UK says independent Scotland would lose the pound


Scotland would not be able to use the pound as its currency if it voted to break from the United Kingdom later this year, the British minister for Scotland said yesterday (6 February), issuing the government's strongest warning on the subject yet.

As Scots prepare to vote on whether to stay in the UK on 18 September, Scottish nationalists are basing their post-independence economic plans on a currency union with Britain.

But the British government, which wants the Scottish public to vote against independence, has already said such a plan would be nearly unworkable.

"Independence means leaving the United Kingdom's monetary union," Secretary of State for Scotland Alistair Carmichael told Britain's parliament.

"The only way for Scotland to be sure of keeping the UK pound as it is now is to stay in the United Kingdom ... No one should vote for an independent Scotland on the basis that they will get to keep the UK pound sterling," he added.

Opinion polls show that around 42% of Scots plan to vote against independence and 29% in favour.

The British government says Scotland and the rest of Britain are better off together, while Scottish nationalists wants to end what they say are decades of economic mismanagement by London.

Much of the political debate over the referendum has so far focused on finance and currency-sharing arrangements.

Scottish nationalists say they could keep using the pound by ceding control of monetary policy to the Bank of England and agreeing broad fiscal guidelines. They believe both sides would benefit from a currency union.

"Scotland is the UK's second largest trading market. It would be absurd for Westminster (the British parliament) to stand in the way of protecting the benefits this brings to businesses and consumers in the rest of the UK," said Stewart Hosie, the Scottish National Party's treasury spokesman.

But Carmichael was one of several lawmakers who spoke in a debate on the future of Scotland to say that any currency-sharing arrangement would be unworkable.

Tough rules

Andrew Tyrie, head of an influential parliamentary committee that scrutinises financial policy, said any monetary union would need to be accompanied by a common fiscal policy to prevent a repeat of problems seen in the euro zone.

The euro zone currency bloc has undergone four years of political and financial turmoil after doubts about the ability of weaker states to repay their debts led to big losses for banks and meant several countries needed to be bailed out.

"A British monetary union would need something dramatically tougher than euro zone rules," Tyrie said. "So tough that on both sides of the border, if fully explained, I'm confident our respective electorates would not want it."

Tyrie said he doubted that Scots, if they did vote for independence, would relish the prospect of a British government picking over Scottish spending plans.

But in the absence of such a joint fiscal policy, British voters would resent bailing out Scottish banks if investors lost faith in Scotland's ability to balance its books, he said.

Tyrie urged both sides to rule out a currency union well in advance of the referendum, to allow Scots to make a fair choice.

"Not to do so, it seems to me, would be to deceive our respective electorates that there is some third way, some relatively painless option, enabling the Scots to imagine that they are fully in control of their own affairs and the rest of the UK to avoid large contingent obligations," he said.

  • 18 Sept. 2014: Scottish independence referendum


an european's picture

The right thing is to get rid of the Sterrling Pound and join the Euro currency

Edward Ramsbottom's picture

Leaving the pound behind would be the right thing to do. Every pound created by the Bank of England (a private company owned by Sir Evelyn De Rothschild) is lent to the government at 10% interest. This interest has to be paid back of course (even though it was never earned) and that's the root cause of why UK is so poor.

Scotland doesn't need to go independent and then wear this financial ball and chain; it can print its own Pound (it already does)but without this interest.

That simple step will enable Scotland to prosper at long last.

George Mc's picture

@ Edward Ramsbottom

The Bank of England has been an independent public organisation since 1998, wholly owned by the Treasury Solicitor on behalf of the government (UK), with independence in setting monetary policy. I think you are a bit out of touch.

I do agree, that if Scotland is to go Independent, then it makes no sense to then hand back economic control to the Bank of England. However, we need Mr Salmond to stop telling fairy tales, own up to the truth on this and many other things and let the people then decide.

Otto's picture

They can unilaterally adopt euro, like Montenegro did. Every currency is better than the doomed pound.

James 's picture

Well if it's not to be the UKIP pound sign floating on the saltyre I am quite sure the Scots will do the right thing and set up their own arrangements. After all with all the posturing going on, it is a fundamental axiom of money throughout history that it is the Banks that run this side of life. If the Bank of England won't do it then a Scottish Central Bank could do it. If in the last analysis UKIP were to win at the EU Parliamentary elections in England, I as a Scot would have an extra inducement to support independence in his area sa well. Who says the Euro is not a viable currency - and it's not run by governments! One thing is certain it's rather better at keeping its value than silly money run by a more isolated English banking system.

George Mc's picture

"They can unilaterally adopt Euro, like Montenegro did. Every currency is better than the doomed pound."

They could use any currency unilaterally, even the US dollar. However, statements like that show a delightful touch of economic naivety. Put simply they need a Central Bank to back them up so that they can borrow at decent rates. That is why the UK treasury would be reluctant without control of Scotlands spend, borrowing and control over Scottish based Banks.

