Securing
the pound in
your pocket
February 2014
Securing the pound in your pocket
The argument about whether Scotland could keep the pound if we left the UK
has been all over the media. Impartial experts have concluded that it is highly
unlikely an agreement could be reached on a Eurozone-style currency union
and the Governor of the Bank of England recently explained the difficulties in
such an arrangement. This consensus among the experts follows the clear view
of the UK decision makers who uniformly agree that such a deal would not be
in the UK’s or Scotland’s interest. This short report explains what it all means.
No economic decision is more important for Scotland than the currency we use.
Today, as an integral part of the UK, Scotland uses the pound. We’ve done so for
hundreds of years, and people value the strength and stability it offers.
But what if Scotland became a separate, independent state? Could we keep
using the pound then – as the SNP claim – or would we need to have a different
currency of our own? What would that mean for jobs, trade, interest rates and
our financial security?
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Contents
Part 1: The strength of the UK pound
4
Part 2: The end of our shared currency
9
Part 3: Can’t we just use the pound anyway?
12
Part 4: Could Scotland join the euro instead?
13
Part 5: Could we have a new Scottish currency?
15
Part 6: Is there a plan B?
17
Annex: Fact checking the SNP’s currency claims
18
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3
Part 1: The strength of the UK pound
Today, as part of the UK, we use the UK pound as
our currency. We have used the pound for hundreds
of years. One of the things the Scots successfully
negotiated with the rest of the UK in the 18th century
was that we would have a single common currency.
It’s important to understand what that means.
First of all, it makes trade much easier. No one has
to worry about exchange rates, and whether they
might go up or down. This matters for ordinary
people, getting our wages and salaries, buying the
things we need for our families and daily lives. We
take for granted that we can use the pound, which is
a stable, respected and trusted means of exchange.
We would all suffer if we lost it.
And it matters a great deal for Scottish companies
too, as most of Scotland’s trade is with the rest of the
UK. Losing the pound would disrupt that, and be bad
for jobs and prosperity.
Scotland’s trade
Scottish exports by main destination, nominal
terms (2002-2011)
80
Rest of World
European Union
Rest of UK
70
The value of the pound
Dr Angus Armstrong and Dr Monique Ebell,
National Institute of Economic and Social Research
“Governments since Charles II have not defaulted
on debt or eroded its real value through excessive
and unexpected inflation. This track record over
such a long time period is unique. Sterling is
perceived as being a sound store of value, which
lowers the cost of borrowing. Yet this property is
inalienable to the UK Government; it is part of its
history.”
The currency is more than just a way of buying
and selling. It allows us to save and invest, to plan
for the future, with certainty and stability. We can
make plans with confidence for everything from our
pensions to our grandchildren’s future. Companies
can borrow and invest to create jobs and wealth.
But only if we have a currency everyone can trust.
Today, Scots are able to save and borrow from banks
all across the UK – and Scottish banks and financial
companies have 90% of their customers elsewhere
in the UK creating jobs for people here in Scotland.
About 200,000 Scottish jobs depend on that.
£ Billions
60
Scotland’s financial services
50
Scottish financial services firms’ customer base
40
30
Percentage of products provided by
Scottish firms to non-Scottish postcodes
Percentage of products provided by
Scottish firms to Scottish postcodes
20
10
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
100
Source: Scotland’s Global Connections Survey 2011
80
As part of the UK, we share a common currency,
the UK pound. We also have shared banking and
monetary systems. It’s not just that we all use the
same notes and coins, and measure our savings
and borrowings in the same pounds. It means we
have a single banking system. The Bank of England
oversees all of the banks, and plans monetary
policy – setting interest rates – to suit the whole UK,
including Scotland.
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60
40
20
0
ISAs
Pensions
Mortgages
Source: UK Government, Scotland Analysis: Financial services and banking,
May 2013
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Scotland’s financial services
Participation in the Scottish financial services
market
Percentage of the products sold to the
Scottish based customers by non-Scottish firms
Percentage of the products sold to Scottish
based customers by Scottish firms
100
being part of the UK we had the financial strength to
borrow the very large sums needed to avoid a deep
recession becoming a terrible depression.
Saving the banks
Alistair Darling,
former Chancellor and Leader
of the Better Together campaign
80
“I will never forget the telephone call I received
when I was the UK’s Chancellor of the Exchequer. It
was the head of the Royal Bank of Scotland telling
me that the bank was running out of money fast.
60
40
20
0
ISAs
Pensions
Mortgages
Sources: UK Government, Scotland Analysis: Financial services and banking,
May 2013
That’s why we need a stable and well-regulated
banking system. That means a trusted central bank
to oversee it. Its job is to keep the currency itself
secure and stable, manage interest rates and the
supply of money, so the economy can grow in a
sustainable way. The Bank of England does that job
for the whole UK today, including for Scotland. As we
have seen in recent years, financial stability matters
to all of us. To ensure it, the Bank has to work very
closely with not just the government, but bodies like
the Financial Services Compensation Scheme which
gives us all security for our savings.
