Stuart Rodger

Report outlines nine different currency options for an independent Scotland, including a free-floating Scottish pound and crytopcurrency

THE first major report into the currency options for an independent Scotland post-Brexit has been released, making recommendations for an independent Scottish currency initially tied to Sterling.

The report examines nine different currency options, considering the merits and drawbacks of each, but gave the following recommendation: “The political weight tends towards the recommendation of a newly independent Scotland adopting an independent £Scot, initially pegged to Sterling but with the option of moving, changing or floating the peg as and when required or desired.”

The report – released today by Common Weal and authored by activist and scientist Dr Craig Dalzell – stated the importance of exploring such questions before any future independence referendum, adding that the failure to do so convincingly was a major drawback during the first independence referendum of 2014.

A currency union would be “practically, politically or legally impossible.”

The report stated: “There is fairly wide acknowledgement that one of the weaker aspects of the 2014 Scottish independence referendum campaign were those debates surrounding currency. A poll conducted by Lord Ashcroft following the results of that referendum found that more than half of No voters cited currency as one of the top three reasons influencing their decision.”

During the first independence referendum, the SNP government proposed a formal currency union, meaning Scotland would retain the pound together with an official position at the Bank of England. Ben Wray, head of policy and research for Common Weal, dismissed this option for the future: “Brexit effectively kills off the case for a currency union, and therefore has provided the perfect opportunity to revamp the currency argument,” he said.

The nine options outlined in the report are:

Option 1: Currency union within rUK

On the assumption that Scotland kept its EU membership while the rest of the United Kingdom left the EU, the report suggests such a situation would be “practically, politically or legally impossible”. However, it does suggest that such an agreement – which would see Scotland given an official say on policy decisions regarding things like interest rates – would put it on a stronger footing than it is right now because Scotland’s position is not formally taken into account.

Option 2: Sterlingisation

This means Scotland would carry on using the Pound but without official permission. However, the reports suggests this would also mean that Scotland would its place on Bank of England boards, excluding it from having a say on key decisions

Option 3: Scottish Pound, pegged to Sterling

‘Pegging’ means tying the value of one currency to another. So, in this case, pegging the Scottish pound to Sterling would have an advantage because it would keep a “fixed exchange rate” with the UK, which is still Scotland’s largest trading partner.

The report suggests an exchange ratio of one Scottish pound to one pound Sterling would leave voters feeling more secure because it would provide a sense of continuity “thoughout the political upheaval of independence”. A set up like this would involve creating a Scottish Central Bank and a Scottish macroeconomic board to oversee the progress of the currency.

Option 4: Scottish Pound, pegged to Euro

The report suggests that tying the Scottish pound’s value to the Euro would be less attractive to pegging with the pound because 60 per cent of Scottish exports go to the rest UK, while only 30 per cent go to Eurozone countries. However, a move like this would show a desire from Scotland to trade with European markets as quickly as possible, something the report suggests could risk jeopordizing independence negotiations because the UK would be worried about losing out to Europe.

Option 5: Scottish Pound, pegged to a basket of currencies

The currency’s value would be tied to a range of different currencies, but generally speaking “would likely weight towards Sterling and the Euro and could help Scotland trade in a relatively stable manner despite shocks which affect one or other of [the] partner currencies”. However, the report points out that this could result in higher business costs in Scotland.

Option 6: Scottish Pound, free-floating

This would give much more flexibility and mean the value of the currency would fluctuate along with economic circumstances, but it’s a riskier move. This is because it the early days of independence, market speculation could “seriously affect the price of the currency”.

Option 7: The Euro

While some commentators insist that an independent Scotland inside the EU would be obliged to join the Euro, the report points out that to qualify you first need to be in something called the ‘Exchange Rate Mechanism II’ for two years, which basically means that the exchange rate of Scotland’s currency would need to be the same as the EU’s for that period of time. Signing up to this agreement would be voluntary.

The report does not discount the advantages of joining the Euro: “The structure of the Euro gives richer, exporting countries a significant subsidy,” it says, but warns against the loss of control over interest rates, and tax and spending policies.

Option 8: Oil standard

The report touts the possibility of a currency pegged to the price of oil, one of Scotland’s key export commodities, but this would run the risk of “Dutch Disease”, whereby an oil boom could damage other parts of the economy by making other exports more expensive, which would limit efforts for economic diversification.

Option 9 – Crytocurrencies or Scotcoin

Cyrptocurrencies – also know as digital currencies – are still in their infancies. Examples include Bitcoin or Scotcoin (recently profiled in CommonSpace). It suggests that one of the major drawbacks would be that digital currencies are currently less trusted unlike those connected to banks, which benefit from their “commercial reputation”.

The report warns that this would discourage people from spending, which could “undermine confidence”. The report also argues that there are still too many “technical challenges” associated with digital currency for this to be a viable alternative right now.

Picture courtesy of: Flickr / dun_deagh