    1. Douglas says:

      Thank you Don, glad it resounded. We must be determined to knock down these false examples and false paradigms made by poster boy economists of the elite.

      If England wants to say NO to CU, then fair play, but that will be a POLITICAL decision, and if they want to play hardball, then they can expect POLITICAL decisions from us too and hardball back.

      We too can play hardball on a whole host of things, no least who is the remainder State on rUK, re the UN.

      The days of telling Scotland what to do are over….

      1. Douglas says:

        And nice one Mark Carney.

        Thank you last night for clarifying, that, after all these 300 years The Bank of England always was and always really has been The Bank of ENGLAND….

        …though we always suspected as much in Scotland….more lies, more veiled threats, more LONDON BULLYING….

  9. dcanmore says:

    Krugman is showing his personal side here, first of all he is an anglophile, that means he enjoys Britain mostly through the window of a plush London hotel. Secondly he an Atlanticist, a fan of Blair and Brown and their close links to the Democrat Party and the ideologies and skewed thinking that go with it… and with that, thirdly, he is a supporter of New Labour. Krugman is angered at Scottish independence because it angers his friends and their ‘new world order’ outlook so in turn he is doing his bit for the cause.

  10. Jamie Shepherd says:

    Oil is real, money is pretend. Indy Scotland does not just have a tiger in the tank, she has the ability to sigue from the largest oil exporter in Europe to the largest renewable energy exporter. Jobs and more jobs!

  11. PolarBear says:

    You have a major flaw in your methodology.
    You account for the exports of oil, but ignore the trade between England and Scotland which is currently internal.
    An independent Scotland would have a large trade deficit with England excluding oil. Therefore an increase to a current account deficit of 7% would not occur.

  12. FlimFlamMan says:


    in the first part of this piece you point out, correctly, how damaging the combination of deficits and lack of currency sovereignty is. We can see that story continuing to play out across the eurozone years after the crash.

    You also point out, correctly again, that the UK runs a large deficit compared to other countries, and that loss of Scottish exports will result in a larger deficit for rUK post independence.

    And yet you then say that rUK needs to enter a currency union, giving up its currency sovereignty. The UK, with its external deficits, simply cannot afford a currency union, and rUK will be even less able to afford one, for the very reasons you give.

    At the end you say, yet again correctly, that it is rUK with the greatest risk of ending up like Spain. Yes. You’ve put the dots in place but not joined them up.

    Fill those lines in and the result, as I’ve been saying since before their first announcement on the subject, is that an even vaguely competent Westminster cannot agree to a currency union.

    I agree with Scottie on Krugman/Keen; Krugman is often horribly wrong, but on this issue he is right. It’s just that his warnings apply far more to rUK than to Scotland.

  13. Mark Otto Smith says:

    The only long term currency solution for Scotland would be the euro or the pound, either way you do what the currency holder says if you want to have a financial sector, i.e. the Bank of England dictates Scottish spending limits or the ECB.

    If you use someone else’s currency without formal permission and lender of last resort the bigger parts of the Scottish financial sector would leave as fast as possible for London and everybody in Scotland would be poorer.

    There’s no reason for remainder UK to support a Scottish financial sector in any scenario after independence. All the UKIP supporters and fellow travellers will be keen to prove the point that independence was stupid.

    A separate Scottish currency would be in a parlous state from day one with the present debt share denominated in UK pounds and paid back through Scottish currency units (the Groat?).

    There is no easy solution without major disruption to Scotland and remainder UK. How the UK funds its trade deficit is not relevant to Paul Krugman’s argument.

    I hope Scotland passes this chance for independence even if it eventually happens, as the timing for a new currency or other arrangement is terrible.

    1. Crubag says:

      To join the euro you still have to have your own currency to begin with and to demostrate careful management* of it within the defined parameters over a period of years. For good of bad, Scotland can’t simply join the eurozone – though it could adopt the euro in the way that Montenegro has, but that brings the same problems as sterlingisation – and the EU doesn’t like it on principle.

      *Or get an investment bank to help

  14. MBC says:

    Krugman has succeeded in winning Carol Cairns over to No in the latest edition of the Scottish Review. She perfectly fits the profile of the economically cautious older female voter who is likely to be a key demographic in this debate because they are most likely to vote, and least likely to use social media.

  15. bella lefaouvre says:

    Krugman is a expansionist, big-state, blind ideologue puppet, and you should take whatever he says with a grain of salt. It’s not for nothing that he has been voted the most biased economic journalist for a few years now.