As the Governor of the Bank of England recently
explained in Scotland, a stable financial system
needs effective supervision of the banks; it needs
a central bank that will ensure that solvent banks
always have the cash to meet people’s immediate
needs; and it needs a credible deposit guarantee
system. The UK does all this for Scotland today.
Of course the banking system has been through
many uncertain times recently. Everyone has felt the
effect of that. But these problems have also shown
the strength and resilience of the UK monetary
system. When the two Scottish banks got into great
financial difficulties, it was the Bank of England and
the UK Government, backed up by the taxpayers of
the whole UK, who were able to rescue them and put
them back on a sound footing. And it was through
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We faced the real prospect of banks collapsing,
people losing their homes and jobs. We have seen
on the news what has happened in other small
countries when their banks got into trouble over
the last few years. People literally went to cash
machines and found they were closed.
Because Scotland was part of the UK, with 60
million people standing together, I was able to take
immediate action to bail out the bank. The debts
of RBS were far bigger than Scotland’s wealth.
For me that experience really brought home the
benefits to Scotland of being part of something
bigger. When times are tough we are there for
each other. We are stronger and better together.”
Scotland is able to be part of this currency and
monetary union because it’s part of a wider union.
First of all, we are an integral part of the whole UK
economy. We trade very freely with all the rest of the
UK. Indeed we specialise in providing services like
banking to customers all across the country, not just
in Scotland. People can move back and forth across
the UK to take up jobs as the opportunities arise, and
many Scots do – nearly a million Scots have done just
that. Indeed our economy is actually very typical of
the UK as a whole. As Mark Carney, the Governor of
the Bank of England put it:
“If one part of the union imports a large share of
what it consumes from other parts, changes in
demand will be quickly transmitted. This helps
to align economic cycles and makes a common
monetary policy more appropriate.”
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Keeping Scotland’s financial system stable
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As part of the UK, different parts of the country
can call on shared resources to cushion the effects
of economic shocks. That might mean to pay for
unemployment benefits if we are hit by a downturn.
Or it might mean sharing surpluses in good times.
Take oil, for example: most Scots agree it’s right that
it should be shared with the whole UK, and in practice
we’ve been able to do that and benefit from higher
and stable public spending over many decades.
Scotland’s employment
and productivity
Labour productivity (2011)
Output per job
100
80
60
Attitudes towards pooling risks
and sharing resources
40
20
0
UK
Scotland
Source: ONS, Regional Labour Productivity (June 2013)
Scotland only %
North Sea Oil Revenues 44
Unemployment benefit 36
Old Age Pension
34
UK as a whole %
50
58
61
Source: Scottish Social Attitudes Survey 2013
Labour market outcomes
UK
This sharing of resources - fiscal union - is needed to
make a shared currency work. The Governor of the
Bank of England explained this very clearly recently.
As he put it “a currency union requires a common
fiscal backstop for its central bank” and “confidence
in deposit guarantee schemes relies on a national
backstop”. In other words, the institutions that make
our shared currency work need the full resources of
a single government to stand behind them. Anything
else is likely to be unstable.
Scotland
100
80
60
40
20
0
Employment Rate Unemployment Rate
Inactivity Rate
Source: ONS, Labour Market Statistics (July 2013), Labour Force Survey
All this is necessary for our shared currency with
the rest of the UK to work. And it does. But there is
more to it than that. Because we are a political union
with the rest of the UK, we pool and share our taxes
and our public spending. So our public services in
Scotland don’t depend just on how the Scottish
economy is doing, but are supported by taxes from
across the whole UK. In good times, we pay into the
common pot, and support public services in the
poorer parts of the country. In hard times, we can
draw on the UK’s resources.
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All this is possible for Scotland today because
the UK is not just a currency and monetary union
but a political union too. People in Scotland elect
members to the UK Parliament to take these
decisions. Decisions about sharing resources, but
also decisions about how the UK can help in times
of difficulty, such as the collapse of our banks. And
because we are part of the same country, there
was no question at all about it - UK taxpayers stood
behind the Scottish institutions to rescue them.
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How much money went into the
Scottish banks
In 2008, the UK Government spent £45 billion
recapitalising the Royal Bank of Scotland in order
to protect the deposits and savings of households
and small business. In addition, the bank received
£275 billion of guarantees through the UK
Government’s Asset Protection Scheme.
To put this into context, this combined support
from the UK Government to RBS is equivalent to:
• 211% of Scottish GDP (including a geographical
share of North Sea oil) in 2008
•27 times Scotland’s geographic share of
North Sea revenues in 2008-09
•31 times Scotland’s health spending in
2008-09
As a range of independent commentators have
noted, Scotland would not have been able to
afford such interventions alone. Other countries
such as Ireland, Iceland and more recently Cyprus
were unable to absorb the implications of the
financial crisis on their own. By contrast, total UK
interventions across the whole banking sector
were almost £1.2 trillion or 76% of whole UK GDP.
