Pound or Euro? Currency of an Independent Scotland

♠ Posted by Emmanuel in , at 11/24/2013 02:22:00 PM
The next few years are literally going to be make-or-break for the United Kingdom. First of all, the ruling Tories have promised a referendum on its membership in the European Union that, if it is held and voters decide against it, will mean the UK leaving the EU. It's a scary thought we can explore in another post; I myself don't see how the EU will lose much given how it has been very aloof.

Next, we also have another referendum scheduled in Scotland voting on staying in the United Kingdom. While it seems just desserts to me that the UK with its breakaway tendencies from the EU would be subject to similar domestic pressures, the political economy of such a move are...complicated. Scottish independence will mean that it will have to reapply for EU membership if it wants to be part of it. Moreover, there is the question of what currency it will use--the British pound, the Euro, or its own currency unit. Obviously, using the Euro will be contingent on first joining the EU and then the EMU. Both will not happen overnight.

How about continuing to use the pound? It is here where the Conservatives are throwing their weight around by threatening to kick the Scots out of the "sterling zone" if they declare independence, leaving them with the sole option of being a small nation with its own currency circa 2014. As Iceland has so vividly demonstrated, this is not such an attractive option in the new millennium, but I digress. From the FT:
Scotland will be forced to quit the sterling currency union if it votes for independence next year, a cabinet minister has said, in the starkest warning yet for Scottish voters to remain in the UK. Speaking to the Financial Times days before the Scottish government releases its vision for an independent Scotland, Alistair Carmichael, the Scottish secretary, warned Holyrood not to assume it will be let back into the sterling area if the country becomes independent.
Such a declaration would complicate efforts of the Scottish National Party (SNP) to portray a "no" vote as a walk in the park:
The Scotland secretary’s words are part of a concerted campaign across the union to rebut suggestions that a separate Scotland could simply continue to use sterling. Carwyn Jones, the Welsh first minister, said in a speech on Wednesday that his Labour-led government should also be given a veto on the idea, which he described as “very messy”

The message comes as the SNP-led government prepares to unveil its blueprint for the make-up of an independent Scotland, designed to answer questions such as what currency the country would use, whether it would belong to the EU and what taxation system it would have...

SNP leaders insist that sterling is an “asset” part-owned by Scotland, and that in the event of a vote for independence, the remaining UK will want to share the currency, not least to minimise exchange rate fluctuations between the two countries. Alex Salmond, SNP first minister, tried to ward off the threat of exclusion from sterling last week by saying that if that happened, Scotland would not be obliged to take on its share of the UK national debt.
My take is that it's a lot of hot air on both sides since poll numbers suggest the Scottish public understands the consequences of independence and generally believes it's not worth the hassle. 

Not gonna happen, as the Yanks would say.