Among the many obstacles thrown by Unionists in the path of Scottish Independence is the issue of currency. This is a fair question and one that deserves a plausible answer. Unfortunately, due to partisan heat generated in the run-up to the 2014 referendum, there was les of a debate and more of a bun fight, with the media asking pointed questions and the independistas offering an incoherent and therefore less than persuasive set of responses, the most persuasive and seamless of which was “to keep the Pound”. This, however, ran into a further series of obstacles, including;
- This would be blocked by Westminster
- This would scupper any chance of keeping/regaining EU membership, as they insist any new members join the Euro.
- This would tie Scotland to UK fiscal policy and therefore undercut the whole point of independence
Let’s consider these reasonable objections to Scotland using the Pound one by one.
- Permission from Westminster. This would not be the first example of such practice. The Channel Islands and the Isle of Man already do. And there is better precedence in the number of countries pegged to or using the US dollar, including most of the Middle East and Latin American countries like Panama and Cuba, the latter being twice the size of Scotland. None of them ask permission from the US Treasury to do this.
- EU & the Euro. Membership of the EU may be desirable but membership of the Euro isn’t. It has helped major countries like France but even medium-sized ones like Spain have been trapped in an economic bind, unable to adjust their exchange rate. A single currency without a single government is unstable and counties like Denmark, Sweden, Poland and Hungary have been wise to avoid it indefinitely. Scotland could do the same.
- Locked into UK Fiscal Policy. Initially, this would be true. But this would also be a time when both economies were still compatible and Westminster fiscal policy would still make sense. It would also provide stability for foreign investment and time to set up our own central bank and associated fiscal mechanism. But it need not be permanent.
Being fully fiscally aligned may suit Scotland initially. Indeed, this is the situation we are in now, with Scottish banks issuing notes that are technically for a Scottish currency, which is fully equivalent to an English pound sterling. Upon independence, this would continue and there is little that a UK government or the Bank of England could do to prevent it. Indeed, there is some advantage to them, as the Scottish economy would effectively be tied to and add some 10% more weight to the pound in the world.
At a pace set by Scotland, they would develop their own fiscal structures, including a central bank and a true Scottish pound that would be pegged to the UK pound, Though this would limit fiscal policy, especially exchange and interest rates, the stability gained would promote inward investment and ease borrowing. To invest in a renewed Scottish economy, this latter would permit the serious spending necessary on infrastructure but the existing debt would not weigh on the pound sterling as Scotland’s economy would remain small (<10%), as compared to the UK.
This situation could continue indefinitely, provided UK fiscal policy remained appropriate for Scotland’s growth. Should, however, some serious economic downturn, such as happened to Spain, especially its property market over a decade ago, having all the trappings of a full currency, Scotland would have the option of decoupling its pound from the UK pound and either devaluing it or allowing it to float as a countermeasure not available to counties like Spain tied to the Euro.