Source: UK Government
All this works for Scotland today, as part of the United
Kingdom. But what would happen if we became
independent, and a separate country?
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Part 2: The end of our shared currency
If Scotland leaves the UK, it is highly likely that
we would lose the UK pound. That is because
independence would break the critical links that
make our shared currency secure – a single banking
system, a fiscal union, and a political union that
oversees them and makes them legitimate.
But the SNP are still saying that it would continue.
They assert we could keep the shared currency even
though we no longer shared our taxes and public
spending, and were not part of a political union. The
most senior UK figures, from all political parties,
make the position clear, but the SNP pretend these
are empty threats.
Of course it’s obvious why they say this. They know
people in Scotland don’t want to lose the pound, so
they simply claim that we would keep it even if we
became independent – whatever the evidence says,
whatever the experts say. After all, we know that the
SNP are willing to say and do anything to try to get
us to back their plans to break up the UK.
But why wouldn’t currency union work, and why
wouldn’t the rest of the UK want to stay in a currency
union with Scotland? The SNP say it would be in
the continuing UK’s interest not to have to change
currency at the border, and worry about exchange
rates going up or down?
economy is very like the UK’s. We have a single
banking and finance system and one central bank to
manage it, overseen by our shared UK Parliament.
We share our taxes and spending so that the
government can offset any imbalances that arise
from economic differences. Most important of all,
we have a political union which ensures that both
fiscal and monetary policy works for the whole
country, especially important in times of crisis.
If Scotland became a separate country, its economy
would diverge from the UK’s. Certainly the SNP
claim it would, as they say we would all become
much better off. This is simply wishful thinking.
A number of experts have concluded that we
could well become much worse off. But all the
evidence is that borders do have an effect on
economies, by reducing trade across them:
that’s why, all across the world, countries
try to reduce that effect by having free
trade areas. But even then a border is
still a big influence. If we left the UK, our economy
would, over time, diverge from the rest of the
country as different policies were pursued. That
would put strain on the currency union. Because
we’d chosen to become a separate state – and not
the fiscal union we are today – there would be no
way for governments to transfer resources to offset
that imbalance.
Well, when we understand what currency union
means we see it’s more complicated than that. Our
GDP Share
GDP %
100
80
60
40
Euro Area
nd
la
Sc
ot
t
UKinui
Germany
Italy
Netherlands Austria
Finland
Ireland Luxembourg Cyprus
Malta
France
Spain
Belgium
Greece
Portugal
Slovakia
Slovenia
Estonia
Co
n
0
ng
20
Sterling Area
Source: 2011 GDP at current market prices, from Eurostat, ONS and Scottish National Account Project
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Believe the experts or believe the nationalists
Mark Carney,
Governor of the Bank of England
John Swinney,
SNP Finance Minister
“It is no coincidence that effective currency unions
tend to have centralised fiscal authorities whose
spending is a sizeable share of GDP – averaging
over a quarter of GDP for advanced countries
outside the euro area.”
“An independent Scotland will control 100 per
cent of our own revenues.”
Another imbalance would be the effect of oil.
Although oil has passed its peak, it’s still very
important to the Scottish economy, and so Scotland’s
currency would be much affected by oil prices. Today,
that’s not a problem. This is absorbed in the wider
UK economy, as oil revenues are shared, and passed
back to Scotland in a stable flow of public spending.
But if Scotland becomes a separate country, that
couldn’t happen. The exchange rate would be
subject to pressures, up or down, that would make
maintaining a currency union very difficult.
Perhaps the biggest difficulty of all, however, would
be in managing the financial and banking system. At
the moment it is wholly integrated, and the whole
UK stands behind each institution. We’ve seen
that in practice. It simply wouldn’t happen after
independence. UK taxpayers would be under no
obligation to support the banks of a foreign country.
The consequences for Scotland, which is even more
dependent on the financial services sector than
other small countries like Iceland or Ireland, could
be very serious indeed. All the experts agree that
the SNP’s plan to stay in the UK’s financial stability
system while leaving the UK simply won’t work.
What the experts say
Professor Ronald MacDonald,
Adam Smith Chair of Political
Economy, University of Glasgow
“Resource shocks are likely to be extremely
important for the behaviour of the exchange rate
of an independent Scotland. Scotland would be
a net exporter of hydrocarbons. Oil would be a
significant part of the budget of an independent
Scotland and so-called oil shocks could move
the exchange-rate around a lot with important
consequences for the non-oil sector.”
What the experts say
Professor Brian Quinn,
Former Executive Director
of the Bank of England
“The concept of a shared system of supervision
and crisis management is seriously – perhaps
fundamentally – flawed and that its weaknesses
would increase during the indeterminate period
of transition following independence.”
