Scotland’s Currency after Independence


By Bill Newman
Suddenly everyone wants to speculate on what form an independent Scotland’s currency should take and it is not surprising that the No campaign should use its usual scare tactics to frighten the electorate.

It is nonsense to pretend that an independent Scotland would be compelled to use the Euro, just as it is absurd to insist that a link to the sterling would inevitably mean that an independent Scotland would necessitate an economic policy beholden to Westminster.

However, it has been unwise of the SNP to insist that an independent Scotland would continue to use the pound sterling, dependent on the monetary policy pursued by the Bank of England (and, inevitably, to Westminster).

Even if the English authorities were to acquiesce to a Scottish Government’s request for a member on the Bank of England’s Monetary Policy Committee, is it seriously believed that such a presence would make the slightest difference to policy decisions?  Indeed, Scotland’ s monetary policy decisions would have to be those determined by the Bank of England (and, again, inevitably, by Westminster).  It’s true that Scotland would be able to make its own fiscal policy, but fiscal policy is heavily dependent on monetary policy.

There are, though they are unsurprisingly not publicly stated, good reasons why Westminster would want to continue to dominate Scotland’s economic policy decisions through monetary ties.  There can be no doubt that the UK’s balance of payments would suffer drastically without Scotland and some continued hold on Scotland’s monetary policy would at least alleviate a crisis in confidence in sterling.

But why should Scotland not want to sever formal links to the Rest of the UK’s currency when its external balances would be so far superior to the RUK’s?  For the Scottish government to demand such an unwise subservience to an English currency in these circumstances seems perverse, and not all nationalists agree with this stance.

Margo McDonald has expressed a wish for an initial parity link with sterling and it is such an informal link that makes sense.  The arguments put forward by Gordon Macintyre Kemp and the eminent economists cited in Newsnet Scotland for a continued link with the pound sterling are compelling, not least as a free-floating Scottish currency would appreciate rapidly on positive prospects for Scotland’s current account of the Balance of Payments, damaging prospects for Scotland’s exports and tourist earnings, but any such tie need not be formal or depend on the whims of the Bank of England.

An informal link by an independent country of its currency to another or to a basket of other currencies is by no means uncommon and would seem to be, at least as an interim measure, the most sensible course for an independent Scotland to take.  Certainly, Scotland would need an independent Currency Board of its own with powers determined by the Scottish Government.

Given the scale of Scotland-RUK economic transactions and a rational desire not to disrupt such transactions, then an initial establishment of parity between a Scottish currency and a RUK pound would seem sensible, at least in the short to medium term.  What future arrangements could be made with the Bank of England and the Westminster government could happily be left to time and the development of relations between the two states.

Colin Fox was, of course right, in his recent blog to point out that there are no simple, infallible solutions to the establishment of a future Scottish currency.  He was also right to mention that any of the possibilities being currently discussed are all within the framework of a capitalist economy within a capitalist world, but that is the present reality of Scotland’s situation and practical solutions are needed to practical questions.

In these circumstances, the establishment of an independent currency linked for the time being to the pound sterling would seem to be the best solution for an independent Scotland.

Bill Newman spent most of his working life in banking, latterly as head of economics and then as Assistant General Manager of a City of London bank. For some 15 years he was also editor of and wrote for a journal on international monetary economics.

He has an interest in African matters, having been responsible for economic and political reporting on sub-Saharan Africa for Westminster Bank and writing for some years for the Europa Yearbook on Somalia and Ethiopia.

He was also on the Executive Committee and the Management Committee of the Banking, Insurance and Finance Union (BIFU) and a delegate to the TUC.