Scotland’s nationalists may have to add the creation of a central bank and a currency to their plan to build a new country, if they win next week’s independence referendum.
The Plan A of Alex Salmond’s Scottish National Party has long been for an independent Scotland to share the Bank of England with the rest of the United Kingdom, along with the pound as a joint currency.
Britain’s three big political parties say they are not bluffing when they rule out such a currency union.
Britain’s three big political parties rule out currency union
The question of what money an independent Scotland would use is the biggest point of contention ahead of the vote on September 18, which opinion polls show is too close to call.
Unless British leaders do a U-turn and agree to a currency union after a vote for secession, Scotland would face the choice of adopting the pound unilaterally or creating a currency run by a central bank of its own.
If it took the latter route, some economists say, the oil-producing country could struggle to build up sufficient reserves despite Salmond’s hopes of creating a Norwegian-style sovereign wealth fund. Using the pound without an agreement with the rest of the United Kingdom would raise major questions about the ability of Scotland to provide support for its banks and steer its economy.
A former top European Union official warned last week that it would also kill Scotland’s chances of the joining the EU, something which is central to Salmond’s independence plan.
Olli Rehn, monetary affairs commissioner in Brussels until July, said Scotland would have to commit to joining the eurozone as a condition for accession to the broader EU, something he said the country would be unable to do if it did not have a monetary authority of its own. Salmond has said an independent Scotland would not join the euro.The British government seized on Rehn’s comments to renew its attack on the nationalists’ proposals.
Rehn’s view has been challenged. Andrew Hughes Hallett, a member of the Scottish government’s council of economic advisers, said Scotland could set up an embryonic central bank of its own and argue that it was outsourcing its functions to the Bank of England, even if there were no currency union.
“You have to have the paraphernalia of a central bank in place so you can signal that you can go into the euro, should you choose to do so,” said Hughes Hallett, who teaches economics at George Mason University in the United States and St Andrews University in Scotland.
“But there is no requirement that you go into the euro.”
He pointed to EU member Sweden which has so far not been required to make good on its commitment to join the eurozone.
Such arguments may one day be heard in the European Court of Justice and they would probably run into opposition from within the bloc, not least from EU member Spain. Madrid is worried that a smooth Scottish accession would embolden Catalan nationalists.
A simpler option, many economists say, is to create a new Scottish currency under a new central bank, giving the new nation more freedom to pursue its own policies.
The task of creating a central bank itself is not a big problem. The Edinburgh government has already proposed the creation of a Scottish Monetary Institute to oversee the banking sector and collect data.
Institutions such as the International Monetary Fund would be able to help. Croatia and Slovakia, which were born from bigger nations, set up central banks smoothly.