This week we are going to work with readers to tackle five of the key questions about Scottish independence. Yesterday James Ball asked how much debt an independent Scotland would have. Still to come:
Tomorrow: How would the BBC be divided if Scotland became independent?
Thursday: How would an independent Scotland defend itself?
Friday: Who would get the oil revenues if Scotland became independent?
Get in touch below the line, email your views to katie.allen@guardian.co.uk or tweet @KatieAllenGdn
The SNP has said that Scotland would keep sterling if its people voted for independence and only later use a referendum to decide whether to join the euro. Both options require the approval of other nations, so does it go without saying that Scots could continue to spend pounds sterling if the country broke away from the rest of the UK?
Unsurprisingly the view once touted by many in the SNP that an independent Scotland would join the euro has become increasingly unpopular in recent months. While all the talk is about who will be leaving the troubled currency union, it is hardly a vote-winning strategy to discuss joining up – at least not any time soon.
So the view from the SNP seems to be keep the pound to start with and then maybe join the euro several, or more likely many, years down the line, when hopefully there is still a eurozone to join and it is significantly more stable than at present.
SNP finance secretary John Swinney said in early February that an independent Scotland would keep the pound for the foreseeable future, pushing membership of the euro back into the mid-2020s.
In an interview with the Scotsman, Swinney said:
I can't foresee a set of circumstances that will see the economic conditions being correct for the euro for some considerable time. It would be difficult to define that but it feels neither to me like the short term or the medium term.
Those comments prompted the Scottish Conservatives to accuse the SNP of flip-flopping on the euro as well as making too many assumptions about whichever currency it chooses for an independent Scotland.
Ruth Davidson, leader of the Scottish Conservatives, said:
Once again the SNP has been caught out making policy on the hoof in a crude attempt to persuade the Scottish public to their position. As each day passes, it's becoming increasingly apparent that they have no coherent plan for Scottish independence. The SNP twist and turn in the wind, changing position to whatever suits them on a given day – where are their principles?
Alex Salmond cannot blithely assume that he can keep the pound and then join the euro at his own choosing. His tactic seems to be that if he says something often enough it will become fact. It's high time he was honest with the public on what a separate Scotland would look like.
Is Davidson right that the SNP cannot assume an independent Scotland can keep the pound? Swinney says he will put in place deals with the Bank of England, what would the terms need to be? Or can Scotland just keep using the pound without any cross-border agreements? Such a move would not be totally unprecedented.
There has been a furious debate about this issue in comments on the Guardian website, such as in this exchange:
Scotland cannot be independent and still use the pound sterling. The central bank (Bank of England) would still be based in London, and set monetary policy, ie interest rates. This is not independence.
Really? Ireland kept the £ from 1921 until it got its own Saorstát pound in 1928, then the Irish Punt in 1938, all of which was pegged to Sterling until it joined the Euro in 2002.
The question: can Scotland be independent and keep sterling?
I have outlined here three currency options that an independent Scotland would have. Please get in touch with anything you feel needs to be considered, any other currency options you can envisage, any pertinent examples of currency unions from history and any other information you think can help answer the question.
Get in touch below the line, email your views to katie.allen@guardian.co.uk or tweet @KatieAllenGdn.
Analysis
Before we consider Scotland keeping or leaving the pound it is worth looking back over the long history of sterling in Scotland. The sharing of the pound sterling between England and Scotland is a monetary union that has "proved more enduring than any other between nations", according to Angus Armstrong at the National Institute of Economic and Social Research. In a recent paper on Scottish independence, he laid out the background:
Political union between England and Scotland began with the Union of the Crowns in 1603 which marked the start of a monetary union with the pound Scots pegged to sterling at a rate of twelve to one. The Acts of Union in 1707 brought into effect the Treaty of the Union, where the two parliaments merged into the Parliament of Great Britain, and full monetary harmonisation with sterling replacing the pound Scots to become the legal currency of Great Britain.
Will that long currency union endure should Scotland become independent? Such a nation has three main currency options. Let's consider each one briefly:
1. Join the euro
As mentioned above, it's a time when most of the discussion is about leaving the euro for its current members rather than anyone new joining up. With problems in peripheral eurozone countries reverberating through the entire single currency area, Scots and Scottish politicians will be wary of joining the party when it's possibly in its dying moments.
