The Government have published the second paper in the Scotland analysis programme series to inform the debate on Scotland’s future within the United Kingdom.
“Scotland analysis: Currency and monetary policy” analyses the characteristics of the current arrangements of the UK as a full monetary, fiscal and political union; and investigates the advantages and disadvantages of the potential currency options open to an independent Scotland.
The analysis sets out that the UK is one of the most successful monetary, fiscal and political unions in history, and the current arrangements bring significant benefits to Scotland. Taxation, spending, monetary policy and financial stability policy are co-ordinated across the whole UK to the benefit of all parts of the UK.
In the event of independence, Scotland would be faced with very difficult choices about its currency and monetary arrangements.
Entering a formal sterling currency union with the continuing UK would be very different from a continuation of the current arrangements. It would require detailed negotiations with the continuing UK and any agreement would be likely to involve significant constraints on the tax and spending plans of an independent Scotland. But even with such constraints in place, the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear.
If a formal currency union could be agreed, it could be seen as unstable—in particular given that an independent Scotland as a member of the European Union could be obliged to commit to adopt the euro. This could lead to speculative activity in financial markets that would put immediate pressure on the arrangements.
Other options—such as joining the euro, using the pound without the UK’s formal agreement, or introducing a new Scottish currency—would involve their own costs, constraints and risks.
The analysis concludes that continuing membership of the UK is in the best economic interests of Scotland and the rest of the UK. None of the options under independence would serve Scotland as well as the current arrangements within the United Kingdom.
This paper follows the independent expert legal opinion published by the Government alongside the paper “Scotland Analysis: Devolution and the Implications of Scottish Independence” on Monday 11 February. This concluded that, in the event of a vote for independence, Scotland would become a “successor state” and would be required to create a new set of domestic and international arrangements.
Future papers from the Scotland analysis programme will be published over the course of 2013 and 2014 to ensure that people in Scotland have access to the facts and information ahead of the referendum.