What currency will an independent Scotland have?

Question: 

What currency will an independent Scotland have?

Answer: 

The Scottish Government proposes that an independent Scotland will continue to use the pound and enter into a formal currency agreement with the government of the United Kingdom – as explained in this article.  

In adopting this policy, the Scottish Government has accepted the recommendation of a group of independent and internationally renowned economists -the Fiscal Commission - that a formal currency union is the best way ahead.  A formal currency union would provide the right balance of autonomy for government and stability for business, as well as straightforward access to markets in the remainder of the UK.

It is important to remember, however, that Scotland cannot be stopped from continuing to use the pound, which is a fully tradeable currency. As No leader Alistair Darling was forced to admit recently, "of course Scotland can use the pound".

The No campaign and Chancellor George Osborne in particular, have argued that there would be no formal currency agreement after a Yes vote.  However, the dishonesty of the Westminster government was made clear when the Guardian reported  comments from a UK government minister that after a Yes vote, "of course there would be a currency union".  Confirming that Westminster would change approach after a Yes vote the minister stated "saying no to a currency union is obviously a vital part of the no campaign.  But everything would change in the negotiations if there were a yes vote".  

Even their campaign leader, Alistair Darling, has described a currency union as "desirable" and "logical" and former First Minister Henry McLeish also told an audience at Edinburgh's Festival of Politics that he too believed that a currency union would be agreed after a Yes vote - and that the UK party leaders knew it too.  And Nobel prize-winning economist Professor Joe Stiglitz has said that the No campaign’s stance is “inevitably” a bluff.

It is beyond any reasonable doubt that a formal currency agreement will be in the interests of both an independent Scotland and the rest of the UK (rUK).  Among the many reasons why this is the case:-

  • the UK is Scotland's principal trading partner, whilst on the other hand Scotland is the UK's second largest trading partner with exports to Scotland greater than to Brazil, South Africa, Russia, India, China and Japan put together;
  • companies operate in Scotland and rUK with complex cross-border supply chains;
  • there is a high degree of labour mobility across these islands, helped by transport links, culture and language;
  • all the necessary requirements for an optimal currency area are present, including similar levels of productivity and evidence of a high degree of convergence in terms of economic cycles;
  • and a currency agreement means that Scotland would continue to make a significant positive contribution to the balance of payments of the currency union area. 

In short, a formal currency union is good for jobs and the economies of both Scotland and rUK.  In fact, Glasgow University Economics Professor Anton Muscatelli has argued in the Financial Times that a currency union would be even more important for rUK  than independent Scotland.   

Further answers on how a formal currency union would work can be found here and in this briefing.  

As the Fiscal Commission economists confirmed, it would actually be impossible for Scotland to be forced to join the Euro on independence (see paragraph 7.37 of the full report).

In order to recommend a monetary union, the expert group also examined the other choices open to an independent Scotland, for example, using the pound without entering a formal monetary union.  The expert group also examined the idea of creating a new Scottish currency. 

Looking at all the proposals in the round, both the Fiscal Commission and the Scottish Government took the view that use of the pound as part of a formal currency agreement would be the best option for Scotland. 

Other political parties, for example the Green Party, believe that Scotland should move to a new currency in due course, and voters in Scotland could make this choice in the future by electing a Green government. 

For a more detailed and independent analysis of the various currency options open to Scotland, we would recommend the full report of the Fiscal Commission Working Group which can be read here.  The Scottish Government's currency proposals can be read in its white paper ("Scotland's Future: Your Guide to an Independent Scotland") from page 109.  

 

Topics: 
Economy