As we have seen, our shared currency works today
because the UK is a fiscal union. In his recent lecture,
the Governor of the Bank of England explained
that a successful currency union needs a central
government that has control over about 25% of
GDP and can redistribute it as needed. Very roughly,
that’s about 50% of our taxes and public spending.
But the Scottish Government insists that
independence means Scotland would have 100%
control over tax and spending. That’s simply not
consistent with a successful currency union.
All this might sound very theoretical, but we can
see exactly these problems today. The Eurozone is
a lesson for us all. It’s a monetary union but doesn’t
have an effective political union to oversee it. It
doesn’t have an integrated banking union, and is
not able to transfer taxpayer resources to countries
which are in trouble like Greece in recent years.
That’s why all of the senior UK figures – and virtually
all of the expert commentary – is clear that if
Scotland were to vote for independence, it wouldn’t
be in either Scotland’s or the UK’s interest to import
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the problems of the Eurozone into a new monetary
union.
What the experts say
Mark Carney,
Governor of the Bank of England
Compare and contrast
As part of the UK
“The euro area has shown the dangers of
not having ... a single prudential supervisor
maintaining consistent standards of resilience, a
single deposit guarantee scheme backed by the
central government, and a common central bank,
able to act as Lender of Last Resort across the
union, and also backed by the central government
… as well as the difficulties of the necessary pooling
of sovereignty to build them.”
CURRENCY
UNION
POLITICAL
UNION
FISCAL
UNION
BANKING
UNION
SNP’s proposed monetary union
So it’s quite clear: leaving the UK means leaving the
UK pound. We cannot expect that after independence
Scots will be part of a monetary and currency union
with the UK, because we will have rejected the very
thing that would make it stable – a fiscal and political
union. So, what are the alternatives? Does Alex
Salmond have a plan B?
CURRENCY
UNION
POLITICAL
UNION
BANKING
UNION
bettertogether.net/pound
FISCAL
UNION
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Part 3: Can’t we just use the pound anyway?
You often hear the SNP say this. Scotland could
just use the pound anyway, and the rest of the UK
couldn’t stop us. Would this work?
Well one country can’t stop another from using
its currency to buy and sell things. A number of
developing countries do that with the dollar. Closer
to home, Montenegro uses the euro, even though
it’s not part of the single currency. The Eurozone
countries don’t prevent that. But Scotland is not a
developing country, and the example of Montenegro
is not encouraging.
Montenegro and the euro
Montenegro, born from the collapse of Yugoslavia,
had a history of extreme instability. It had two
separate periods of hyperinflation, including one
of the most extreme phases of hyperinflation in
economic history in 1994. In 1999, it unilaterally
adopted the Deutsche Mark but annual inflation
was over 42 per cent.
The adoption of the euro was done outside of
the official framework for euro entry and there
was no formal discussion with the EU or the ECB
prior to the decision to adopt the euro. This gave
Montenegro a credible monetary policy during
post-war reconstruction. Inflation was below three
per cent in 2011. But then Montenegro had very
limited policy tools available to restrict the rapid
increase in credit growth in 2008 and prevent
the economy from overheating. The IMF has
recommended to Montenegro that it should keep
significant reserves of cash in order to provide a
backstop for the financial sector.
But this isn’t a currency union. What it means is that
Scotland would actually have no currency of its own,
and no central bank. The rest of the UK would use
the pound, and the Bank of England would work for
it, supervising its banks and financial institutions,
and making sure its interest rates and supply of
money were stable. The Bank wouldn’t do anything
for Scotland.
have difficulty in borrowing money, and would have
no control over interest rates or other aspects of
monetary policy. This is not how a modern economy
works, and it would be very damaging. Even the
Scottish Government’s own advisers ruled it out as
not being a credible long-term option for Scotland.
The SNP’s own advisers ruled it out
Scottish Government Fiscal Commission report:
“International evidence suggests that informal
monetary unions tend to be adopted by
transition economies or small territories with a
special relationship with a larger trading partner.
Advanced economies of a significant scale tend
not to operate in such a monetary framework.
Though an option in the short-term, it is not likely
to be a long-term solution.”
It would be damaging most of all to Scotland’s
banking and financial services industry, on which
around 200,000 jobs depend. It is simply not
possible to have a sophisticated banking and
financial services industry without an effective
monetary policy and central banking system.
Additionally, a country which does not have a central
bank and a monetary policy of its own will find it
very difficult to borrow on international markets to
support a deficit. As a result, there will be pressure
to decrease public spending and increase taxation.
It’s inconceivable that this policy, which is followed
by countries whose economies or financial systems
have collapsed, is appropriate for a modern
successful country like Scotland. When the SNP
suggest this, they are treating the people of Scotland
like fools.
Because Scotland would have no central bank
and no currency of its own, it wouldn’t have all the
tools of economic policy that a modern country
needs. It would be able to decide how much to tax
and how much public spending to have, but would
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Part 4: Could Scotland join the Euro instead?
