Scotland politics

Scottish independence: Are there lessons from Ireland for the UK and Scotland?

Pounds sterling and euros
Image caption Ireland pegged its currency to the pound after independence and later joined the euro

Much of the discussion about Scotland's independence referendum has been about whether Scotland's economy is stronger as part of the UK or alone.

But recent history in the Republic of Ireland shows that things are not quite that black and white.

Ireland has been independent from Britain for more than 90 years, but its economic history has been a very different story.

When the Irish state was first being created, the economies were so intertwined that the Irish continued to use sterling for seven years, and then when they began using their own currency, they pegged it to sterling for half a century.

One Irish punt was always worth exactly one British pound.

That's an idea that that's been talked about a lot in terms of the Scottish debate - it's known as sterlingisation.

Prof Brian Lucey from Trinity College Dublin says that for Ireland, the decision to stick with the pound was "a no brainer".

Image caption Prof Brian Lucey said Ireland's early decision to stick with the pound was "a no brainer"

Prof Lucey said this meant the Irish economy was dependent on British inflation and interest rates they had no control over, but the ties were simply too deep to cut.

"The decision was made for very pragmatic reasons, the deep inter-relationship of the two countries in terms of trade, and the fact that you still had a very large number of people in the Republic who were in receipt of transfers either from relatives and friends working in the UK, or UK government pensions."

And those trade connections are still just as strong today.

Dublin provides back office support for almost all of the UK banks, and 2m euros worth of goods flows across the Irish Sea each week.

Half of the sweets from the Jelly Bean Factory, on the outskirts of Dublin, are sold to the UK, according to managing director Richard Cullen.

"We're manufacturing 12 to 14m jelly beans a day so with a population of four million people, if the Irish market was our only market every man, woman and child would be eating an awful lot of jelly beans every single day!" Mr Cullen said.

Image caption The Jelly Bean Factory exports half its sweets to the UK

"We have to look at the UK as an extension of our home market."

Trade flows the other way too, with most of the raw ingredients from the Jelly Bean Factory coming from the UK.

Sales into the Irish market are crucial for UK exports. £27bn pounds worth of UK goods are sold to Ireland each year, which accounts for around one in five of all UK exports.

So the incredibly strong relationship between the UK and Ireland meant that as a new country, Ireland didn't have much choice about which currency to use, and their economy had to just ride the waves of the UK inflation.

But it also meant that the UK had to step in when the Irish economy needed a bailout.

In 2010, UK Chancellor George Osborne announced an extra eight billion pounds for the Irish bailout.

Image copyright Getty Images
Image caption Ireland's economy received a bailout from the UK in 2010

The Bank of England became a willing lender of last resort because it's own economic interests were so bound up with the Irish economy.

The chancellor said: "It is clearly in Britain's interest that we have a growing Irish economy and a stable Irish banking system."

If economic independence isn't really achievable between the UK and Ireland, then it's even less achievable between Scotland and the rest of the UK.

More trade flows over the Scottish border, and the two financial service sectors are ever more interlinked.

That could mean that in an independent Scotland would have to peg to the pound and be subject to waves of UK inflation if there was no formal currency sharing agreement.

But it also means that the UK may not be able to stand on the sidelines if the Scottish economy was in trouble.

As they did in Ireland, they may have to weigh in as a lender of last resort, whether they want to or not.

More on this story