Separate Scottish currency could cost as much as £300bn

A leading macroeconomist has warned that a separate currency in an independent Scotland would need to be backed by billions in foreign exchange reserves to protect it from economic shocks and speculators.

Professor Ronald MacDonald, research professor of macroeconomics and international finance at the University of Glasgow, said the reserves needed could be anywhere from £30bn to £300bn - the latter figure held by Hong Kong, which fixes its currency’s exchange rate to the US dollar. Norway has reserves of £30bn for its own free-floating currency.

“You are talking about a massive flip round from [Scotland having] a pretty large deficit to a surplus to start gathering these reserves,” the academic told the Daily Telegraph.

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“It implies massive spending cuts and/or tax rises. That is the elephant in the room.

Nicola Sturgeon said yesterday the report would not shy away from Scotlands challenges. Picture: John Devlin

“Scotland’s proportion of Bank of England reserves is small beer compared to what would be needed.”

He said that even if Scotland used the pound unofficially with no central bank, in the same way Panama uses the US dollar, “everything in the economy has to be backed up by reserves”.

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Prof MacDonald, who has been a vocal supporter of the Union in the past, added that pegging a currency to sterling would have the benefits of avoiding redenomination as “anything other than a one-to-one rate is a nightmare scenario”.

His intervention comes as a Growth Commission established by the SNP prepares to publish a long-awaited report on the economy of an independent Scotland, which is expected to recommend a separate currency following a transition away from the pound.

Nicola Sturgeon said yesterday the report would not “shy away from Scotland’s challenges”.

She added: “Instead it looks at how we can address these challenges positively and in line with our core values as a nation … it focuses on the ‘why’ of independence and how we can use the powers it will deliver to build a stronger economy and a fairer society.

Earlier this week Mark Carney, the Governor of the Bank of England, said a currency union between an independent Scotland and the rest of the UK is economically possible, but warned that it would require continued deep integration to function.