If a separate Scotland is not able to use the pound,
could it use the euro instead?
Well, until quite recently this was the SNP’s plan.
Since 1993 all new EU Member States have been
required to commit to join the euro.
SNP euro U-turn
The SNP’s first term independence white paper
favoured joining the euro:
“Scotland would continue to operate within the
sterling system until a decision to join the euro by
the people of Scotland in a referendum when the
economic conditions were right.”
“It would be difficult to devolve monetary policy
effectively while Scotland remained part of the
United Kingdom as a common currency is a
feature of a unified state. For example, if majority
opinion in Scotland favoured joining the euro, that
would not be possible within the United Kingdom.”
First Minister
January 2009:
Alex
Salmond,
speaking
Joining the EU means joining
the euro
in
“As you know, we’re in sterling and sterling is
sinking like a stone. It’s now about parity with
the euro.”
As part of the United Kingdom, we benefit from an
opt-out from the euro. The UK’s favourable terms
of membership, reflects our unique position and
interests, which we have negotiated over a long
period of time.
The Scottish Government’s claims that it would
retain the pound are at odds with the EU’s rules
for new members.
Currency used since countries joining the
European Union since 1993
Year Country
joined
EU
1995 Austria
Finland
Sweden
Required
to join
the euro?
Yes
Yes
Yes
2004
Yes
Yes
“I think there is a strong argument for the euro,
and I think as sterling declines even further that
argument is being made very strongly.”
The UK has a permanent opt-out from the euro, as it
would not be suitable for the UK economy. Equally
it’s not suitable for Scotland’s economy. But it’s quite
possible that an independent Scotland, as part of its
negotiations to join the European Union, would have
to give some sort of commitment to joining the euro.
That could put us in a difficult position.
2007
2013
Cyprus
Czech
Republic
Estonia
Latvia
Lithuania
Hungary
Malta
Poland
Yes
Yes
Yes
Yes
Yes
Yes
Slovenia
Slovakia
Bulgaria
Romania
Croatia
Yes
Yes
Yes
Yes
Yes
Current status
Has used euro since 1999
Has used euro since 1999
Required to adopt once
necessary conditions met
Has used euro since 2008
Preparing to adopt
Has used euro since 2011
Has used euro since 2014
Aims to adopt euro in 2015
Preparing to adopt
Has used euro since 2008
Aims to adopt as soon as
possible
Has used euro since 2007
Has used euro since 2009
Committed to adopt
Committed to adopt
Committed to adopt
Source: European Commission
Professor Andrew Hughes-Hallett, SNP’s Fiscal
Commission Working Group member:
“All new members of the EU are required to join
the Euro eventually and it is not clear that there
are grounds to argue that Scotland has the right
to inherit the UK’s current Euro opt out.”
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Some people in the Yes campaign want us to use the
euro.
Yes chief wants us to use euro
Dennis Canavan, Chairman of Yes Scotland
campaign:
“I think that there is a considerable body of
opinion that would favour Scotland having its
own currency and keeping open the option that
if and when the Eurozone recovers economically
then possibly put it to the people of Scotland by
means of a referendum whether we should join
the Eurozone.”
Asked if he would like an independent Scotland
to join the Eurozone, Mr Canavan said “eventually,
if the economy within the Eurozone recovers, yes,
I think that would be something to aim at.”
BBC News, 30 April 2013
It seems unlikely that the euro would be a good
currency for Scotland. We could be in the position
of one of the smaller Eurozone countries. They
find that they have imposed on them an economic
policy, and interest rates, that may be suitable for
the larger members, like Germany, but which put
their economies under great pressure. Greece is
perhaps the most extreme example. All the evidence
is that Scotland’s economy is much more like the
UK economy than the Eurozone’s. Our levels of
productivity are very similar, and our economy
responds to external events and pressures in the
same way as the UK’s, not the Eurozone’s. So it is
unlikely that the interest rates and monetary policies
are right for those countries would be right for us.
greater fiscal union. So Scotland would have to share
sovereignty with the other Eurozone members, just
as it would have to if it wanted to be part of a sterling
currency union. Other countries would have a say in
how much we could tax and spend.
And it gets more complex. Membership of the euro
is not an immediate possibility because countries
which are committed to join the euro are obliged to
keep their own currency stable against the euro for a
period of a couple of years. This is to ensure that they
enter the new currency at an exchange rate which
is sustainable in the long run. Entering a currency
union at the wrong rate could be economically fatal.
So before joining the euro an independent Scotland
would have to manage its own currency for at least
a period of a couple of years. So we would have to
change our currency not once but twice. Once from
the pound to a new Scottish currency and then again
from that into the euro. The transition costs would
be huge.
Maybe we would be better just to have our own
currency?
Additionally, as the vast majority of our trade is
with the rest of the UK, which will continue to use
the pound, using the euro would mean transaction
costs for businesses and individuals and uncertainty
about the exchange rate. There is therefore a very
serious risk that membership of the Eurozone would
not be in Scotland’s long-term best interests.
