The wages of Scottish independence – the currency problem

The most problematic  decision for an independent Scotland is the currency.  There are three choices: to keep using the pound, join the Euro or create their own currency.   If they choose the pound or Euro they will not be truly independent because they will have to relinquish control over   a large slice of Scotland’s fiscal policy.  True independence
would require the creation of a new currency.

If Scotland chooses to stay with the pound, as things stand  they would l be subject to the
decisions  about interest rates made by the Bank of England  (BoE). It is improbable that the Westminster  Government  would change the present regime to suit an independent Scotland, and any change, for example, returning control  of monetary policy to the Government from the BoE’s Monetary Policy Committee (MPC) or the alteration of the MPC’s remit,  would be made to suit the UK Government not Scotland.

The MPC’s  present remit is to keep inflation under control around a 2% target:

“ The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government’s inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.”


The  MPC  has ignored that remit since the recession began in earnest in  2008, leaving
inflation to look after itself by first reducing Bank Rate  to an all-time low of half a per cent and then keeping it there.   Ostensibly this has been done because of fears of a severe shrinkage in the UK  money supply. In addition, to boost the money supply the BoE has engaged in what is politely known as Quantitative Easing (QE)  and impolitely known as printing (virtual) money.   A cynic might say that the reason the MPC and the BoE have behaved in this fashion is to covertly do the Government’s bidding, namely,  (1) preventing
a  wholesale collapse of house prices through massive defaults caused by keeping  Bank
Rate at a sensible, much higher, level and (2) reducing  public and private debt by inflating it away.  Whatever the truth, the management of the economy since 2008 illustrates an important truth: whoever controls the currency to a very great extent controls the politics of a country.

If  an independent  Scotland opted to keep the pound, when shove comes to push they would have to accept whatever Westminster decided, not only  from the direct
management of the economy through MPC  decisions and strategies such as QE, but also
the effects of the general fiscal regime decided by Westminster which would affect the value of the currency.   This would include the tax regime in the UK and Westminster’s  attitude towards debt, especially private debt. It is not inconceivable that credit controls such as those which existed before Thatcher removed them in the 1980s could be re-imposed,  for example restrictions on bank loans and mortgages.

There are also dangers  for the rest of the UK if an independent Scotland is  tied to the pound. One of two arrangements would exist:  either no Scots  say in how the Westminster Government acts  (probable)  or  some arrangement by which  Scotland would have
a formal say in the setting  of interest rates (improbable). Whichever it was you can bet the  Scots Numpty Party (SNP) would complain  that interest rates are set to benefit England.
That would create a danger  that  politicians in Westminster would give some
ground to them even if there was no reason to do so.  If you doubt this reflect on the fact that David Cameron has  not laid down any conditions for Scottish independence merely said that he would campaign against it. (  If the Scots do  vote for independence , it is not probable  that negotiations  between the SNP and Westminster would  result in the Coalition Government giving a great deal away to the SNP in the vain hope they can cobble together a deal which  allows them to pretend the UK as presently territorially  constituted still exists in some form. This is an issue which needs to be aired in public as often as posssible.

More fundamentally,  the division of a currency between two supposedly sovereign states would create uncertainty in the  money markets  because it would not be clear who was pulling the strings or  what would happen if  Scotland got into the sort of economic trouble
Greece is currently experiencing.  The danger for the UK would be that Scotland would get into such a financial mess that the rest of the UK (in reality England as both Wales and Northern Ireland are economic basket-cases)  would come under immense pressure to bail Scotland out, exactly the predicament the richer  EU countries have found themselves in over the Euro turmoil. Even if  Scotland did not suffer a Greek-style economic collapse;
if it turned out to be church-mouse poor  rather than the  oil-tax El Dorado  which fills the dreams of SNP members,  that would have a serious  effect on the behaviour of the currency,  because the money markets would  look at the combined economic performance of the UK and Scotland.  That would mean UK Government borrowing would cost more.  It would also probably mean higher Bank Rate than would otherwise be the case or higher inflation in the BoE kept rates low despite what the economic indicators were saying.

