Voters will decide on the outcome of the Scottish independence referendum on 18 September 2014. Although it appears unlikely that the referendum will come to pass, there are many questions surrounding the possibility of a majority ‘Yes’ vote, particularly when it comes to the currency that an independent Scotland will adopt.
First Steps
To begin with, Scottish independence would require the creation of political, economic and social bodies, laws and regulations. The country would require a payments system as well as a central bank, which would put Scotland’s national economic management skills to the test.
Main Risks
An independent Scotland would be at risk of shocks from the energy and finance sectors’ core business areas. It would face volatility, in particular, from demand and prices for its North Sea oil and gas reserves, as well as from any related currency fluctuations. It would also inherit part of the UK Government’s debt.
Currency Options
The main options open to an independent Scotland are:
To forge a currency union with the UK
-This would allow an independent Scotland ease of trade with the rest of the UK. However, the rest of the UK would have to shoulder any weakness in sterling as a result of market concerns over a newly-independent Scotland. On the other hand, a thriving Scottish economy would be marred by a weak sterling in case of economic weakness in the rest of the UK.
To unofficially adopt sterling or another major currency
-This can be the case in countries where there is no confidence in the country’s formal currency.
To establish a new Scottish currency, either floating or pegged against another currency, e.g. sterling
-Financial assets would have to be redenominated into the new currency. A new Scottish currency would be beholden to investors’ sentiment about the new Scottish economy, and would be in a precarious position, susceptible to high levels of volatility.
To seek entry into the Eurozone, thereby adopting the euro.
-Scotland would first have to establish that it can meet Eurozone entry requirements. Within this period, it would have to battle the uncertainties linked with independence, and have to navigate these using an interim currency. After a drawn-out process, financial assets would have to be redenominated into the euro currency.
Scottish International Trade
Scottish international trade would initially focus on continuing its relationship with the rest of the UK, but could be impeded by political, economic, social and logistical barriers to trade, particularly if Scotland does not form a currency union with the rest of the UK, or ultimately enter the Eurozone. The uncertainties surrounding a newly-independent Scotland could also cause high levels of volatility for whatever currency the country would adopt.”