Scotland would also have to keep the rules of euro
membership, the so-called Maastricht criteria. That
would set limits on how much the country could
borrow, and on inflation. On top of that, in order to
increase its own stability as a currency union, the
Eurozone is becoming more integrated including
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Part 5: Could we have a new Scottish currency?
There is no reason in principle why it would be
impossible for a separate Scottish state to have a
separate Scottish currency. Many small countries do,
but it’s by no means an easy option, and managing
the transition could be very difficult.
A new currency isn’t created very often. All the
evidence suggests that it would have to be introduced
very quickly indeed. There would probably be a
system of capital controls first, to stop people taking
their money out of Scotland because they wanted
to keep their savings in pounds. Scotland would
have to create its own central bank. There would be
a difficult job in deciding how contracts, savings,
pensions and salaries would be converted at the
start into values in the new currency. The worst time
to adopt a new currency would be during a crisis.
If the SNP remain in denial about the fact that their
currency union is not going to work then they might
create such a crisis.
Assuming these hurdles could be surmounted,
the big question about a Scottish currency would
be how to manage its exchange rate. Should it be
allowed to float on the markets, go up and down
– perhaps driven by the price of oil – or should the
Scottish Government try to keep its value stable,
perhaps against the pound or the euro?
Letting the new currency float on the markets
might allow it to find its own level. The government
wouldn’t need to spend a lot of public money to
stabilise it. But Scotland is a small open economy,
and greatly affected by the oil price. So the exchange
rate could be volatile. You could not be sure from
day to day or week to week how much the new
currency was worth. The effect on individuals and
businesses of exchange rate uncertainty could
then be very great. Trade, and so jobs, would suffer,
because these costs would hit businesses. Buying
goods and services from elsewhere in the UK
– which we all take for granted today – could become
much more difficult.
Alternatively, the government could try to fix the
new currency at a stable exchange rate, perhaps
compared to the pound. Many small countries try
to do this, but it greatly reduces their economic
freedom for manoeuvre. They then have to hold
substantial reserves of foreign currency to be able
to intervene on the markets to keep the currency
stable. This very much reduces their ability to borrow
bettertogether.net/pound
to invest in public services or manage the country’s
economy.
Yes campaign currency chaos
Patrick Harvie, Yes Scotland board member
“To be clear, my preference would be that the
scenarios would still include at least the possibility
over the long term that a separate currency could
be put in place … I would personally prefer to
see any period of continued use of sterling as a
transition period leading to something separate.”
Colin Fox, Yes Scotland board member
“After weighing up all the issues involved and
recognising that many other small Independent
countries such as Norway, Switzerland and Iceland
prefer to use their own currency - this option
seems to make most sense.”
Pat Kane, Yes Scotland board member
“Sterling zone might be solid first step for
independence but it is in no way final.”
The strictest version of this is what’s called a
currency board. That means new Scottish currency
would be tied, pound for pound, to the UK pound.
The Scottish Treasury would have to keep one
pound sterling in its reserves to match every Scottish
pound it issued. Some countries manage this, and
small jurisdictions like Gibraltar or the Channel
Isles. But just like using the pound without formal
agreement, it gives the government no real
economic powers of its own, and in particular
no real freedom over interest rates or the supply of
money in the Scottish economy.
Most challenging of all, a new currency will have to
win the confidence not only of people in Scotland,
but of the international money markets, so that
Scotland could borrow money to finance its public
sector deficit. Nationalists never admit this, but
even after oil revenues today, Scotland has a
substantial fiscal deficit. All the predictions are
that as oil revenues decline our deficit will increase
markedly. Scotland can sustain higher levels of
public spending today because resources are shared
across the whole country.
A separate Scotland would have to borrow from the
international markets to finance its deficit, but could
find it very difficult to do this and at the same time
Securing the pound in your pocket
15
maintain the currency link. That is why countries
that maintain currency boards typically run big
fiscal surpluses to avoid any risk to their currency.
So Scotland might have to move from a position
of deficit to one of surplus, implying billions of
pounds of cuts in public spending or increases
in taxation far over and above what would be
required anyway.
The UK, which has a strong record of repaying
debts for hundreds of years, can borrow money
at very attractive rates. We already know
from estimates by economists that, because it
would be a new country with no track record of
borrowing, Scotland would inevitably be charged
higher interest rates than the UK does today for
any new borrowing it was able to do, or to
refinance its existing debts. This additional cost
will have to be borne by Scottish taxpayers.
If, in addition, the markets were unsure about a
new Scottish currency, and whether it might fall in
value, a further premium on interest rates would be
highly likely. That means paying more for things like
loans and mortgages payments.
Higher borrowing costs
If Scotland leaves the UK, the continuing UK’s
borrowing costs would not be expected to change.
