Understanding the Currency Outcomes for an Independent Scotland

Ranked by Barclays currency trading index as the second best performing Forex trader in the world between 2008­-2012, Jarratt Davis knows a thing or two about effective currency management. Establishing his career in 2006, he mastered the art of Forex trading by teaching himself techniques online; becoming the only self-taught trader to reach an institutional level.

The arguments for and against Scottish independence are broad and many. But when citizens take to the polls on September 18 this year, the matter of a Scottish currency is likely to be at the forefront of their minds.

Make no mistake, a yes vote would have huge economic implications. In terms of a currency, there are three realistic options available to an independent Scotland, all of which come with a degree of economic uncertainty.

1. An official currency union with the UK

Understanding The Currency Outcomes For An Independent Scotland

The solution being pushed by the ‘Yes’ campaign is an official currency union between Scotland and what would be the reshaped UK (England, Wales and Northern Ireland). This union would see Scotland continue to use the pound sterling in an official capacity, in exactly the same way as it does now.

So far so good. But an official currency union becomes more complex when the role of a central bank, interest rates and taxation is considered.

A currency union of this nature would see Scotland yield control of its economy to the UK’s central bank, The Bank of England. This means Scotland’s monetary policy and interest rates would not be in control of a Scottish government.

Economic compromise is hardly the definition of sovereign independence and something which could be difficult for some Scottish nationalists to accept.

Yielding key economic controls to the Bank of England could also prove to be damaging to an independent Scotland’s economy, because it will be the minority partner in the currency union.

Recent history tells us that currency unions that experience turbulence and instability are those that cannot control the economic policies of member states that act in irresponsible ways.

This means that a currency union between an independent Scotland and a reshaped UK would be a complex and stringently regulated agreement when it comes to monetary policy, as the Bank of England would be obliged to provide bail out funds if the Scottish economy experienced severe difficulties.

So one can only imagine the difficulties of the UK government and Scottish government negotiating the details of future monetary policy, and the extent of restrictions that might be imposed on Scotland’s spending power.

Needless to say that the ‘No’ campaign have been quick to point out that an official currency union does not serve an independent Scotland’s interests. In fact, it has been pointed out that Scottish economic interests would be better served if it stayed within the UK.

2. Joining the euro

Scotland joining the euro has been touted as a possible option should an official currency union with the UK become unattainable. In fact, I believe it may be the most realistic option should the ‘Yes’ campaign achieve a majority later this year.

This is because an independent Scotland is likely to want to join the European Union (EU) – and one of the conditions for new members that want to join the EU is to adopt the euro. It’s a rule that all of the newest members of the union have followed.

However, the problem with Scotland joining the euro centres around influence. As a member of the Eurozone, Scotland would be at the mercy of the European Central Bank policy making. It’s estimated that Scotland’s GDP would be approximately 2% of eurozone GDP, which means the economic interests of Scotland will not be high on the list of priorities for the European Central Bank.

There’s also the question of whether joining the Euro is desirable politically amongst the Scottish population. The eurozone project is deeply unpopular in smaller EU nations such as Portugal and Greece and has led to catastrophic effects on their respective economies.

It would be exceptionally hard for an independent Scotland to ignore these recent lessons.

3. An unofficial currency union with the UK

The third option for an independent Scotland is to continue using the pound sterling without an official currency union with the reshaped UK. Many other countries do this with other currencies, such as Montenegro with the euro, or Ecuador with the US dollar.

But this option comes with huge risks and is not a sustainable solution for an economy which is as big as Scotland.

The first problem with an unofficial currency union with the UK is the absence of a central bank. The Bank of England would have no obligation to provide economic support to Scotland if its economy became unstable. Needless to say, this risk is unpalatable with many Scottish citizens, especially since the financial crash of 2008.

But it gets worse. With no central bank, the main Scottish high street banks would have no way of receiving the pound sterling, which could lead to many of them deciding to relocate outside of Scotland. As a result, many Scottish jobs may be lost.

It’s also important to note that a country needs to have a central bank to become a member of the European Union. Adopting an unofficial currency union, Scotland would find itself isolated from the rest of Europe with little room for manoeuvre.

Does the electorate know the implications?

It’s clear to see that none of these suggested solutions are ideal for an independent Scotland, as they all cause a great deal of uncertainty – and uncertainty is never good when it comes monetary policy.

Ahead of the referendum later this year, it’s important to ensure that the Scottish electorate recognise the economic impact independence is likely to have – and to keep it in mind when casting their votes.