The ‘Yes Scotland’ campaign – the campaign for Scottish independence - is gathering pace and it brings with it some interesting currency-related questions.
Scottish independence is by no means imminent - the referendum is not scheduled until the autumn of 2014 - but there is plenty of debate to be had. Scotland’s First Minister Alex Salmond has certainly put his and the weight of his Scottish Nationalist Party firmly behind the cause. However, there is plenty of support for keeping Scotland within the UK; a pro-union campaign is expected to be launched in the coming months. Indeed, a recent poll commissioned by Scottish MP Alistair Darling revealed that only 33% of those surveyed were in favour of independence, whilst 57% opposed it and 10% were undecided.
In 2006, Salmond endorsed the idea of the “arc of prosperity,” where Scotland joined a Nordic Union made up of wealthy smaller Northern European nations of Iceland, Ireland and Norway. Joining the euro seems a little more likely.
Salmond has said that Scotland could eventually join the euro, after a referendum was held on the issue. However, this is becoming a decreasingly attractive prospect given the escalation of the debt crisis over the past year or so.
Leading economist Professor Garelli, former MD of the World Economic Forum, has argued that an independent Scotland will have no choice but to join the euro. Garelli cited the euro’s world reserve currency status and the benefits this brings with commodity trading and making the most of North Sea oil.
There are some interesting arguments suggesting that Scottish independence would require a reapplication to become a member of the EU, and new members of the EU are expected to join the euro as a matter of course. Interpretation of the European Community Treaty may well have to be played out in the courts- it comes down to whether Scotland would continue to benefit from the UK’s special dispensation to opt out of the euro whilst remaining in the EU.
The development of the eurozone debt crisis makes it quite hard to believe that the Scottish population will want to join that particular party. Certainly, 2014 leaves plenty of time for conditions to change, but progress in the debt crisis has proved remarkably slow. Joining the euro would seem to be a long-term plan, very long-term. SNP Finance Minister Swinney has cited the mid-2020s as a possible euro-entry date. By this point, EU integration is likely to be so far down the line that the notion of any genuine Scottish independence within the euro could be laughable.
The SNP has made it clear that its current position is for Scotland to keep the pound in the short-term, and importantly, retaining the backing of the Bank of England. It goes without saying that Scotland would want to maintain access to the Bank of England as a lender of last-resort (a backstop), should any of its financial institutions hit panic-stations. Scotland would like to combine this with fiscal independence, but this would equate to the BoE signing blank cheques. It is impossible to believe that Scotland will be allowed to pick and chose in such a way. So this raises the question of just how independent Scotland can be if it retains the pound. This is a question which the SNP are struggling to cope with.
Richard Driver
Analyst – Caxton FX
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