The independent National Institute of Economic
and Social Research have estimated that
Scotland’s borrowing costs would rise following
independence, between 0.7 and 1.65 percentage
points above UK borrowing costs.
Even a small increase in costs could lead to a
significant impact.
To illustrate, if independence resulted in there
being a 1% rise in mortgage rates it would cost the
average Scottish households:
• with a 75 per cent mortgage, around £1,300 in
increased payments in the first year; and those
with a 90 per cent mortgage, around £1,590 in
increased payments in the first year.
In total, this would be around £1 billion a year
in increased interest payments for all Scottish
households.
Higher borrowing costs lead to higher living costs.
Scotland would be launching a new currency with
no credit rating. This would mean higher credit
card and store card bills and more costly car loans.
It would also mean higher taxes as the Scottish
Government would have to pay more to borrow
money.
Source: NIESR & UK Government
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16
Part 6: Is there a plan B?
People in Scotland understandably want to keep
the pound, but leaving the UK means leaving the
UK pound. Countless economic experts and senior
UK figures from the Chancellor to the Governor of
the Bank of England and the Shadow Chancellor are
making it clear that a Eurozone-style currency union
wouldn’t be in the UK’s or Scotland’s interest. So what
are the alternatives? What is Alex Salmond’s plan B?
Of course he won’t tell us, but in truth there are only
these three. Each of them is worse for Scotland than
keeping the pound inside the UK.
1. Just using the pound anyway, with no formal
currency union, would put Scotland in an impossible
position. We would have no monetary or interestrate policy of our own. We couldn’t run the modern
banking and financial services firms on which much
of our economy depends. We would struggle to
borrow money to finance public services, and the
effect on jobs and incomes could be catastrophic.
If Scotland chooses to remain a strong and proud
part of the UK, we can be sure of keeping the
UK pound. We would be choosing to remain in a
successful economic partnership, as part of an
integrated economy, in which the UK’s resources
stand behind our public services, our banks and
financial institutions, and the Scottish economy as a
whole. That’s the choice that Scotland will face this
September.
Plan B unpopular
• 12% believe Scotland should just use the pound
without a formal agreement
• 11% believe Scotland should set up a new currency
• 4% believe Scotland should join the Euro
Source: Panelbase poll of 1,012 Scottish adults, January 29 - February 7 2014
2. In principle a separate Scotland might use the
euro, but it would be agreeing to a monetary and
interest rate policy designed for the majority of the
Eurozone and not suitable for Scotland’s economy.
No one would want Scotland to be put into the
position of Greece in the Eurozone, but the effects
could nevertheless be very serious. And there’s no
easy way to get there, without repeated disruption.
3. The last option is a separate Scottish currency.
This would be very difficult to do but perhaps not
impossible. But then Scotland would be faced with
a choice between two uncomfortable alternatives.
We might have a Scottish currency that was volatile,
driven by the oil price and market sentiment. It
is then difficult for individuals and businesses to
predict from day to day what costs they would face,
or price they could get for their goods and services.
Alternatively the Scottish Government might try to
fix the exchange rate. This is potentially very costly,
and would require Scotland to run a very strict fiscal
policy, with serious effects on taxation and public
spending. Either way the interest rates we all face
would go up.
All of these are second best to what people in
Scotland want – to keep the currency they know and
trust, the UK pound.
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17
Annex: Fact checking the SNP’s currency claims
With so many claims and counterclaims flying around
it can be hard to keep track of what is fact and fiction,
so here are the facts on the SNP’s currency claims.
1. THEY SAY:
‘The pound is Scotland’s currency just as much
as it is the rest of the UK’s.’
THE FACTS:
• A vote to leave the UK is a vote to leave the
UK pound. That’s part of the choice people in
Scotland are being asked to make.
• The UK pound isn’t an asset to be divided up
between the two countries like a record collection
after a break-up.
• The value of the UK pound is not the notes
and coins in circulation, but that it is backed by
the Bank of England, which in turn is backed by
the strength of the taxes paid by the 60 million
people living across the whole of the UK.
• To use the UK pound after independence would
need an agreement to set up a Eurozone-style
arrangement something which experts have said
is unlikely to be agreed.
• An independent Scotland cannot insist that
taxpayers in a country that it would have just
voted to leave would continue to back its
currency or stand behind its banks as a lender of
last resort in the event of another collapse.
2. THEY SAY:
‘A currency union is in the overwhelming
economic interests of both Scotland and the
rest of the UK.’
THE FACTS:
Not true. And in any event it would be for the
continuing United Kingdom to decide what was and
was not in its interests.
integration to address these challenges. But the
SNP want the exact opposite – currency union
without fiscal or political union.
• The economies of an independent Scotland and
the UK would diverge as different policy decisions
are taken. Scotland in particular would be far
more dependent on North Sea oil which is volatile
and will run out. Sudden changes in oil prices
would affect Scotland far more and therefore the
same interest rate would not suit both countries.
