At-a-glance: Report into currency in an independent Scotland

banknotes

The National Institute of Economic and Social Research (NIESR) has published a wide-ranging economic review of the case for Scottish independence.

In a paper entitled Scotland: Currency options and public debt, authors Angus Armstrong and Monique Ebell consider which currency option would be best for an independent Scotland.

It examines three currency options: being part of a sterling currency zone, adopting the euro, or having an independent currency.

The paper states there is no currency which provides the best option when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important. It says:

  • Scotland is expected to be an EU member and therefore is very likely to be required to commit to joining the euro at some unspecified future date.
  • The attractions of sterling for an independent Scotland are familiarity, no risk of disruption to existing contracts, and no transaction costs for exchanges between Scotland and the rest of the UK.
  • Several UK subsidiaries of foreign banks are members of the Sterling Monetary Framework and therefore have access to lender of last resort facilities at the Bank of England. There is no reason why Scottish banks' subsidiaries in the rest of the UK, which meet the qualifying prerequisites, would be excluded from the framework.
  • No country has joined the eurozone without first having a period of time with its own currency.
  • After comparing the trade benefits of an informal euro currency union with an informal sterling currency union, the authors rule out the euro.
  • The rest of the UK may be required to bail out an independent Scotland (rather than vice versa). To avoid any prospect of this outcome, the UK government would require strict and binding limits on Scotland's fiscal independence.
  • If Scotland were to introduce its own currency, the obvious disadvantage is that there would be transaction costs for trading, investing, moving and spending across the border. However, the evidence from introducing the euro suggests that the impact on trade and welfare is perhaps less than expected.
  • An independent Scotland might find that in future the financial stability advantages to having its own currency outweigh any disadvantages due to trade and transactions costs.
  • The most important advantage of having a Scottish currency is the added element of flexibility. A Scottish currency would bring the greatest degree of autonomy over economic policy and so is perhaps the most consistent with the notion of economic independence.
  • If Scotland were to find itself with high debt and interest rates, and in the throes of an already painful austerity drive, and were to face a further adverse shock, then markets might question the commitment to remaining in the monetary union.
  • The lower Scotland's initial debt and debt servicing burden, the smaller the fiscal tightening necessary to return to a sustainable debt burden, and the less painful any further spending cuts or tax rises would be to the electorate.
  • A Sterling Monetary Union would require the endorsement and legislation of the continuing UK government as the Bank of England is constituted under Acts of the UK Parliament.

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