Matt Qvortrup: Financial perspective on independence

Multiple solutions exist to sharing the pound but each one has its own complexities, says Matt Qvortrup. Picture: TSPL

Will Scotland be able to keep the pound? As in all other issues pertaining to the referendum, opinion is fiercely divided. Not surprisingly, the Scottish affairs committee at Westminster – dominated by unionist MPs – played on Monty Python and declared in a report that currency union is “dead as a parrot”. Ian Davidson, the Labour chairman, recently said: “The Scottish Government tries to give the impression that a currency union is still a possibility. It is not. This parrot is dead.”

His opponents, of course, categorically deny this. Maintaining that the possibility of a currency union is still possible, Deputy First Minister Nicola Sturgeon has emphasised that “not sharing sterling would cost businesses south of the border an extra £500 million in transaction costs”.

The issue of the currency has been hard fought and was – for a while – a strong point for Better Together. But this changed after an article published in the Guardian in March this year. The newspaper’s chief political correspondent, Nicholas Watt, wrote that a “government minister at the heart of the pro-union campaign”, admitted, “of course there would be a currency union”.

That a currency union is possible was also the message from Mark Carney, the Governor of the Bank of England. Though Dr Carney was adamant that sharing the currency was a challenge and would be difficult.

The two governments, he said, will have “to consider carefully what the necessary foundations for a durable union” are.

Currency unions are not as rare as many have suggested. Before the euro was established Belgium and Luxembourg were part of a successful currency union. Earlier in European history there have been similar arrangements between large and small countries. Between 1873 and 1914 Denmark, Sweden and Norway formed the so-called Den skandinaviske møntunion. The union broke down after the First World War broke out. The Latin Currency Union, established by France, Belgium, Italy and Switzerland in 1865 lasted until 1927.

But a fully fledged currency union is not the only option. There are roughly three alternatives.

The first option is that the Bank of England becomes a supranational institution with representatives from both independent countries. This is the option favoured by the current Scottish Government. This proposed arrangement is opposed by the current British Government. London fears that a Scottish government may be more fiscally generous than a Conservative-Liberal coalition would like.

This arrangement is what is referred to as a currency union. To establish such a union would require an international treaty. Some lawyers take the view that this treaty would lead to transfer of sovereignty to a new body. If that is the case, current legislation requires that there is a referendum in England before the treaty comes into force.

If it becomes impossible to establish a supranational Bank of England, an independent Scotland could do the same as El Salvador and Ecuador do in relation to the US dollar. Similar to the two Latin American countries, Scotland could simply use English banknotes. But that might not be palatable for a newly independent Scotland. This arrangement is the second option.

The third option is a so-called Hong Kong Solution. The Hong Kong dollar is pegged to the US dollar. In fact, this is very much the situation today. Since The Banknote (Scotland) Act 1845, Scottish banks such as RBS, Bank of Scotland and Clydesdale Bank have had the right to issue notes on the condition that they hold an equivalent quantity of English banknotes. Similarly, the Hong Kong Monetary Authority has at any given time a reserve of US dollars equal to the amount of Hong Kong dollars in circulation.

In the event that an independent Scotland does not reach an agreement with London, the Hong Kong option would be a possible solution, though one that would require a high level of fiscal stability in Scotland. As long as Scotland does not embark upon a Greek spending spree, this option is a possible solution.

Some in Better Together suggested the Mark Carney ruled out currency union. Yes Scotland came to the directly opposite conclusion. So what did the Governor actually favour? He did not say directly. Being a public servant, and a Canadian, he was aware of the political dangers. But given that he used the words, “necessary foundations for a durable union”, it seems that he believes the best option is a supranational institution. In other words a currency union.

But while Carney may be closer to the Scottish Government position he stressed that it would be very difficult to reach an agreement. This prediction is likely to be accurate.

• Matt Qvortrup is a constitutional lawyer and author of Referendums and Ethnic Conflict