The Euro poses the same problems as the retention of the pound writ large.  Whether  the Euro will survive in its present form or even at all is uncertain. But even if it does manage to overcome the present difficulties which besiege the currency, it is dubious whether the richer Euro members, especially Germany, would welcome into the Euro fold another small country with a dangerously high dependence on public spending, much of which
would vanish at independence.  However,  if  Scotland did gain membership of the
Euro,  its government would have absolutely no effect on  how the currency was managed  and would be much more likely, because of the number and diversity of the Euro members,   to find itself trapped by interest rates and the value of a currency which was not suited to Scotland’s  needs than they would have been  if they kept the pound ,
a stable, important currency which has been shared between  Scotland and the rest of the UK for 300 years.  The present mess that Ireland, Portugal and Greece find themselves in should be warning enough of these dangers.

The other problem with being in the Euro is the likelihood of ever more invasive powers over  economic decisions such as oversight of banks being  given to the  Eurozone members .  Even as things stand, in theory at least there are severe restrictions on the amount of public debt a Eurozone member may run up.  The current Euro crisis is bringing ever louder calls for much more stringent controls over what Euro members can
do and meaningful enforcement of Euro regulations.  Scotland would have far less fiscal freedom if they joined the Euro than if they retained the pound.

That leaves the creation of an entirely new currency.  This would give Scotland fiscal freedom, but would come with its own  vast problems.  Getting international credibility for a currency is difficult for a large country with vast  natural resources (think of Russia after the dismemberment of the Soviet Union); it is much more difficult for a small country (Scotland has a population of around 5 million) even one with still substantial oil reserves.

An Independent Scotland  would not seem an attractive economic proposition to foreigners.  Around 60% of current Scottish  GDP is derived from  public expenditure and this is projected to rise to nearly 70% by 2012 (  Much of the public expenditure is dependent on a subsidy from England (the difference in per capita Treasury funding alone means  Scotland takes  around £8,000 billion from England  each year – ( and the likely tax revenues from oil and gas  in Scottish waters  (some of the oil and most of the gas is in English waters)  are likely over a the medium term to be considerably less than the subsidy  received from England.  (
Moreover,  the amount of oil extracted  in the future will depend on the price and likely tax regime and the amount of oil will decline steadily even if the price remains high.

Foreigners would also be concerned at the very  narrow economic base of Scotland’s economy.  Of the forty odd percent of  the economy which is not publicly funded, a substantial  part  derives from  the oil and whisky industries (   Moreover, much of  Scotland’s private enterprise, especially the oil firms and  rather humiliatingly the whiskey producers, is foreign owned so that the profits  emigrate .

There is also a lack of  entrepreneurism in Scotland so the private sector is unlikely to swell:

“Scotland has the lowest ratio of businesses per head of population in the UK, according to figures published by the Department for Business Innovation and Skills (BIS). At the  outset of 2010, Scotland had 672 private sector enterprises per 10,000 adults, while England had 922, Northern Ireland 860 and Wales 783.” (

An independent Scotland would also start with a massive national debt.  Here is Bill Jamieson of the Scotsman dealing with the UK national debt:

“What of deficit and debt apportionment? Both in the immediate term and in the final settlement, the SNP has called for more borrowing powers. But how much more borrowing will be sought on top of Scotland’s share of UK debt? To give a proximate idea of what we face, let’s assume Scotland’s debt share is similar to that of her share of UK GDP – circa
10 per cent. By 2015-16, when a referendum vote may be held, UK net debt is projected at £1,359 billion (69 per cent of GDP) and the annual interest charge would have risen to £67bn. Scotland’s share would be £136bn, and £6.8bn respectively.” (

That would not be the full debt  Scotland would have to take on. There would also be a proportionate  Scottish share of the funding of UK public sector pensions up to the advent of  independence;  either a proportionate share of the UK’s PPP and PFI  obligations at the time of independence or full responsibility for all PPP and PFI contracts in Scotland plus any other debt accrued for  Scottish projects,  both at local and national level,  and other UK  debt  up to the time of independence.  It is dubious whether foreign investors or the money markets would see an independent Scottish currency as a safe bet with those massive starting obligations.

More generally,  companies operating in Scotland now have the assurance that they are operating within a country  which is controlled by   a much larger and richer national entity namely England.  That is particularly important for the oil industry who need safe  seas to operate in. They would have no such assurance if Scotland was independent.

