Scottish independence: the currency question that is still unanswered

This is an opinion article by an external contributor. The views belong to the writer.
Scottish independence: the currency question that is still unanswered

Earlier this month Scottish citizens re-elected their MSPs (Members of Scottish Parliament) in an election that was closely followed throughout the EU and the UK.

The results are likely to have profound implications on the possibility of another referendum on Scottish independence from the UK, the outcomes of which will partially decide whether or not Scotland can apply for EU membership as an independent state. 

As many may remember, there was an independence referendum in Scotland in 2014, in which 55% of Scots voted to remain in the UK. However, there are strong indications that the results of the 2016 Brexit referendum and the UK’s subsequent exit from the EU have tipped the scale in the other direction and have convinced previous ‘NO’ to independence voters to change their minds due to the promise of EU membership post-independence.

Politicians, in particular those from the Scottish National Party (SNP), argue that Brexit has made the divide between Scotland and the rest of the United Kingdom more prominent, often citing the fact that only 38% of those in Scotland voted to leave the EU.

Put simply, some of the key reasons for which a large part of the Scottish population want independence is due to the lack of freedom and autonomy over what happens inside their borders. Speaking on Politico’s EU Confidential podcast, Mairi McAllan, who ran for election on behalf of the SNP explained that, despite the UK system of devolved governments, many key issues are still dictated in Westminster and there “is always a ceiling to what you can achieve.”

For example, Scotland houses the UK’s nuclear weapons on their shores which most in Scotland are against, they have little macro-economic autonomy and, of course, Scotland has been forced to leave the EU. All this has led to what McAllan calls a “democratic deficit” for Scotland. 

If Scotland were to have another independence referendum in the coming years, what would make it different from the one in 2014 is that this time the discussion around independence would be focused on eventual EU membership.

Independent economic policies

This is where the issue of currency comes in. Of course, a newly independent Scotland would need a currency but which this will be is unclear. The issue of currency has been relatively little discussed in more recent talks and debates on Scottish independence and EU membership.

It seems there are three options. Firstly, to keep using the Pound Sterling, secondly, to establish their own new currency, and lastly, to adopt the Euro. However, neither of these options seem like a perfect fit and all entail sacrifices. 

The SNP has more than hinted that in an ideal world they would keep the Pound Sterling in Scotland, which comes as no surprise as it is one of the currencies most used in international trade and has fared relatively well in times of financial crises. However, if Scotland were to adopt the British Pound (notably there has been no official agreement from authorities in England on this), they would still be subject to the interest rates, exchange rates and other monetary policies of the Bank of England (BoE).

Interest and exchange rates are important tools for managing domestic economic policy and for dealing with crises. Naturally, the BoE would no longer consider Scotland’s economic situation when setting their rates and implementing their policies. Scotland would have to accept these and, for lack of a better term, hope for the best.

What's more, if a monetary union is to be formed, the Scots would also have to give up some power over their fiscal policy. As autonomy from Westminster is one of the key reasons for independence, this is an obvious area in which the desire for more sovereignty would have to be sacrificed. It is also worth mentioning that it is unknown how the EU will feel about Scotland joining the block whilst using the currency of the first country to become an ex-member state. 

The next option is adopting a whole new currency, the Scottish Pound if you will. To many, this may seem like the obvious choice for a newly independent country and would grant Scotland the highest level of independence. Despite this, one of the reasons why the SNP haven’t fully championed this idea is because it would involve large transaction costs. Changing the currency of all mortgages, bills, contracts etc would be extremely expensive, not to mention the cost of printing all new bills and coins. As well as this, a new currency would add to uncertainty and instability in a time when there would already be many unknowns in the country. 

Finally, there is the option of adopting the Euro. Here, there is one key problem which is the strict accession criteria to join the Eurozone (the Maastricht convergence criteria which relate to, among others, debt and deficit levels, inflation rates and interest rates). Countries wanting to adopt the Euro must first demonstrate currency stability and have a proven track record of this.

It is therefore impossible for Scotland, at least straight after independence, to join the Eurozone as they will have no data related to their currency and economic stability as an independent country. Furthermore, if Scotland adopted the Euro, monetary policy would be decided by the European Central Bank in Frankfurt and not by Scotland itself.

Perhaps on an emotional level Scots are more willing to give up sovereignty over monetary policy to Europe than to the UK but on a practical level, the scenarios are similar in terms of the amount of control Scotland itself would have. 

The question of currency is a difficult one for all newly independent countries that wish to assert themselves as a fully autonomous and functioning state. For Scotland, at the moment, there seems to be no clear path to take if independence is to happen. Policymakers will undoubtedly be debating this topic in the coming months and years and assumingly, a decision will be made before independence, if this were to happen. For now, we must wait to see whether Scotland is granted another independence referendum and, if so, what the outcomes of this all-important vote will be.

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