Mervyn King gave the Graham lecture at Princeton last night, provoking a crisis of technology: he didn’t come with PowerPoint, but did want a lectern, which Princeton proved unable to provide. He had a lot of interesting things to say — boy, is he hard on euro area policymakers, and as I heard him he’s surprisingly sympathetic to the current Greek leadership. But wearing my technical international economist hat, I thought the most interesting discussion involved the hypothetical case of an independent Scotland using the pound as its currency.

I’ve written a fair bit about this, and my approach, given my background, was to view this issue through the lens of optimum currency area theory. This theory mainly focuses on the problem of responding to asymmetric shocks — a slump in Spain while Germany booms, etc.. We know, or we think we know, that when this happens fiscal integration — Florida can count on Washington to pay for pensions and medical care, Spain has no comparable cushion — is crucial. European experience since 2009 has also led us to focus on banking integration or the lack thereof.

What Mervyn suggested, however (after I pressed him a bit) was that these issues are relatively unimportant in the Scottish case. Scottish banks, he argued, aren’t really Scottish at this point — so much of their ownership and business is outside Scotland that they’re effectively English, so they would surely retain lender-of-last resort privileges from the Bank of England and be bailed out if necessary by Westminster. And he also argued that Scotland’s business cycle is closely correlated with the rest of the UK, so that asymmetric shocks of the kind experienced by euro area countries — or US regions — would be minor.

Interesting. I do remember that back in the early 1990s many euro advocates assured us that asymmetric shocks wouldn’t be a problem; in reality, the boom and bust in intra-European capital flows gave rise to the mother of all asymmetric shocks. On the other hand, Scotland doesn’t have a lot of warm beachfront real estate for people to speculate in …