Scotland post independence – what currency would, could, it use?

Scotland will vote in September on whether to break from the rest of the UK. (RUK) The polls suggest they wont, but its all coming to a boil. A, possibly THE, major issue is the economy. Bill Clinton could have told Salmond that – it’s the economy stupid. At the heart of the debate seems not to be oil/gas but instead which currency a future independent Scotland, lets call it Alba, would use were it to return to the international stage.

Pro independence campaigners have argued that they would wish to maintain a currency union with the RUK – see p37 here. This is however an inherently technical and thus hard to sell argument. By contrast the ‘we wont let you use the pound sterling’ argument has been a strong, consistent and seemingly coherent argument advanced by the unionist side. The most recent utterance today was from Labour reiterating the issue. In essence the argument is that RUK would not enter into a currency union with Alba, for political reasons.

However, RUK could not stop Alba from using the pound sterling as its currency if they wished. Ireland from 1921 to 1979 used, in effect, the pound sterling (a 1-1 convertibility from Punt to Pound); not every country has its own currency. Beyond the currency union of the Euro we see Kosovo and Montenegro using the Euro. We see El Salvador and Panama with the US Dollar as legal tender. So there is nothing to stop an independent Scottish parliament adopting the US dollar or the Euro or the Pound Sterling or any other currency as the official legal tender of Alba. So long as they can earn enough from exports to hold sufficient reserves of the adopted currency as a backstop to the adoption then its no issue.

Where the problem comes is in what usually goes along with a currency union. Scotland now and Alba in the future has a very large financial services sector, a large banking sector in particular. Adopting a currency unilaterally would mean that the sector would have no lender of last resort.  A drastically slimmed down Alban banking sector would be the inevitable outcome. While that would perhaps not in principle be a bad thing the dislocative effects would be considerable. The options are spelled out quite well here. Martin Wolfe in the FT gives a good argument here on the poor and worse options Scotland faces in any case, as a small country now in a fiscal and currency union and seeking to determine its own future.

Bottom line – Alba can keep the Pound but it might have to give up RBS…