Still, joining the eurozone does not necessarily mean soaring borrowing costs; yields on government bonds vary greatly between eurozone members.
The euro has been touted as an option in the past by the SNP and is still seen as a long-term option. Back in 2009 Alex Salmond told Spanish TV that with the pound weakening there were growing arguments for joining the euro:
I think the argument for having strong fiscal powers, powers over revenue, powers to expand the economy within a monetary context, within a European euro context, will prove to be a very strong one for the people of Scotland.
Whenever an independent Scotland would want to sign up, joining the euro is not a mere formality. There are already questions about whether an independent Scotland would even remain an EU member. If it needed to reapply, it is worth bearing in mind that any enlargement of the EU requires unanimity among member states. In theory, countries with separatist movements such as Spain, with its Basque region, could take objection to sending certain signals by allowing in an independent Scotland.
Finally, swapping the pound sterling for the euro does not mean Scotland would be shaking itself free of outside controls. It would be swapping monetary policy set by the Bank of England for monetary policy set by the Frankfurt-based European Central Bank - policy that tries to fit to a myriad of different economies spread over a wide area.
2. Keep sterling
Again, keeping sterling is no mere formality. Unless Scotland goes down the Kosovo route. Kosovo is not a member of the eurozone but uses the euro. It is legal tender but the country is not even a member of the EU and has no formal currency agreements with the ECB and other European institutions. Such a path would be one way to keep the pound without having to wrangle with Westminster. But such a move is not without many risks, notes Ross Walker, UK economist at the Royal Bank of Scotland.
If Scotland pursued such a policy with the pound it would not benefit from the Bank of England as lender of last resort, says Walker. With bank runs and bailouts still fresh in people's memories, Scotland's sizeable financial sector and other businesses would not accept such a position.
The more likely path is for an independent Scotland and the rest of the UK to remain in a currency union, retaining the backing of the BoE. For that to happen Scotland would need agreement from Westminster and among other things the UK would require a stability and growth pact in place, says Walker. As for what such a pact means for independence and independent policy-setting, Walker adds: "You are hardly going to have George Osborne sitting in the Treasury imposing austerity and trying to retain the UK's 'AAA' credit rating while allowing a free-for-all north of the border."
Many experts argue keeping sterling does make economic sense.
NIESR's Armstrong notes there are three common criteria used to assess the viability of an optimal currency area:
1. Integration of intermediate and final product markets with a high degree of cross-border trade relative to domestic trade.
2. Capital and labour market mobility to enable greater integration, specialisation and faster adjustments to shocks.
3. The extent to which nations have similar structures and cycles.
He concludes that on these there is "prima facie evidence that Scotland would benefit from continued use of sterling" because criteria 1 and 2 are easily met while 3 is harder to judge.
3. Get a new currency
This is the most risky option. Walker at RBS comments: "The risks over whether the fiscal policies for the rest of the UK under keeping sterling would suit Scotland are dwarfed by the potential risks and volatility that a new currency brings."
Picking up on some of the comments below the line in reference to a comment above on whether Spain would have any objections to an independent Scotland joining the European Union: As several commenters have noted and was discussed on yesterday's Reality Check, the Spanish government has denied it would have any objection to an independent Scotland being a member of the EU.
For anyone wishing to read more on this, some links worth flagging up that have been sent in below the line:
KingDoug responding to Jo Murkens of the LSE's email points us to Stephen Noon, a post-graduate in EU Law who authored the last SNP manifesto and two posts from him:
http://stephennoon.blogspot.com/2012/01/fair-shares.html
http://stephennoon.blogspot.com/2011/12/20-years-out-of-date.html
Beor says this post by Aiden O'Neill QC responds to Jo Murkens as well: http://eutopialaw.com/2011/11/14/685/
Thank you again for the comments and links that have been coming in all day. Here's an overview of some of the discussion of the question so far:
maisiedotts highlights this piece in the Scotsman from Gavin McCrone looking at Salmond's comments on sticking with sterling and then joining the euro at an appropriate time. He focuses on the concept of an independent Scotland issuing its own currency. He concludes:
The lesson I draw from this is that an independent Scotland could not continue to use sterling as if nothing had changed. A lender of last resort would be required to deal with speculative pressures and possible crises. This would require a Scottish Central Bank and it should issue its own currency, which could be pegged to sterling. If a Scottish Government did not always want to accept policies decided for the rest of the UK and objected to oversight of its fiscal policy by authorities in London, its exchange rate could be altered. The possibility that this might happen, however, could affect the price and rate of interest of Scottish Government bonds.
