Tuesday, 16 September 2014

Scottish Independence: THE CURRENCY QUESTION

VIDEO: https://www.youtube.com/watch?v=4CZjyXH3FTc&feature=youtu.be
Thursday has the potential to be the most significant day in 2014 for Britain, or even perhaps Europe- it is the day of the Scottish Referendum. It's been talked about for months, with various 'Yes' and 'No' campaigners working tirelessly to attack the other side whenever possible, notably in the form of numerous intense televised debates between Scottish firebrand Alex Salmond and curiously black-eyebrowed pro-unionist Alistair Darling.

The world has never been quite certain over what the result of the referendum is to be- while an ICM poll for the BBC on the 11th of September claimed 42% to vote No, and 40% to vote Yes, a poll from the same agency for the Daily Telegraph on the 13th of September found 54% of Scots to be in favour of a 'Yes' vote. It really is shaping up to be an incredibly close call.

But what are some of the economic arguments for and against separation?
This is the first part of a series looking at some of these arguments.

It's been one of the biggest conflict points in the independence debate- in the event of a Scottish Independence, which currency would it use? Well there are three main possibilities, and they all don't seem too welcoming:

Currency Union- the most likely possibility in the event of independence, this would mean Scotland would continue using the pound and relying on the Bank of England. 
A Currency Union would in the main be in the interests of both an independent Scotland and the UK- Scotland is the UK's second largest trading partner, and the UK is Scotland's principal trading partner. 
A Currency Union would allow for trade between these two partners to continue relatively smoothly- there would not be the currency exchange fiasco that would be inevitable should Scotland create its own currency. It would allow the flow of money and labour to continue more smoothly.

'Sterlingisation'- this would be similar to a currency union, in that Scotland would continue to use the pound- but the similarities would pretty much stop there. The Scottish would have even less power than currently over the currency, and the UK would be less careful of Scotland when designing monetary policy- meaning certain policies that affect the pound could have negative effects on Scotland. 
Sterlingisation is kind of like desperate hitchhiking- you can't really control the car, or the route to a certain extent, but at least you can get a lift.

Creation of a new currency- This would certainly have the most interesting outcome of the three mentioned options. A new currency would indeed extend Scotland's powers of autonomy- a 'Bank of Scotland' would be able to control money supply and programmes such as Quantitative Easing, though it could have serious ramifications with regards to Scotland's international trade.
A new currency, especially one created by an independent Scotland whose international political power would not be as solid as it is currently, would create uncertainty in its initial years. Businesses may hesitate to trade in whatever currency Scotland create, unsure about its long-term stability, and as a result transaction fees (costs for making sales in ones own currency) would increase for Scottish businesses trading abroad. 
This would make it more difficult for the new Scottish currency to achieve that initial boost that it would need to announce itself on the worldwide stage.

So Independence would indeed have a profound effect on Scottish currency.
Despite the numerous warnings from the pro-unionists, it seems as though an Independent Scotland would go on to form a currency union with the UK- while it's not the ideal result for Westminster, perhaps the alternatives present complex and fiddly issues both the UK and Scotland would prefer to avoid.

Mohammad M Lone Editor


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