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If Scotland Wants Real Independence It Must Have its Own Currency

28/03/2014 11:40 GMT | Updated 27/05/2014 10:59 BST

The more we learn about what an independent Scotland would look like, the less independent it seems. That is the core of the problem facing Alex Salmond and the nationalists. And nowhere is that more true than on the currency question.

The Nationalists have been travelling the road towards independence, and that is the question they have now reached.

There are four different routes they could take. One path points towards the euro. One to a new Scottish currency which is allowed to float freely. One to a new Scottish currency pegged to sterling. And the last towards sterling.

Which route to take was the question which Salmond entrusted to an august body called the Fiscal Commission Working Group. For some time now, we have waited for the results of their deliberations. But the truth is that each path leads to a Scotland which is less, not more, independent.

Consider each in turn.

The path towards the euro shrivels up when you consider the next steps. To join, it would have to be a member of the European Union. But as European Commission President Jose Manuel Barroso said, that would be difficult to achieve in the short term.

And even if Scotland did use the euro, it would mean it was subject to interest rates set not for the 5 million people of Scotland, but for the 333 million people of the eurozone. The Scottish economy would figure less in the calculations of Mario Draghi and his successors than those of Mark Carney and his, in London: in short, it would make Scotland less independent, not more.

What about the second option - a new independent Scottish currency? That after all seems to hold the prospect of a more independent Scotland. But there is a reason why this isn't Alex Salmond's first choice: Scotland currently has no credit rating.

That matters. Currently Scotland's national debt is only a part of the UK's national debt. The UK has a good credit rating so it can borrow at decent rate. But an independent Scotland would be an unknown entity, with no credit history as an independent country. That would mean lenders would charge more to lend to an independent Scotland than they do to lend to the UK as a whole. Scottish taxpayers would pay a higher rate of interest than they do at the moment. And those higher interest rates would mean that mortgage payers would pay more per month. Some estimate that Scotland's interest rate would be up to 1.65% higher for ten year debt. Overnight, Scotland's mortgage payers would have less money in their wallets to spend.

The third path points towards an independent Scottish currency pegged to sterling. This seems to give Scotland the best of both worlds - the independence of its own currency and the stability of sterling.

But again, there are reasons why Alex Salmond isn't keen on this route either. Currently the Monetary Policy Committee sets interest rates with the people of Scotland in mind. If Scotland were an independent country, it would not need to even consider about what is best for Scotland. That sounds like a loss of independence to me. The same goes for decisions on issues like quantitative easing, the property market, and bank regulation - over all of which the Bank of England has some oversight powers. On the day Scotland became independent and pegged its new currency to the pound, the Bank's duty to take Scots into account in all these areas would end.

This leaves only the option of joining the pound, Alex Salmond's preferred choice.

But again, an independent Scotland using the pound would not be more independent. In fact, it would be considerably less independent.

To see why, imagine this scenario. Scotland votes to become independent, and some years down the line, there is a crisis in the Scottish economy. A large company, one that is vital to Scotland's economy both by virtue of its size and its function, goes bust. It is so big and so vital that it must be bailed out by the lender of last resort. For an independent Scotland, that means the Bank of England. Once the bailout had taken place, the government of the rest of the UK would effectively own the assets of its neighbour, Scotland. Conversely, a large part of the economy of an independent Scotland would be owned by taxpayers in England, Wales, and Northern Ireland.

An independent Scotland would no more like this scenario than Britain would like any of its flagship national private companies like John Lewis or Alliance Boots to be owned by the French government. But worst of all for the nationalists, it would reveal the underlying truth: that an independent Scotland was in fact highly dependent on the rest of the UK.

This scenario, of course, is exactly what happened to the UK with the Royal Bank of Scotland. During the crisis, RBS' balance sheet swelled to 2.4 trillion pounds. This was bigger than the UK economy, and fifteen times bigger than the Scottish economy. The UK government bailed the bank out at a cost of 20 billion pounds.

Worse still, this precisely reflects the SNP's policy. Last November, the party confirmed that in their vision of an independent Scotland, the Bank of England would be the lender of last resort. The SNP's vision of an independent Scotland with the pound is in fact a vision of a Scotland that is deeply dependent on the rest of the UK.

But there is a more immediate stumbling block along the sterling route. Let's agree that in the hypothetical scenario that Ireland or France were to ask to use the pound, it would be a decision for the UK government. An independent Scotland would be in the same situation. Alex Salmond has asked, and the leaderships of the Conservative, Labour and Liberal Democrat parties, have said no.

And that is why the Fiscal Commission Working Group, who have to recommend what an independent Scotland's currency should be, were in such a dilemma.

This week, they decided to simply ignore the fact that the option to join the pound has been taken off the table. They recommended Scotland use it.

Dr Azeem Ibrahim is the Executive Chairman of the Scotland Institute and an International Security Lecturer at the University of Chicago.