Scotland’s search for a currency

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Recent developments in the referendum debate have centred on economics and money. Specifically, the question of which currency an independent Scotland would use has gained a surge in media attention.

As with many other aspects of the debate, it is highly contested, but it has come to the fore after an offensive by those opposed to Scotland separating itself from the UK. The chancellor, George Osborne, has stated (with the agreement of all three main parties) that the rest of the UK would oppose Scottish entry into a currency union using the pound sterling. As the Nobel Prize-winning economist Paul Krugman stated in a recent op-ed for the New York Times, a strong monetary foundation is very important. In the same piece, however, he also touched upon concerns about the plans of the Yes campaign.

While there are of course differing views within the Yes camp on what currency an independent Scotland should use, voices calling for formal currency union are most prevalent – Alex Salmond, the Scottish first minister, and Nicola Sturgeon, the deputy first minister, among them. Advocating the adoption of the Euro is not an electorally sound tactic these days, and the creation of a new currency may prove more risky than keeping the pound.

So the current proposal is for a formal currency union, based upon the recommendations of the Fiscal Commission Working Group (which included, among others, the Nobel Prize-winning economist Joseph Stiglitz), which looked at possible economic outlooks for Scotland. It claimed that formal monetary union would provide the basis for a strong economy and would also be in the interest of the UK due to extensive cross-border business links.

While the rest of the UK cannot prevent Scotland from using the pound as its currency, it can oppose formal currency union. Among the reasons cited for this by the Treasury are: the uncertainty caused by the possibility of Scotland switching its currency at a later date, misaligned tax and spend policies, and that projections of potential revenue in an independent Scotland are at odds with the Office of Budget Responsibility.

Pundits have been quick to point out that if there were no formal currency union, Scotland would be like Panama, which unilaterally uses the US dollar. Indeed, an informal currency union would put Scotland in a weaker position to the rest of the UK. It would have no central bank of its own, and the Bank of England would be under no obligation to be a lender of last resort. Effectively, Scotland would have very little control over its currency. As a result, numerous economists and the Scottish government’s own Fiscal Commission oppose this plan, but it is not clear whether a plan B has been formulated.

Ms Sturgeon has insisted that it would be in the rest of the UK’s interest to maintain a currency union because England-Scotland exports amount to £60 billion, and using different currencies would increase transaction costs. These transaction costs would not be in place if Scotland unilaterally adopted the pound, however, and the deputy first minister’s comments relate to the use of a different currency option. The head of the Better Together campaign, Alistair Darling, has claimed that the Yes campaign is in disarray and that Mr Salmond is proceeding bullishly as though the rejection of currency union is not a serious issue.

Salmond’s stubbornness comes in part from the Yes campaign’s allegations that talk of ‘banning’ a currency union is bluffing and bullying, and that it is still open to negotiation if the referendum goes in their favour. But the referendum is fundamentally a political question. What is being called bullying and bluffing is in fact a political manoeuvre par excellence. The Yes campaign wants to use the pound, but if Scotland is not accepted into a currency union then the rest of the UK holds greater financial power. Better Together has succeeded in setting the agenda and casting doubt on the economic case for independence, and Yes Scotland is feeling embittered by it.

So close to the referendum, developments on the currency front have inflicted a great deal of public damage on the case for independence. It remains to be seen what a viable plan B will look like and whether Yes Scotland is capable of controlling the damage. We would certainly not be bartering on street corners, but there are clear questions that need much clearer answers before September.

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