THERE are four options for what currency Scotland could adopt following a yes vote in the 2014 Scottish independence referendum.
Firstly, Scotland could keep the Pound and agree to form a new “currency union” with the remainder of the UK. Under this arrangement (which is favoured by the SNP), the Bank of England would remain as Scotland’s central bank, setting interest rates and governing monetary policy. The deal would compel both parties to agree a series of constraints to ensure they did not destabilize the currency. The SNP Government argues these constraints would not limit Scotland’s ability to set its own taxes. It also says the deal would be on the interests of both partners. However, the UK Government says it would necessitate “rigorous oversight” of Scotland by the UK. And, using the example of the Eurozone, it has warned that the economic rationale for such a deal is “not clear”.
Secondly, Scotland could unilaterally decide to adopt Sterling in the same way that Panama, for example, uses the dollar. However, it would have several downsides - for example, Scotland would be borrowing in a currency over which it had no control, boosting debt interest costs. It has therefore been largely discounted.
Thirdly, Scotland could enter the Euro. In the wake of the Eurozone crisis, SNP Ministers have pushed such an eventually into the middle distance. However, membership of the euro remains a commitment for all new EU members. Membership would give Scotland the advantage of its macroeconomic framework. But it would likely entail strict constraints on Scotland’s ability to do as it pleases, as tough new rules being laid down on Eurozone members are introduced.
Finally, Scotland could create its own currency. The move is favoured by some pro-independence supporters, as offering the most flexibility and independence to the new nation. But, given the fragile economic mood, it could face difficult birth pangs from both money markets and savers who might choose to put their money elsewhere.
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