Scottish independence: Economist says currency union deal still possible

Scottish bank notes The Scottish government believes a currency union would be in the best interests of an independent Scotland and the rest of the UK

A currency union between an independent Scotland and the rest of the UK is still possible, according to a leading economist.

But Prof John Kay told MSPs that the opposition of senior Westminster politicians meant negotiating a deal would be "clearly more difficult".

And he said he would be sceptical about an agreement being reached, given the likely demands of the rest of the UK.

His comments came ahead of September's referendum on Scottish independence.

Voters will be asked the Yes/No question: "Should Scotland be an independent country?"

Start Quote

I don't think the announcements that have been made from Westminster this year rule out the possibility of having a currency union... but they clearly make it more difficult”

End Quote Prof John Kay

In February, UK Chancellor George Osborne, his Labour shadow Ed Balls and the Liberal Democrat Chief Secretary to the Treasury Danny Alexander all ruled out entering into a currency union with Scotland in the event of a "Yes" vote.

Scottish First Minister Alex Salmond dismissed the remarks from the three Westminster politicians as "bluff, bluster and bullying", arguing that a currency union would be in the best interests of both an independent Scotland and the remainder of the UK.

Prof Kay is a former economic adviser to the Scottish government, and a former director of the Institute for Fiscal Studies think tank. He is now a visiting Professor of Economics at the London School of Economics.

From Democracy Live: Professor Kay and Professor McCrone give evidence to the finance committee

He told Holyrood's Finance Committee that from "the point of view of Scotland a currency union with England would be the best outcome, if it could be negotiated".

He added: "I'm sceptical, I was sceptical about whether it could be negotiated even before the various announcements which have been made from Westminster this year.

'Unilateral option'

"I don't think the announcements that have been made from Westminster this year rule out the possibility of having a currency union, if Scotland did indeed vote for independence, but they clearly make it more difficult."

Prof Kay suggested an independent Scotland continuing to use the pound without a formal agreement could be one solution if a currency union did not happen.

"The unilateral option may have more to commend it than it seems at first sight, that Scotland would simply go on using the pound anyway in these circumstances," he said.

The economist said this would bring "stability" and would mean there would be no transaction costs between north and south of the border.

He said the disadvantage of this arrangement would be that an independent Scotland would "effectively not have any freedom in monetary policy".

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On the whole, I think that a separate currency but one pegged to sterling is probably the long-run answer”

End Quote Prof Gavin McCrone

But he went on to state: "I think the practical reality is that an independent Scotland would not really have any freedom in monetary policy anyway."

If the referendum resulted in a vote to leave the UK, Prof Kay said talks over a currency union would see "conditions laid down by the rest of the UK Treasury in these negotiations which I thing would be very difficult for a Scottish government to accept, because the rest of the UK would be demanding controls over the banking system in Scotland and over fiscal policy in Scotland".

He told MSPs on the committee: "That's the almost intractable problem on which these negotiations would fail - that is there would be a demand for supervision of Scotland's fiscal policy which either Scotland would concede, in which case you would be conceding most of the economic policy levers you would hope to gain by independence, or else Scotland would refuse, in which case the monetary union could not go ahead in this form."

Prof Gavin McCrone, a former chief economic adviser to the Scottish Office, told the committee he believed it was "more likely in the end" that Scotland would adopt its own currency "even though it may start with an attempt to keep the same currency".

He added: "On the whole, I think that a separate currency but one pegged to sterling is probably the long-run answer, that's what the Irish did for a long time, then they unpegged it when they went into the European exchange rate mechanism.

"Smaller countries very often do that, the Danes for example have kept their own currency but it is pegged to the euro, but that means they can alter it if they really have to."

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