THE BLOG

Uncertainty a Major Currency in Scottish Independence Debate

24/04/2013 11:06 BST | Updated 23/06/2013 10:12 BST

The prospect of Scottish independence is a very real and highly contentious issue. The campaigns 'for' and 'against' an independent Scotland began in earnest last year. However, the publication of a paper by HM Treasury this week, outlining the reasons why we are 'Better Off Together', has reignited the discussion about how the finances and, in particular, the currency constraints of a Scotland separated from the rest of the UK would perform.

The essential argument in this latest round of debate is what happens to the pound if Scotland votes to break-away from the Union?

The 'Yes' campaign wants to keep the pound for obvious reasons. Sterling is, for all its recent travails as a result of the economic crisis, still viewed as one of the world's major currencies and has been used by investors as a haven away from the European debt crisis. Other currencies with reserve status include the US dollar and the Japanese yen, but nobody serious is talking about the possibility of a Scottish tie up with those two.

Setting up an alternative new currency, unless you absolutely need to, comes at a huge cost. Moreover, unless there is a dramatic sea change in the trade ties of companies north of the border, their main partners will remain England, Wales and Northern Ireland. A barrier to entry into these markets, such as different currency, provides absolutely no benefit to Scottish businesses.

There is also no guarantee of the resilience of any new 'Scottish pound'. The argument that 'Yes' campaigners make is that the balance of payments of an independent Scotland would be a lot better than that of the rest of the UK, given its heavily export-centric economy of whiskey, oil and other popular international goods. This is true but an AAA, or even AA rating and security in the debt markets are far from assured because of the country's financial services system.

We all, as UK taxpayers, have bailed out large Scottish banks to the tune of billions of pounds in this financial crisis. Taking the profits of the North Sea oil fields as a major advantage has to come with a major caveat that the debt of those same banks is also transferred to the balance sheet of the new independent Scottish government. This will impact on any credit rating an independent Scotland is assigned.

There are fears that Scotland would have to adopt the euro in order to join the EU but then again the EU is 27 countries with only 17 using the euro at the moment. Suggestions that they would have to join the single currency club, can be seen as scaremongering from the 'No' camp. However, in truth the prospect of joining an ailing Eurozone can hardly be appealing to even the most committed independence campaigner - such is the extent of the uncertainty in the region.

The truth is that a new national currency would be an entirely unappealing prospect, but the options outside of that scenario are hardly appealing either. It's going to be one of the key issues that the people of Scotland will have to think hard about, before the big vote in 2014.