August 19, 2014 7:09 pm

Scotland’s currency choices in the event of independence

If the UK refuses a formal currency union with an independent Scotland, what choices would the country have?

(1) Use the pound anyway

Even if the Westminster government does not agree to share the pound, Scotland could use it anyway, without a say in monetary policy. Ecuador and Panama, for example, have adopted the US dollar. But it would be unusual for a country with an economy the size and complexity of Scotland’s to follow such a course.

(2) Join the euro

For many years, the Scottish National party’s stated policy was to join the euro after independence. This would tie the country more closely to the bloc and give it the stability of a large monetary union. Since the eurozone crisis, this has become much less popular in Scotland but it might be forced to follow this path if it wants to continue as an EU member state. Even so, it would not be an immediate option.

(3) Launch a Scottish currency

Many nationalists have pushed for the Scottish government to back this option, because it would give the most independence. But establishing a new currency is risky. Without its own borrowing history, an independent Scotland might find the currency quickly loses value when traded and markets could demand a higher interest rate on its debt. It is also likely to be more volatile than an established currency. There are two quite different approaches to an independent currency: to peg it to the pound or to let it float.

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