13 thoughts on “Should an independent Scotland keep the pound?”

  1. Posted 14/02/2014 at 10:36 | Permalink

    This is all very well, but it doesn’t address the issue of why the rest of the UK should or would agree to such an arrangement. Were Scotland to secede, the government of the rest of the UK would not be obliged to act in the interests of Scotland – it would, rightly, put its own interests first.

  2. Posted 14/02/2014 at 14:37 | Permalink

    I’m not sure we should assume that a newly-independent Scotland would necessarily be a member of the European Union. It might be obliged to ‘apply’ for membership, and there might be a waiting period; or it might prefer not to be a member of the European Union (as might indeed be true of the ‘rest of the UK’ too within a few years).

  3. Posted 16/02/2014 at 08:00 | Permalink

    The Euro could work. It would depend on how the terms of trade worked out for an independent Scotland. The Euro works fine for net exporting countries like Germany and the Netherlands. Ireland too is now a net exporter and they are now starting to recover reasonably well from their recent economic turmoil.

    But, the Euro does not work for a net importer. It would be a disaster for the UK as a whole now. Money drains from a net importer’s economy to pay for those imports. This has to be replenished by the Government running a budget deficit, or the economy slumps badly. Incidentally this is a point that both Ed Balls and George Osborne seem blissfully unaware of. The government then needs to sell treasury securities , internationally, to recycle the funds back into the domestic economy.

    There’s nothing wrong with doing this, providing there are international buyers for those securities. There seems to be plenty of buyers for UK bonds. Of course, Scotland would have to make a judgement about that.

    But they wouldn’t have that option with the Euro. Budget deficits of any size are a big no-no. If they got it wrong there would be no turning back and they could end up trapped in an economic abyss like Greece and Spain.

  4. Posted 16/02/2014 at 19:15 | Permalink

    The President of the European Commission has today (Sunday 16th February) said that if Scotland were to vote for independence, it would not automatically become a member-state of the European Union. He added that it would be difficult and might be impossible for Scotland to join. I think we can take his comments with a huge pinch of salt (a salt mountain?). The idea that the European Union would deliberately choose to reduce the size of its ’empire’ is not credible. On 14th February I suggested that an independent Scotland might choose not to be a member of the EU. I now suggest that there may be parts of other current EU member-states that would consider ‘independence’ precisely in order to leave the EU.

  5. Posted 16/02/2014 at 22:55 | Permalink

    HJ – the value of the arrangement that Larry describes is that the English do not have to agree to it. The Scots can just do it

  6. Posted 17/02/2014 at 08:11 | Permalink

    Philip – That’s not correct if a seceded Scotland also wanted to stay in, or join, the EU, since EU rules require a central bank – a lender of last resort. This article admits to that problem then unsuccessfully tries to wave it away: “A problem remains only if there is a sudden shortage of reserves due to a banking panic. The possibility of panic justifies having a central bank only if it can be shown that panics are more frequent and severe in countries without central banking than in countries with central banking.” This is obvious nonsense because it is not a question of whether a ‘panic’ would be more likely or severe in a country without central banking, rather an issue of what you do if there is one (unless it can be demonstrated that the absence of central banking removes the possibility altogether). I say this as someone who is inclined to think that we might be better off without any central banks – I am just describing the current way banking systems work. Under what is suggested here, it’s pretty obvious that Scottish banks would move over the border.

  7. Posted 17/02/2014 at 10:19 | Permalink

    HJ – I was not aware that EU rules required a central bank that also provides LOLR facilities (is LOLR a requirement too?). Larry (and George Selgin) have done a lot of work on whether the system is more stable with or without central banks. However, your last sentence does reveal another weakness in the plan which I have also frequently mentioned. Even without that EU rule relating to central banks, EU rules do allow banking through branching and, as you say, they would move over the border and branch in Scotland (though be regulated by the Bank of England). Of course, the whole issue of EU membership has now been opened! Presumably, Montenegro will have to give up its arrangement if it joins the EU if an LOLR is required in each country – that is an odd requirement I must say.

  8. Posted 17/02/2014 at 11:12 | Permalink

    Philip – I believe that I am correct in my assertion not because I have personal knowledge of EU rules but because it has been stated recently by several well-informed economists, including Andrew Lilico.

  9. Posted 07/07/2014 at 15:33 | Permalink

    With regards to joining the Euro/Eurozone, you may find the following link useful.

    You will note that under the “who manages” paragraph it refers to the ECB and the national central banks of the Member States. It has long been the case that an central bank is required for membership of the EU and euro. Although Bulgaria is mentioned in the article as using the euro independently, it does still have its own central bank.

    George Osbourne’s statement that:
    “London would not wish to enter a monetary union with an independent Scotland that was free to run up excessive sovereign debts for which the (rest of the) UK might feel the need to assume responsibility.”
    Is somewhat strange given that a monetary union has two aspects, economic and legal. The legal aspect requires the drafting of an agreement on monetary policy and other issues such as public debt, borrowing in order not to negatively impact the economy of the other monetary union countries – in this case mostly Wales and Northern Ireland.

    Mark Carney, in his speech, available here:

    Alluded to this and in further speeches made it clear that a proper currency union would/could result in Scotland having to cede sovereignty, see link below:

  10. Posted 08/08/2014 at 14:55 | Permalink

    Sry for my bad english: I just ordered something online for 500,- in pound sterling from Scotland an the transaction costs (from my bank in continental Europe) are more than 10 percent!

    I hope you join the euro solution, because in a globalized world, where people can so easily order online products from china – I wish you good luck! (the chinese don´t have the product I want in the quality I want)

  11. Posted 14/09/2014 at 09:28 | Permalink

    After all this discussion my only comment is, will the English, Welsh and Northern Irish be given a referendum on wether we will let them have the pound OR any monies to prop them up during the transition. I vote NO.

  12. Posted 16/09/2014 at 10:43 | Permalink

    The main 3 parties have said very clearly that they will not allow Scotland to keep the pound in a currency union, because they don’t want the rest of the UK pick up the pieces and bail out Scotland if their experiment fails. They have also said there is no way back. After all the hysteria from the Yes campaign I think a lot of us will be glad to see the back of them.

  13. Posted 16/09/2014 at 12:36 | Permalink

    The Scottish people need to realise that the £ is the IOU of the UK State issued via the Bank of England. As things stand they have an 8% share in that because they are part of the UK. If the Scottish people decide to leave they can take their share, if they wish, which would include the assets and the liabilities of the BoE.

    But they can’t take a share of the ability of the BoE to write IOUs. IOUs have to be written by a single entity. I can’t write IOUs on behalf of anyone else. Nor they for me. The Scots, if independent, couldn’t write IOUs for the rUK nor vice versa.

    That doesn’t mean the Scots can’t use BoE IOUs. But, they could not issue them. They could use the Pound, the Euro, or the US$. Whatever they like. But they would not be even part issuers of any of these currencies.

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