Scotland can easily solve this by having their own Central Bank and Currency, the Scottish Pound or whatever. The Scottish Government knows this and are not confident they could get it past the electorate.

George Mc's picture

"Euro is not a viable currency - and it's not run by governments"

Correct, it is run by Government - Germany.

Richard's picture

"They can unilaterally adopt euro, like Montenegro did. Every currency is better than the doomed pound."

Yes, Scotland can adopt any currency it wants - but that's not the same as a currency union.

A country is free to adopt a currency for use - there are actually a few small countries like Ecuador that actually use the US dollar.

But this means they do not actually have a currency of their own - they are using the currency of a foreign country.

You may stop to think for a moment exactly why countries, even ones with massive problems and weak, fluctuating national currencies do not simply take on a major one like the euro or the dollar.

The reason is simple; a country that uses the currency of another sacrifices having any control at all over that currency. For example, Ecuador has no control whatever over the US dollar - they have no representation in either the Federal Reserve System or the US Treasury; neither of those bodies give any consideration to Ecuador when making their decisions, nor does the Federal Reserve act as lender of last resort for Ecuador and so on. In essence, Ecuador simply trails helplessly in the wake of the USA, subject to but with no influenc eover decisions that can have a radical effect on it's economy.

But the Scottish Nationalists do not propose an independent Scotland merely *use* the pound; they want a currency union - in other words, they want to set something like the eurozone up.

There are big problems with this, as the governor of the Bank of England pointed out in his recent speech.

In a currency union, each member would effectively end up as having to act as guarantor for the other; since Scotland's economy is far too small to ever bail out the rest of the UK (which is ten times bigger), the risk is entirely one way. Essentially, the SNP are saying they want the rest of the UK, which Scotland would have just voted to separate from, to act as it's financial guarantor.

Not only is it hard to see why this would be beneficial to the rest of the UK, it is impossible to see how it could be achieved politically; the English are hardly going to be in a mood to accomodate the wishes of the just-departed Scotland. It is like telling you rpartner you want a divorce, but retain the family credit card, just in case.

Also, as the eurozone demonstrates, if you want a currency union to actually work, you need MORE integration, not LESS. The absurdity is that the eurozone will invariably move towards economic union, which democracy will demand political union; the Scottish Nationalists want to take sterling and do the reverse, turning it into a copy of the eurozone as it is now.

That is patently an absurdity. At the very least, to even consider a currency union, both sides are going to have to agree on being able to oversee each other's finances - for example, they would both have to have a veto on each other's annual budgets to make sure one side did not run up excessive debts or somesuch. It is almost certain that the rest of the UK would insist on such conditions.

Given the disparity of the two partners, the "sterling zone" would be completely dominated by the rest of the UK - Scotland would be very much a junior partner. It would constantly get outvoted at the Bank of England, for example.

So in essence, Scotland would be "independent" but immediately sign over control of it;s currency to what would now be a foreign country which would also have things like a power of veto over it's national budget. Eventually, thw two sides would be driven towards re-creating the Union that Scotland had voted to leave, anything else would be unworkable or democratically unacceptable.

The SNP say that that Scotland will keep the pound, yet they have not even bothered to ask whether the rest of the Uk would agree to it. They would be in no position to bargain either: not only would they be by far the smaller of the two negotiating sides, they would be faced with either accepting whatever conditions the rUK wanted to place on a deal, or creating their own currency. They could not join the euro, even if they wanted to.

It is also worth noting that Alex Salmond in 1999 described the pound as "a millstone around the neck of Scotland" and wanted to join the euro.

He stopped talking about that though - at about the same time he stopped talking about his "Celtic Arc of Prosperity".

James 's picture

Well now a currency union is not the same as the banking system operating in a commercial sense. Ever since the times Assiento when Genoan bankers ran the the affairs of state of the Spanish empire, the functions of banks have been distinct from the machinery of the state. Clearly even in more modern times Banks have been separate from the states in which they operated. Who says the refusal of the UK government to allow Scottish banks to operate in the financial markets is realistic? Judging by the mess of the UK banking system and the extreme remedy of the UK government in being forced to nationalize the major JS banks because each one was judged “too big to fail" it is a farcical and risible excuse to use threats to Scotland over using or not using sterling with the UK experience on Banks! In the single market, anyhow, there is a clear alternative. The UK “computer says no" gives the Potentially rebellious Scots every excuse to join the more solid and reliable euro should they wish to do so. When the Scots are still familiar with a range of own brand banknotes, variety is no obstacle to intelligent solutions. Why is the Old Lady “of needle” so involved in looking into her own navel? That's very possibly the consequence of being in effect still very much in the pocket of Westminster, and not in the commercial world. I fear this one red herring will continue to the meanwhile how many more bonds are to be bought up with much BoE printing of sterling paper?