What currency should an independent Scotland adopt?

If Scotland does vote for independence it must decide the future of its currency

LAST UPDATED AT 16:07 ON Thu 13 Feb 2014

IN THE event of a 'Yes' vote in Scotland's referendum, and the establishment of independence, what currency should the country adopt? Various suggestions from keeping the pound to setting up a brand new currency have been put forward. 

As Chancellor George Osbone nails his colours to the mast, here are the options:

Sterling – formal currency union

Alex Salmond favours a formal currency union with the UK, according to a White Paper by the Scottish government. The paper sets out the case for Scotland maintaining a formal currency union with the rest of the UK in the event of independence, the BBC reports.

But UK Chancellor, George Osborne, this week said that a vote for Scottish independence would mean the end of a unified currency. Speaking in Edinburgh, the chancellor said: "The pound isn't an asset to be divided up between two countries after a break-up like a CD collection. If Scotland walks away from the UK, it walks away from the UK pound."

The rest of the UK's economy dwarfs that of Scotland by a factor of ten, leading some analysts to suggest that any attempts to create a union would necessarily not be a relationship of equals. While the advantages to Scotland of a unified "sterling-zone" are obvious, the UK government's indications that it intends to play hardball have made Salmon go in search of a "Plan B," the Scotsman reports.

Sterling – informal currency union

An informal currency union would see Scotland continue to use the pound but without the permission of the UK. This would be similar to the relationship Panama has with the US dollar.

"This model, however, is seen by economists as problematic because, without a link to a central bank, an independent Scotland would have no safety net when financial crises strike," The Scotsman says.

In such an arrangement the Bank of England would also have no obligation to intervene in the event of trouble.

Scotland's own currency – fixed

One obvious option would be to create an entirely new currency linked to the pound in the same way the Irish punt used to be fixed to sterling. This is a model that has worked well for Denmark, the Scotsman notes: "The Danish krone is pegged to the euro at around 7.45, an arrangement which has offered remarkable stability over the past decade or so."

In such a model, a Scottish central bank would have no control over interest rates, but in the case of financial crisis it would allow Scotland some flexibility to adjust its currency if it needed to do so.

Many independence supporters think this may be the best option, providing the right combination of security and autonomy.

Scotland's own currency – floating

This option would see the creation of a new currency entirely disconnected from any other currency. This is a system that tends to be adopted by currencies based on strong economies, such as the US dollar, Swiss franc of British pound. A country around the same size as Scotland that has adopted this model is Norway, whose currency has a propensity for volatility, fluctuating from a high of 9.95 against the euro to a low of 8.00 in the last ten years. One potential positive of a floating currency is that it would allow Scotland to control its own interest rates, but many believe the threat of volatility makes this model too great a risk.

Euro – informal currency union

Adopting an informal union with the euro would see Scotland create the same relationship with Europe as Montenegro, which has adopted the euro without being a member of the eurozone.

Under this model, the European Central Bank would be under no obligation to assist Scotland if it ran into financial trouble. It would therefore be more likely that Scotland would pursue a more formal union with the euro.

Euro – formal currency union

This model would be similar to union with the pound, except that it would mean the country would have interest rates set by the European Central Bank, rather than the Bank of England.

As well as the costs associated with changing from pounds to euros, there would be the added risk of joining up with the Eurozone in a time of instability.

"There is the danger that policy set by the European Central Bank would be less suited to the Scottish economy than that set by the Bank of England. Joining the euro, however, would see Scotland constrained by the European Union's fiscal framework and the banking union that is currently being developed in order to try to bring more stability across the eurozone," The Scotsman says. · 

Disqus - noscript

The Groat.

...the "Alba"?

No country can be 'Independent' while remaining in the EU as Scotland no doubt will if it becomes 'independent' (sic), it doesn't matter if they keep the pound, adopt the Euro or use the ring pulls from Irn Bru cans they will still be dictated to and ruled by Brussels bureaucrats so it's a completely futile debate.

Better Brussels than London.

lol - such a blinkered view of the reality of globalisation and politics. If England and Wales left the EU then every policy decision they wish to make would be at the mercy of China, US, Russia and every major multinational company. You'd have less control over your own country than you do now as at least you can hide behind the EU. It's not the 1930s anymore, the world has changed!

Why not Edinburgh instead of Brussels if you really want 'independence'? I do like Scotland and the Scots despite the worst efforts of Blair and Brown.

'Hide behind the EU'? That's a new one, to use an analogy imagine a woman unfortunate enough to be in an abusive relationship with a violent partner who spends all the 'housekeeping' money on booze and makes her life a misery, should she stay in such a relationship and 'hide behind' him or her rather than leave? I would engage in debate on benefits of remaining in the EU but in the case of the UK or Scotland if the electorate vote to secede, I can't think of any, of course the poorer economies benefit greatly though from the generosity/stupidity of the richer members.