  16. Scottie says:

    No one seems to look at the risks of staying in the UK. Our kamikaze growth strategy of using tax payers money to fund another Ponzi scheme which will be underwritten by the tax payer will end in tears – not for all of course. The banking cartel in London will come out wealthier – wealth is never destroyed, merely transferred. Never before have so many been plundered by so few.

  17. Crubag says:

    “It is one thing to run 3-4% current account deficit, year after year, and expect to borrow to pay for it. But a near-7% deficit is another thing entirely.”

    I’m not sure either situation is comfortable, whatever the market appetite for good quality public debt, but Scotland will initially be running a trade deficit, as far as the figures are available – around 7.5% (trade deficit of 10 billion against 132 billion GDP).

    Scotland’s exports to rUK are around 33 billion and imports from rUK around 45.8 billion, so independence will actually be good for rUK balance of payments.

    “The UK now has an external debt second only to the USA, at 406% of GDP.”

    If we can believe wikipedia sources, US external debt is only 106% of GDP, and UK is behind Ireland (1,000%) and Luxembourg (3,443%) but those data reflect how open/dependent your economy is on extra-territorial transactions. A better measure is public debt, which puts UK and US on the same par (+80%) and Norway on -165%, Sweden on -16%, Denmark on +7%.

    But I’m not sure American economists really get Europe. The US can run a single interest rate and a common currency because labour (people!) pick up the slack and move to where the economic activity is. For reasons of culture, language and politics, people are much less inclined to move within Europe.

  18. I see this more simply like this;If we manage to get a yes vote and Westminster stays stupidly to no currency deal,the pound will crash and be worth a half dollar,but if they agree to a currency deal,the pound will be fine.As for the companies dropping share value its because they said they would desert Scotland and that brings heavy costs so no wonder their share price dropped.Its really simple if we don’t think about it too much(paraphrase Zorba The Greek)

  19. Mark Otto Smith says:

    I can’t see an independent Scotland following any currency deal when they would have to accept the Bank of England as bank regulator and accept its spending limits. Alex Salmond or equivalent would play the victim card and England would be blamed for Scotland’s financial collapse post an independence vote and the rules wouldn’t be followed as Scotland’s spending got increasingly out of control.

    Why would England want to play a regulatory role to another nation? England presently takes all the wingeing the Yes campaigners dish out in good humour, Scotland is acting like your wife complaining she pays for the gym and food while you pay for the mortgage, but her inheritance from Auntie Edith paid for the extension, it all comes out in the wash and is not worth arguing the toss.

    Having chosen independence, England would not want to take any more nonsense from Scotland and the UKIP and little Englander voters from all parties would not be interested in further supporting Scotland beyond settling the long list of thorny issues as quickly as feasible to complete the divorce.

    Scotland can stop being in the thrall of the “moneymen” and England by following Argentina into default or by paying back its debt asap so its currency is seen as sound. A big sucking sound of billions of £s suddenly leaving Scotland in either case.

    Arguing you can ignore financial markets for the benefit of the population hasn’t worked well for Argentina, Cuba or Zimbabwe unless you want to go back to a pre-industrial era and knit your own clothes and eat potatoes from the back garden. Maybe healthier than deep fried pizza and mars bars, which I admit I did eat occasionally during my early adulthood in Edinburgh.

  20. Bill Scott says:

    Krugman is against rent controls; decries opposition to free trade agreements like TTIP argues that sweatshops are preferrable to unemployment; opposes European labour market regulation and dismisses the case for the Living Wage. Only in the US would someone with these sort of views be considered as being on the “left”. He’s not.

    1. Douglas says:

      Yes, well Krugman writes a newspaper column for El Pais newspaper, which is, just like Krugman himself I suspect, a neoliberal sheep in social democratic clothings…

      Krugman is on the payroll of Juan Luis Cebrian, the owner of El Pais newspaper and the PRISA group, a veritable danger to European democracy, a propagandist, and a phoney intellectual gangster/ apologist for the neo-francoist government currently ruling Spain…..

      ….or so I’ve heard/suspected/often pondered…

  21. John Baillie says:

    What Scotland needs is an Independent Central Bank which is free to peg the Scottish Pound to either the UK pound, the euro the Norwegian Crown or whatever is opportune at any given time.

  22. lowlander says:

    Krugman: ‘I find it mind-boggling that Scotland would consider going down this path after all that has happened in the last few years.’

    Answer: Scotland is going down this path precisely Because Of all that has happened in the last few years. And decades. And centuries.

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