Disorderly Greek exit from the eurozone and its effects on Scotland

With the economy bound to be one of the key election battlegrounds, Holyrood asks a number of economists to sum up Scotland’s economic outlook for the year ahead. 

The recent, and indeed ongoing, dramatic fall in the price of oil will surely be the dominant factor on the economic horizon for the Scottish economy in 2015 and beyond. As a small open economy with essentially no influence on the price of oil, or indeed other important commodity prices and economic variables, much of what happens in the Scottish economy is driven by events elsewhere. 

Since the UK as a whole is a net importer of oil, the recent halving in the oil price should improve the UK’s balance of payments and this will hopefully help to attenuate the persistent overvaluation of sterling which has, at least in part, been driven by the oil effect. To the extent that it does, exports in Scotland and the rest of the UK (rUK) should be boosted. This potential boost to exports could be further bolstered by the potential rise in world economic growth resulting from the oil price fall. For example, the IMF estimates that falls in the price of oil act much like a tax cut and this could bolster world growth by anything up to 1 per cent, which should give a further positive spurt to UK exports.

However, to set against this potential boost to net exports there is the slowdown in the rest of the world, particularly in China and Japan, and also, of course, the weak demand from the euro area. The latter could considerably worsen and indeed go viral if Grexit takes place, which would likely be highly contagious. As the recent financial crisis has amply demonstrated, a further crisis in the eurozone would create chill winds for trade with the UK and beyond.  

Turning to factors closer to home, we know that the oil industry employs around 350,000 people in the UK, both directly and indirectly, and there have been warnings that at least 10 per cent of these jobs could be cut. Even without job cuts, there have already been severe wage cuts of around 10 per cent for those in employment, which will clearly have implications for savings and consumption in the economy. 

To set against the clear negative direct effects of the oil price fall on employment and wages, there will be the beneficial effects of the tax cut effect of the oil price fall for UK consumers both directly, in terms of fuel savings (i.e. motor and heating fuel), and indirectly through, for example, reduced haulage and airline costs. This should help to boost economic growth unless it is used, at least in part, to pay off the large personal sector debt overhang.

The UK economy is expected to grow steadily in 2015, by between 2 and 3 per cent, and since 70 per cent of Scotland’s trade is with rUK, and taking on board all of the above effects, I would expect Scotland to have positive growth this coming year although of a lesser magnitude to that in rUK. However, a disorderly Greek exit from the eurozone could easily overturn that prediction.

Professor Ronald MacDonald, Adam Smith Professor of Political Economy, University of Glasgow