EUR/GBP: Old Lang Syne

FX Trader Magazine. Free forex trading magazine. Fundamental Analysis. EURGBP Old Lang Syne

6 Jul 2016

UK secession from the European union is bound to have a serious effect on the Pound Sterling, perhaps, for years to come. Too be sure this is not to say that the UK can’t reorient it’s economy, establish new trade and financial passport agreements, absorb any job losses and a myriad of other challenges. In the short term, however, the story is quite different. For example, Scotland and Northern Ireland may not wish to leave the European Union. These are really small economies with smaller populations which better handle the many EU regulations.

Scotland does not have a legal tender1. This is not to say that Scottish banknotes cannot be used as currency; the Scottish Pound is a UK legal currency.  The UK Pound Sterling is just as acceptable in Scotland as well as the Northern Irish Pound. Under current Bank of England rules2, “...The acceptability of a Scottish or Northern Ireland banknote as a means of payment is essentially a matter for agreement between the parties involved...Scottish and Northern Ireland banknotes can be used in England and Wales. Holders of genuine Scottish and Northern Ireland banknotes are provided with a level of protection similar to that provided to holders of Bank of England banknotes. This is because the issuing banks must back their banknote issue using a combination of Bank of England banknotes, UK coin and funds in an interest bearing bank account at the Bank of England...”

This situation creates a serious and unexpected loophole: since there is no specifically designated “legal tender” in neither Northern Ireland nor Scotland and debts may be legally settled between the parties involved, well doesn’t this (accidently) admit the use of the Euro? A secession referendum vote merely needs to include an article linking the acceptance of the approval of a referendum to secede from the UK with a blanket agreement for all Scots to accept the Euro as well. This is similarly true for Northern Ireland. Importantly, this loophole completely bypasses ERM II. The Euro could become as acceptable in Scotland as the Northern Ireland pound or the English Pound Sterling, overnight.

To put this into a little sharper perspective, it went largely unnoticed in the days following the UK referendum shock, that Sinn Fein called for a unified Ireland3. Now, to be certain, this is a bit of rhetoric but should not completely be discounted from the realm of the probable. Northern Ireland also does not have a designated legal tender and the currency of the Republic of Ireland is already the Euro.

EUR/GBP Price Event Chart