All of this just goes to show that the declared option of staying with sterling would be far from a simple matter for an independent Scotland, and how that is dealt with would have major implications for the economy. There is a good deal to be considered and explained before we vote in the referendum.
sneekyboy has taken an in-depth look at four options they see for currency in an independent country:
1) Keep the Pound Sterling in a common monetary zone.
2) Start up our own currency "Pound Scots" and peg it to the Pound Sterling (essentially the same as #1 but without consent of the other user. Definition of 'Pegging' - A method of stabilising a country's currency by fixing its exchange rate to that of another country).
3) Start up our own currency "Pound Scots" and let it float on the foreign exchange market.
4) Join the Euro... Although you need to be in the ERM2 for 2 years first so #1, #2 or #3 would be needed first in any case.
calmeilles responds:
Good list of the plausible options. But there are some caveats.
1 would require agreement with Westminster and it really does seem unlikely that a chancellor would give up any part of the political control over the Bank of England so both 1 and 2 would mean Scotland not having control over its money supply or interest rates.
1 and 2 are incompatible with 4 so a plan to eventually join the Euro more or less requires 3 at some point.
4 isn't just a choice, it is a requirement of the acquis communautaire for new members. That raises the question of whether Scotland would be treated as a new accession state or if some special negotiations would finesse its membership on special terms. But in either case it seems improbable that the existing members would allow an independent Scotland the wide range of derogations historically enjoyed by the UK.
RClayton adds:
Sneekyboys helpful postings set out the options and issues.
- Yes Scotland could use Sterling either as Kosovo does or through a currency union;
- Using someone else's currency without having a currency union has risks; and if you used different notes these include the risk that this would actually be treated by the world at large as a different currency which was exchanged at a discount or premiium to sterling.
- If you have a currency union, there would need to be agreements with the central bank about fiscal and economic policy: see currency area theory and the recent events in the Euro Zone.
- The question therefore is not so much whether an independent Scotland could use Sterling; but the extent to which use of Sterling (or equally the Euro) is a risk (if outside a currency union) or compromises independence (if in a currency Union.
in a currency Union (whether with Sterling or the Euro) , Scotland would in effect be as independent as Greece is,. For those who favour indpendence, this is no doubt a greater freedom than continuing with the United Kingdom, The currency does not seem decisive against other reasons for and against independence
HandandShrimp suggests that there are short and long-term options to be considered:
Of course Scotland could use Sterling and certainly in the short term that would be the only practical course. In the medium term we would need to determine what best suited our economy. The pundits are forecasting low interest rates for years to come. Low interest rates have traditionally better suited the Scottish economy which has not had the over-heat and property bubbles of the South.
There have been cries of Aha! (a la Alan Partridge I think) that if we use Sterling that is not real indpendence but If interest rates stay low I cannot see currency impacting on political independence. On a day to day basis it would be a non-issue. If for some unforeseen reason the BoE needed to raise interest rates dramatically then yes, Scotland would probably drop out of Sterling and either float its own currency or consider the Euro. Contingency plans would always need to be on the Risk Register. Fortuntaely the BofE is independent of the Treasury and monetarist policies are no longer the port of first call for Government.
The only real debate is whether the arrangement is formal or informal.
If the Euro survives the next couple of years I think in the long term we will all be in the Euro.
macart adds
Some people claim that the BoE controlling monetary policy isn't really independence and I can see why they may think that. However, real independence comes from control of resource, taxation and spend.
I'm quite comfortable with the idea of Sterling and the BoE. It's a strong tradable international currency and the chaps there seem to know what they're doing most of the time. Perhaps in a few years once that oil fund is set up and we get a nice little nest egg going we may even consider our own currency, but until then its good business and a show of good relations to keep faith with a currency and bank so well thought of.