Scottish Independence Answering the Currency Dilemma

macroeconomics scottish independence currency dilemma

2 Jul 2014

This September, citizens of Scotland are set to take to the polls to answer once for all the question of Scottish independence. Currently, Scotland is one of four countries to make up the United Kingdom, joining England, Wales and Northern Ireland. However, one compelling question that is yet to be answered by advocates of independence is: what currency would Scotland use if it left the UK?

Needless to say, should the referendum endorse independence for Scotland later this year, the impact on the Scottish economy would be very significant. Realistically, there are three currency options available to an independent Scotland. Each one has its own advantages and disadvantages. 

1. Agree an official currency union with the rest of the United Kingdom (rUK)

Politicians behind ‘Yes’ campaign are suggesting that an official currency union between a reformed United Kingdom and the newly independent Scotland (England, Wales and Northern Ireland) is a solution worth pursuing. Under this agreement, the pound sterling would be used in exactly the same fashion as it is today, in an official capacity.

However, where a currency union of this nature becomes more complicated is when the role of the Bank of England is considered. As the UK’s central bank, it controls monetary policy and interest rates. So if Scotland divides itself politically with the rest of UK, but effectively yields control of its economy as a minority partner to a foreign central bank, it’s a questionable definition of true independence.  

Europe is a superb example of how currency union with one central bank can struggle to serve the best interests of its minority nations. Greece, Portugal and Spain have all experienced turbulence because of policies implemented by the European Central Bank.