Finally, there is the thorny question of the Scottish banking system.   It is not merely that the British taxpayer (in reality the English tax payer because the Celtic Fringe take vastly  more out of the UK tax pot than they put in) has put  directly “The Government has pumped around £45 billion into RBS and £20 billion into Lloyds – holding stakes of 84% and 41% respectively – although the taxpayer is currently sitting on almost £20 billion in paper losses on the holdings.” (  Those are horrific figures for an economy the size of Scotland (£140  billion approx – see below) . However, that is only the tip of the taxpayer cost iceberg.   Part at least of the ongoing costs of  the recession and the burgeoning UK national debt  is down to the reckless behaviour of  financial institutions and the two Scottish banks RBS and HBOS were by far the greatest contributors to the  need  for taxpayer support and the ravaging of value by  feeding inflation through QE.

The size of the damage done can be seen from the Jamieson quote above: if the UK national debt reaches £1.4 trillion by 2015 that will mean the national debt will have nearly trebled (excluding inflation) since 2008 when it was around £500 billion (  Even worse, the official national debt figure does not include the costs of bailing out the banks or  the full cost of PPP and PFI expenditure, debt which  was kept off the official national
debt by Gordon Brown’s off-the-books Enron style accounting.  The official national debt figure with all identifiable  costs included (the unadjusted measure of public sector net debt ) was £2252.9 billion  or 148.9 per cent as at May 2011. (

Exactly how Scotland would be able to sustain an independent currency  against the background of  the loss of English subsidy, the narrowness of the Scottish economy, the over-dependence on the  public sector, the huge national debt  Scotland would start with and the  awful mess of their banking system is to put it mildly difficult to see.  That economic  background also  makes the idea of Scotland using either the pound or Euro  very unattractive, because not only would it drag down the credibility of the currency (especially in the pound’s case),  but the likelihood of a either England or the Eurozone having to bail-out Scotland with vast amounts of money looms very large.

All those obligations and difficulties  have to be set against the small size of the
Scottish economy. No official GDP measure is produced but the ONS 2009  figure for Scottish Gross  Value Added  (GAV),  which is GDP  without  taxes (less subsides) on products,  was  £102,552 billion  (
The GDP today is in the region of £130-140 billion.

Whatever currency choice Scotland made one thing is certain:  borrowing  by Scotland’s government, both central and local,  and any other  public body in Scotland would become much more expensive.   The UK can borrow at a  rate which is moderate: an independent Scotland would, because of its precarious economic situation, have to borrow at considerably  more than the UK rate, if things go really wrong  at the extortionate  rates the Greek Government is having to pay despite being part of the Euro.

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10 Responses to The wages of Scottish independence – the currency problem

  1. Perhaps you’ll disagree but, and it’s a minor point, though not less important for that, the ‘U’K will cease to exist when we give the Scotch their independence. Wales will be in the same relationship with England as before 1707 but what of Northern Ireland? I certainly don’t want England as a distinct political entity burdened with that troublesome place and people. If Scotland goes Northern Ireland must go too, and we should be making that point.

    People are not thinking this through at all. It isn’t simply a case of ‘U’K one day and a ‘U’K light with an independent Scotland, unencumbered with any of the debts that Scotch politicians and bankers have built up and loaded with far more than its fair share of the assets, the next, whatever the absurd Mr Salmond may say. The Scotch can decide what they will; they’ll have their independence when we are satisfied that it isn’t going to cost us our great, great grandchildren’s inheritance.

    An excellent series of articles by the way.

    • Thanks. I will be writing further articles in the same series,. These will include

      The Scottish national debt

      Immigration and Scotland

      The EU and Scotland


      Infrastructure, partcularly transport

      Foreign relations and security

      I may join some of these subjects together

  2. The immigration issue is another that hasn’t been thought through. The Scotch don’t seem to see that they cannot have the unrestricted access to England they have hitherto enjoyed and an independent immigration policy. Salmond has also said that if they find that independence isn’t what they thought it would be they can opt back into the union.

    I term that peculiarly distorted tartan-tinted view McStigmatism.

  3. Pingback: The complete “Wages of Scottish independence” | England calling

  4. Pingback: The complete “Wages of Scottish independence” | England calling

  5. Pingback: The complete “Wages of Scottish indpendence” « Living In A Madhouse

  6. Pingback: The complete “The wages of Scottish Independence” « Living In A Madhouse

  7. Eric Hunter says:

    Wish you’d stop calling them Scotch….that aside a very good read and thanks for that.

  8. Pingback: All you could ever want to know about Scottish independence | England calling

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