AN INDEPENDENT Scotland must be ready to adopt its own currency, as keeping the pound might not deliver real economic freedom, a former top adviser to Alex Salmond has warned.
The SNP government would struggle to strike a deal with the Bank of England to keep sterling without hardline caps on spending and deficit levels, which would effectively undermine the “freedom sought through independence”, according to economics Professor John Kay.
But the economy will not be weakened if Scots vote Yes in next year’s referendum, the academic says, with North Sea oil and gas revenues making up for any shortfall the country may suffer if it leaves the UK.
Prof Kay is a former member of Mr Salmond’s trusted Council of Economic Advisers and currently a visiting professor at the London School of Economics.
“The currency issue is crucial,” he will say in a keynote speech on independence at Glasgow University tonight.
“Scotland would be right to seek agreement on monetary union with the remaining United Kingdom, but it would be difficult to negotiate an agreement that would be consistent with the fiscal freedom sought through independence.
“Scotland should be ready to adopt an independent currency. Market expectations would begin to force events from the day a Yes vote was obtained,” he added.
The SNP wants to keep sterling, and this was endorsed last week by an expert group looking into the fiscal position after independence.
But Scotland would be a junior partner in any currency union, leaving the UK government and Bank of England calling the shots over areas such as interest rates, which affect mortgage payments.
“Scotland is 8.5 per cent of the monetary union and the rest of the UK is 91.5 per cent,” Prof Kay will say. “You’re not going to play an equal role – to put it mildly.”
But the prospect of Scotland setting up its own currency would be “perfectly feasible and not difficult at all”, according to the academic.
It would mean Scots having to exchange currency at Berwick or Heathrow when travelling south of the Border, and there would be some “uncertainty” among the public and business over transactions, he says.
But Denmark has retained the kroner as a separate currency, and this is pegged to the euro, which could provide an example for Scotland to follow.
Scotland could also use the pound without being in monetary union. Montenegro does this with the euro, but such a system was dismissed as “hopeless” by Prof Kay, with Scotland unable to print any currency.
About 90 per cent of oil and gas revenues would remain in Scotland, he says, and this extra cash would balance out the higher public spending Scotland now enjoys as part of the UK.
“The overall fiscal position of an independent Scotland would, at least initially, be little different from the present,” he added.
But finance secretary John Swinney last night insisted that retaining the pound would not restrict Scotland’s ability to make its own economic policy.
Mr Swinney said: “Scotland will retain sterling after independence – that policy was backed last week by experts on the Fiscal Commission working group as the most sensible and practical currency option, and it will offer flexibility for the Scottish Government to develop its own taxation and spending policies to boost growth, and address inequality.”
But former chancellor Alistair Darling, who heads the Better Together campaign, warned: “You would be leaving a political union, but giving away all economic control of your currency and the interest rates that affect all of our savings and mortgages.”