When Czechoslovakia broke up at the end of 1992, the new states agreed to use the same currency pending further negotiation. This resolve lasted 19 days. The scale of speculative transfers from Slovakia to the Czech Republic forced immediate action to stabilise the banking systems of the two countries. Three weeks later there were separate Czech and Slovak korunas.
Speculation about Scotland’s currency future would begin on the day Scotland voted for independence – or the day on which a poll showed that this result was likely. Scotland would have three main options – the euro, the pound sterling, or its own distinct money.
The euro is the official currency of the EU, and Scotland would in principle be committed to its adoption. But there would be little enthusiasm for that course in either Edinburgh or Brussels, and Scotland – like the UK – would not meet the criteria on debt and deficits for joining the euro. A vague Scottish aspiration to join the single currency at some distant date would probably satisfy everyone.
The sensible outcome would be continued currency union with England – or with the entity that, in deference to Wales and Northern Ireland, participants in the Scottish debate call rUK – rest of UK. Scotland might ask for – and get – a Scottish economist on the Bank of England’s Monetary Policy Committee (not a representative of Scotland – the rules of the committee preclude representative roles). But that would be the extent of Scottish influence on monetary policy.
The tough negotiations would be over fiscal policy. The central difficulty is the asymmetry in the size of the two countries: rUK – representing 91.5 per cent of the population of the monetary union, and a similar fraction of its output – would demand oversight of the borrowing and expenditure levels of Scotland. But it is impossible to imagine rUK conceding similar – or significant – oversight of its own fiscal policies to a Scottish state that made up 8.5 per cent of the monetary union.
If I represented the Scottish government in the extensive negotiations required by the creation of an independent state, I would try to secure a monetary union with England, and expect to fail. Given experience in the eurozone, today’s conventional wisdom is that monetary union is feasible only as part of a move towards eventual fiscal union. But desire to break up fiscal union was always a major – perhaps the principal – motive for independence in the first place.
Scotland could continue to use the pound unilaterally, whether the Bank of England liked it or not – as Ecuador uses the dollar and Montenegro the euro. But this is not really an attractive course, and the only countries that have adopted it are those – such as Ecuador and Montenegro – whose monetary histories are so dire that they prefer to entrust their policies to foreigners.
So Scotland might be driven towards the option of an independent Scottish currency. This would impose costs on business on both sides of the border and inconvenience travellers every time they cross it. The same inconvenience suffered by residents of Denmark and Sweden, countries that are not members of the eurozone but whose economic fortunes are closely bound up with those of the currency bloc.
The Danish krone is pegged to the euro – if the link were broken its value would probably rise, which has forced some Danish interest rates to negative levels. The Swedish krona has no formal tie, but in practice its fluctuations have followed those of the euro, and it makes sense for the Swedish central bank to manage its monetary policies so this remains true. Most politicians and business people in both countries would prefer full membership of the euro if their electorates would allow it. But Scandinavian experience shows that a separate currency is a feasible, though not ideal, option.
Whether or not an agreement on formal monetary union with rUK could be reached, an independent Scotland would have bargaining power only if it held open the option of a separate currency. And that is the only option that campaigners for a Yes vote can commit to deliver.
The question that remains is what to call the new money. Perhaps the Scots crown, or the pound Scots. But I prefer the resonance of the coin first minted by the father of Mary Queen of Scots – the bawbee.