As Russia said recently, Britain
is just a small island that nobody listens to. Westminster has been punching above its weight internationally since Suez and the only reason Washington, Moscow and Beijing tolerate this is because London has a lot of influence in
the EU and the common Market of half a billion people. This would change is Britain were to leave the EU. We would be a middle ranking country with no influence in the world.

The UK or Scotland, as a part of the EU, is able to stand toe to toe with the big boys in the world. Hence numerous restrictions placed on certain US and Chinese goods. The UK would not be in any negotiating position on its own with these nations and would have to blindly accept what they want when negotiating new trade pacts. This, to me, is less control over our affairs than through having influence in a collective negotiating position in Brussels.

The world where any government of a medium sized country has complete and utter control over its currency, trade rules and competition laws is long gone back in the 20th Century. The whole world is moving towards trading blocks, to try and 'go it alone' is too much of a risk.

The days of the Empire are long gone, we don't need to 'punch above our weight' any more but we do need to make our own laws in our own country, control immigration and basically run our own country, of course we can trade with Europe in the same way that Norway and Switzerland do and by all means accept a manageable number of immigrants but do we really need a complete lack of border control and to have our laws dictated to us by countries that quite frankly aren't very keen on us?

To trade in the same way with Europe as Norway and Switzerland would mean applying to join the EFTA and gaining permission from the EU... you said they weren't keen on us so why would they let us join? very doubtful! It is possible we could remain a member of the EEA and still have access to the common market but we would have to accept most of the rules but have no influence in making them, makes no sense to me! We would need to renegotiate trade agreements with every nation on earth if we left. Our negotiating position would be extremely weak and our terms offered by them would be pretty poor, that's not running our own country, that's the Chinese or the Russian's telling us how to run it!

With regards to immigration from the EU. Recent figures show that just over 2 million Brits live elsewhere in the EU and roughly 2.1 million EU immigrants live in the UK. Most of the Brits abroad are retired (using the French and the Spanish health service) and most of the immigrants from the EU in the UK are young, healthy and paying tax. If we left the EU we'd have to swap these two groups over with the returning Brits costing the state a hell of a lot more money.

Britons abroad are either highly skilled and usually transient or retired and financially independent, not undercutting local workers, making bogus asylum claims or claiming benefits to supplement low wages, Britons have to pay for translators whereas we provide taxpayer funded interpreters to explain housing benefit, council tax reductions and countless other handouts in every language from Albanian to Zulu, even if EU migrants are working they are responsible for employers lowering wages and worsening working conditions, they are actually taking more in housing benefit, living in HMOs so not paying council tax than the measely amount of tax they chip in and claiming for children that either don't live in this country or don't even exist, we have to start putting British people first.

We also have millions on low wages or unemployed, instead of importing poverty we could house, feed, clothe and employ every Briton instead of cheap labour migrants, an exchange of 2 million Britons who have paid into the system for 50 years for a bunch of Eastern European rejects and a job, house and living wage for our own people seems quite far to me, can't see too many people crying over fewer immigrants.

Your grip on the facts is akin to your grip on reality. We are discussing the EU, why have you started talking about asylum seekers? Are you that filled with hate that all non-brits look the same to you?

When you talk about Brits abroad being highly skilled I guess you've never been to Benidorm?

Where have I said I hate anyone? It's quite simple logic that we can't take in the sheer numbers we currently do, while we remain in the EU we have no border controls and EVERY asylum claim in this country is bogus as these freeloaders have bypassed numerous other countries rather than going to the first safe one.
Yes I have been to Benidorm (and I am highly skilled) but there is no comparison to buying a return ticket and spending a bit of money before returning home to jumping housing queues and taking jobs, houses and yes even benefits that could and should go to locals first.
Every country should put their own people first, the UK is roughly the size of the former West Germany, England about the same size as Greece or Hungary, Scotland, Wales and Northern Ireland considerably smaller, we just don't have the jobs, houses, money, resources and above all room to continue taking all these people in.

The BAWBEE?

You are simply blaming the EU for everything and anything and it has nothing to do with them.

1/ No asylum seekers come from EU
countries. It is illegal under EU treaties for a citizen from one EU country to claim asylum in another EU country.

2/ Rights of the asylum seeker have
nothing to do with the EU. The law stems from the 1967 Protocol Relating to the Status of Refugees and the 1951 Convention Relating to the status of Refugees.

3/ The EU helps with the asylum problem in the UK as if a person’s asylum application is turned down in one EU country then they are banned from applying in another EU country.

4/ In 2012, Germany, France, Sweden and Belgium all had
more asylum applications than the UK.

You are that guy down the pub who thinks he knows everything because he reads the headlines of the Daily Express. It is the
ignorance and blatant stupidity of people like you that are the biggest threat to all that is good about this country.

I don’t see in you any of the positive traits I consider to be part of the British characteristic and you do more to remind Scottish people why we should be separate than any economic argument. I should thank you as you’ve probably converted a few readers to the SNP cause.

Little small nation states aren't going to exist forever. Fact.

For further concise, balanced comment and analysis on the week's news, try The Week magazine. Subscribe today and get 6 issues completely free.