A separate currency would be politically unpopular, particularly given the economic crisis, but it may not be the high-risk proposition that some have suggested, Scottish law firm Tods Murray said.
The Scottish Government insists it would keep sterling in a formal currency union, assuming independence.
But Scottish Secretary Michael Moore has said it is “highly unlikely” the rest of the UK would agree to the Bank of England acting as Scotland’s central bank.
Tods Murray banking team partners Rod MacLeod and Hamish Patrick challenged Mr Moore’s assertion in the March edition of Law and Financial Markets Review.
The rest of the UK would be “unlikely” to reject a currency union and while it would be “a difficult and complex undertaking”, it would not be impossible, they wrote.
It may also be in the UK’s interests to bail out Scottish banks, they said.
“Whilst some would view issuing a new currency as a high-risk alternative due to the inevitable uncertainty over the new currency’s exchange value on the international money markets, if Scotland issued its own currency it would at least guarantee a greater degree of fiscal autonomy than under the other options,” they wrote.
“An independent Scotland’s size and reduced economic power on the international stage (when compared to the rest of the UK) would not necessarily preclude a successful currency in the long run - if one looks at nation states such as Switzerland or Singapore.
“However, on balance, it appears unlikely that the Scottish pound would be a popular option in Scotland in the short term as market confidence in any new currency is likely to be affected by the ongoing global economic crisis.”
Scotland may not have much more influence on monetary policy in a currency union than if it just unilaterally adopted Sterling, the authors suggested.
“If an independent Scotland keeps the pound, there needs to be an appreciation that, at best, Scotland will have limited control over monetary policy as the junior partner in any currency union or even less influence if a currency pact is rejected,” they wrote.
The Bank of England could impose checks and balances on Scottish fiscal policy, debt, deficit, taxation and public spending, which “could amount to a loss of fiscal autonomy” for Scotland.
Maintaining cross-border price stability would be “a thorny issue” but might be comparable to balancing disparities across current UK regions, the authors suggested.
“Whilst the UK would be well within its rights to reject an offer of a currency union with Scotland, this scenario seems unlikely due to the negative impact that this would have on negotiations over other areas of the national break-up,” they wrote.
“The notion of bailing out a bank from another country might be a politically sensitive issue; however, supporting the Scottish banks would be in the interests of the rest of the UK and given the interconnectedness of the banking system in Scotland and the rest of the UK.”