Scottish independence: ‘Currency union too risky’

A TREASURY analysis paper published yesterday concluded there is “no evidence” a currency union between the rest of the UK and Scotland post-independence could work.

Paper concludes no evidence a link-up is viable. Picture: Getty

The report concludes that the rest of the UK would be exposed to greater financial risk if it shared a sterling zone with an independent Scotland.

“The continuing UK would become unilaterally exposed to much greater financial risk from a separate state,” the report states. “Greater financial risk would come from UK taxpayers being asked to support the wider economy of another state and financial risk were banks from that state to fail.”

Sign up to our Politics newsletter

Sign up to our Politics newsletter

Meanwhile, separate advice from top civil servant Sir Nicholas MacPherson, the permanent secretary to the Treasury, also warned against the arrangement.

Paper concludes no evidence a link-up is viable. Picture: Getty

In the memo, which Chancellor George Osborne published yesterday, Sir Nicholas said: “I would strongly advise against a currency union as currently advocated if Scotland were to vote for independence.”

The mandarin’s advice warns that currency unions are “fraught with difficulty”.

Scotland’s banking sector is too big in relation to national income and it could leave the UK having to bail out the fledgling state if there was another financial crash.

Sir Nicholas also assured the Chancellor that First Minister Alex Salmond’s “threat” to refuse a share of the UK’s debt was not credible.

Mr Osborne said he wanted to publish the full advice, from an impartial civil servant, to show that politicians had not doctored it. It was released alongside a larger Treasury analysis entitled Assessment of a Sterling Currency Union.

The Treasury report rejected the Scottish Government’s position on existing shared ownership of the pound and the Bank of England.

“There is no rule or principle in international law that would require the continuing UK to share its currency with an independent Scottish state,” it states.

“The system of currency used by a country is not part of its assets.”

The Scottish Government has suggested in its blueprint for independence that another currency option could be chosen in future, such as adopting its own currency, which also drew concerns in the advice from Sir Nicholas.

“Successful currency unions are based on the near-universal belief that they are irreversible,” he said. “Imagine what would have happened to Greece two years ago if they had said they were contemplating reverting to the drachma.

“Secondly, Scotland’s banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk which it creates.”

He added the rest of the UK could also face having to bail out an independent Scotland in the event of another banking crash.

The suggestion that Scotland would start off by having to cede newly won sovereignty was raised in an earlier speech by Bank of England Governor Mark Carney, who set out the technical pros and cons of currency union in a speech in Edinburgh last month.

Sir Nicholas also predicted the Scottish Government might repeat that it would not take on a share of UK debt if the Chancellor went along with the Treasury’s advice. “I do not believe this is a credible threat,” he said.

So what are the curreny options for Scotland?


This arrangement would allow an independent Scotland to keep the pound, and its proponents believe it would provide stability, while giving the Scottish Government the power to alter fiscal policy, handing over economic levers that would enable Scottish ministers to tax, spend and borrow. A fundamental aspect of such a currency union is that the Bank of England would retain control over monetary policy – interest and exchange rates – both sides of the Border. Another key aspect would be a banking union governed by a consistent regulatory framework.


There is nothing to stop the Scottish Government simply continuing to use the pound after independence as it is an open, tradeable international currency. But this would deny Scotland access to the Bank of England. A comparable model is the informal currency union that Panama has with the US dollar. This model, however, is seen by economists as problematic because, without a link to a central bank, an independent Scotland would have no safety net when ­financial crises strike. In the event of financial difficulty, investors would choose to hold money in core currency south of the Border, which would have central bank protection rather than the domestic Scottish one. Should a crisis engulf Scotland, the Bank of England would have no obligation ­to step in to help.


Scotland could have its own currency tied to the pound in a similar way that the old Irish punt was fixed to sterling. It is a model that has worked reasonably well for Denmark – where the krone is pegged to the euro.

A Scottish central bank would have control over interest rates, although these would probably have to follow the rates set by the Bank of England or speculators would attempt to borrow money from the country with the lower interest rates and pump the cash over the Border where there was a higher rate. A drawback would be transaction costs – the cost of changing money from one currency to another – which may discourage some businesses. Right, a Scottish groat from the reign of David II.


THIS economic model would also see the creation a new Scottish currency, not pegged or linked to any other currency. The value of a floating Scottish currency would be allowed to fluctuate according to the foreign exchange market. Smaller countries like Norway following this model have seen high fluctuation rates. This model would mean that a Scottish Government could set its own interest rates


Scotland could simply start using the euro in the same way that Montenegro has, without being a member of Eurozone. The euro may be a slightly more tenable option now as the crisis of recent years appears to have subsided. This arrangement would again mean that Scotland would not have a link to the central bank and suffer from all the disadvantages that are inherent in an informal union.


This would mean Scotland having to sign up to the European Union’s fiscal framework and the banking union to try to bring more stability. Interest rates would be set by the European Central Bank rather than the Bank of England. There would, however, be transaction costs associated with changing the euro into pounds when doing business over the Border. There is also the danger that policy set by the European Central Bank would be less suited to the Scottish economy than that set by the Bank of England.