Until very recently, next week’s historic referendum on Scottish independence barely made the news, probably because many considered separation from the United Kingdom (U.K.) after more than 300 years a long shot. Financial markets too were so confident that independence wouldn’t happen, the issue barely registered. Then a few weeks ago, stories started to appear that showed a secession vote gaining traction. And to much surprise, a poll last weekend showed the pro-independence camp actually in the lead.
While this vote has far-reaching implications culturally and economically, our focus is on the currency implications of an independent Scotland. There are essentially three possible options that analysts are debating:
- Scotland stays with British pounds: Economically this makes the most sense, particularly in the short run. Sterling has the advantage of acceptance by the market, with access to the Bank of England’s “lender of last resort” facilities. The problem here is that all British political parties have said they will not allow an independent Scotland to remain in a “sterling zone”.
- Scotland issues its own currency: It would be very volatile initially; markets would need time to sort out the value and acceptance of a Scottish currency. Properly managed, however, it could work, but would force a much greater fiscal discipline than Scotland has exhibited lately.
- It joins the eurozone: This would be the worst option of all. Scotland’s economy is not in sync with most of the European economies (but then again, many other eurozone countries are equally unsuited). No one who has watched the horrors of the eurozone over the last five years would think this is a good alternative.
At the moment, this is all just speculation. There is still too much uncertainty over which way the vote will go, to judge whether or not currency will be a big issue.
My View: Despite the cultural significance, I think Scotland would be better served by staying within the U.K.
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