In the campaign for Scottish independence, key ‘Yes’ camp leaders consistently argue that a sovereign Scotland could retain the British pound as currency, and they’ve decried statements from British officials that Scotland wouldn’t be permitted to use the pound in the event that Scottish voters opt for independence in the September 18 referendum.
But putting aside whether, as a technical matter, Scotland would be able to adopt the pound, the greater issue is why it would actually want to do so — either in a formal currency union with the rest of the United Kingdom or by informally adopting the pound sterling as Scotland’s currency (‘Sterlingisation’).
Even though polls show the ‘Yes’ campaign narrowing the gap with the ‘No’ side, (the latest YouGov survey, taken between September 2 and 5, gave the ‘Yes’ camp its first lead of 47% to 45%, with 7% undecided), almost every poll in the last year shows more Scottish voters opposed to independence than in favor of it.
If the ‘Yes’ side falls short, one of the key questions will be whether the decision to embrace the pound as an independent Scotland’s currency was wise as a strategic matter. But if the ‘Yes’ side carries the referendum, Scotland’s first minister Alex Salmond will have to confront what kind of independence he’s actually won for a new country yoked on Day One to monetary policy dictated by the Bank of England.
It’s odd that the campaign’s fight over the pound has become such a central debate, but it’s possibly even odder that Salmond would cling to the pound (and other indicia of the union, such as the British monarchy) in his campaign for independence.
George Osborne, chancellor of the exchequer, has attempted to maintain a united front among his own Conservative Party, the Liberal Democrats and Labour that Scotland would not be able to avail itself of the pound if it becomes an independent country. But there’s plenty of skepticism that the remaining United Kingdom of England, Wales and Northern Ireland would actually be able to stop Scotland from doing so.
After all, plenty of countries use the US dollar as currency without the permission or consent of the US Federal Reserve. Scotland is home to just 5.3 million of the United Kingdom’s 63.2 million citizens, so it wouldn’t necessarily be impossible for Scotland to use the pound without London’s official consent. But that also means that, even in a good-faith currency union, interest rates and other monetary policy decisions would be heavily tilted toward England, not Scotland.
Accordingly, the real puzzler is why Salmond and the Scottish nationalists would even want to keep the pound. Even if Scotland were able to do so in the face of English recalcitrance, the ability to mint a currency (I’m partial to calling it the thistle) and set monetary policy is one of the most fundamental rights of an independent country. In the bundle of sticks that constitutes ‘sovereignty,’ independent monetary policy is one of the most important. So it’s not necessarily clear why Salmond and the ‘Yes’ camp have been so insistent on giving it up from the outset. Economists can’t even come to a clear view.
It’s even more discordant when you consider that the most difficult policy problem vexing Europe over the past decade has been the economic depression that’s tanked the Greek, Italian and Spanish economies, in large part due to this exact issue — being trapped in a currency union and unable to take steps to lower the value of their currencies. It’s precisely because Greece, Italy and Spain now use the euro (and not the drachma, lira or peseta) that monetary policy rests with the European Central Bank, not with officials in Athens, Rome or Madrid. Though they’ve done much better under dollar regimes, even countries like El Salvador and Panamá can’t argue that their experiences in dollarization have been unqualified successes. Certainly, the Scottish and English economies are more interlinked in 2014 than the eurozone economies were in 2002, but that won’t necessarily be true in 2024 or 2034.
As a matter of logistics, especially in allocating portions of the current outstanding UK debt to Scotland and to the rest of the United Kingdom, it might make sense for a newly independent Scotland to use the pound for an interim term. But that has more to do with creating an atmosphere of stability as Scotland moves toward independence. It will be vital for an independent Scotland to make the transition of separating from the United Kingdom as seamless as possible, and that’s surely justification enough to cede monetary policy temporarily to London. It’s less clear why Scotland would want to do so on a permanent basis.
That will become especially true as time goes by. Though the Scottish and English economies are highly integrated today, they will presumably become less so, to a degree, if Scotland separates from the United Kingdom. Scotland and England might still be, respectively, their top trading partners, but Scotland might also trade more with the rest of the eurozone or, if the Transatlantic Trade and Investment Partnership is completed, the United States. So even if a currency union makes sense in the short-term or medium-term, it might not be the best long-term solution for Scotland.
Moreover, if the City’s profits soar and cause the pound’s value to rise against the dollar, as in the mid-2000s, it could strangle Scotland’s competitiveness, especially if Scottish oil revenues are low. Alternatively, if the pound’s value is too low, and oil prices (and Scottish oil exports) are high, it could accentuate a rise in inflation in Scotland.
If, as Salmond and other Scottish nationalists promise, Scotland becomes a services- and commodity-driven economy with domestic policies that drive it more toward the Scandinavian social welfare model than the Anglo-Saxon free-market model, there would be a stronger argument that Scotland should have its own currency — or even, like Ireland, simply join the eurozone. If Scotland is initially worried about speculation, it could always peg its new currency to the pound or establish a ‘currency band’ that pegs it to within a certain range of the pound. Even if Scotland introduced a new currency, many Scots might still choose to keep their savings in pound-denominated accounts. Essentially, Scotland would introduce a currency that could ‘compete’ against the pound. As international markets and Scottish citizens themselves gained more faith in Scotland’s new currency, they would use it increasingly more than the pound.
One of the strongest arguments for a currency union is the stability that it would bring to Scotland. But that’s an argument for voting against independence in the first place. Looking back to 2008 and the massive bailout required to save the Royal Bank of Scotland, it’s clear that the British treasury would have much more liquidity than a hypothetical Scottish treasury to save RBS and other banks during a global financial crisis. Even today, the British government owns around 80% of RBS, so it’s not clear what would happen to RBS if Scotland becomes independent — it might have to be broken up or moved entirely to London (hardly a great omen, given RBS’s storied history and its symbolic role in Scottish finance). There’s no certainty that, even in a currency union, London would feel obligated to bail out an independent Scotland’s banks in the future.
But that’s one of the risks, of course, that Scottish voters would be taking with independence. There’s no way to know whether it would emerge from a crisis more like oil-flush Norway or more like crisis-scarred Iceland.