A Eurozone-style currency union would not be in an
independent Scotland’s interests because:
• Even if it could be agreed, a formal Eurozonestyle currency union would severely limit an
independent Scotland’s economic freedom. As
the Governor of the Bank of England has said:
“tight fiscal rules” would be required, adding
that “It is no coincidence that effective currency
unions tend to have centralised fiscal authorities
whose spending is a sizeable share of GDP –
averaging over a quarter of GDP.”
• To ensure the risks to the rest of the UK were
managed properly an independent Scotland
would not be able to set its own interest rates and
would have to accept the rest of the UK having
oversight of its tax and spending plans as is the
case in the euro area. As the Governor of the
Bank of England has said: “a durable, successful
currency union requires some ceding of national
sovereignty.”
• If financial markets sensed that the Bank of
England’s monetary policy did not suit Scottish
circumstances they might doubt Scotland’s
commitment to the currency union.
• Financial market speculation could lead to
capital flight and higher interest rates. Ultimately,
if markets weren’t calmed, Scotland might have
to adopt its own separate currency in a time of
crisis.
A Eurozone-style currency union would not be in
Scotland OR the UK’s interests because:
• As the Governor of the Bank of England and
leading experts have made clear: currency
unions don’t work without close political and
fiscal integration. Independence is about
disintegration, not integration.
• The lesson of the Eurozone crisis is clear –
currency unions are very difficult without fiscal
and political union, and can expose all their
members to significant risks. Eurozone countries
are moving towards closer political and fiscal
A Eurozone-style currency union would not be in the
rest of the UK’s interests because:
• The Governor of the Bank of England has said:
“a durable, successful currency union requires
some ceding of national sovereignty.” Joining
a currency union with another state would
therefore involve the UK giving up some of its
control over in monetary and fiscal policy. Why
would it agree to this?
• The continuing UK would comprise around
90% of total GDP in a sterling currency union,
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18
with Scotland as 10%. The continuing UK would
therefore bear much more risk of having to bail
out an independent Scotland if it got into fiscal
difficulties.
• As Martin Wolf, chief economics commentator
for the Financial Times, has said: “it is doubtful
whether a union would be in the interests of the
rest of the UK. The gains from the shared currency
would certainly be far smaller for the rest of UK
than for Scotland, since the latter represents a
10th of the shared market.”
• Why take the risk? Negotiating a Eurozone-style
currency union would be far more important for
an independent Scotland than for the continuing
UK. The rest of the UK accounts for 70% of
Scotland’s total trade, whereas Scotland accounts
for 10% of the UK’s trade.
• As Carwyn Jones, the First Minister of Wales,
has asked, what gain is there to the rest of the
UK from having an independent country share
its currency, other than uncertainty leading
to higher interest rates and higher borrowing
costs for Scotland and all parts of the union,
making everyone worse off? Mr Jones has made
clear he is “not convinced” that a shared currency
would work.
• Scottish trade is important to the UK economy,
but is it important enough to run the risk of
recreating the problems we have seen in the euro
area in the British Isles?
3. THEY SAY:
THE FACTS:
‘Scotland is the UK’s second biggest trading
partner. It is in the interests of business in the
rest of the UK not to put up unnecessary
barriers.’
• This is simply not true.
• There is nothing anywhere in the Edinburgh
Agreement that could require the continuing UK
to agree to a Eurozone-style currency union with
an independent Scotland.
• Whatever the Scottish Government say, they
cannot compel the rest of the UK or future UK
Governments to set up a currency union that
recreates the problems of the Eurozone.
• The Chancellor, Shadow Chancellor, former
Chancellors and the First Minister of Wales
have all said that a currency union is unlikely to
be in the UK’s or Scotland’s interests and highly
unlikely to be agreed.
• The only way to guarantee Scotland keeps the
UK pound is to vote to keep our United Kingdom
together.
THE FACTS:
• Lets be clear: it is the nationalists that are in the
business of putting up barriers.
• If we make the decision to leave the UK, we don’t
get a say in what the UK does anymore – and
that includes over whether we get to share the
pound.
• The rest of the UK accounts for around 70% of
Scotland’s total trade, whereas Scotland accounts
for 10% of the UK’s trade. Common sense
therefore tells you that negotiating a Eurozonestyle currency union would be far more important
for an independent Scotland than for the
continuing UK.
• The UK’s biggest trading partner now is the United
States – no one would suggest we switch to using
the dollar to suit them. Our next biggest trading
partners are France and Germany – no one suggests
that we would automatically join the euro.
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4. THEY SAY:
‘Neither the Governor of the Bank of England or
UK politicians have ruled out a currency union.’
THE FACTS:
• As the Governor of the Bank of England has
made clear, it’s not his role to decide on this – it is
for elected politicians.
• Dozens of experts have said the SNP’s proposals
for a Eurozone-style would create significant risks
for an independent Scotland.
• The Chancellor, Shadow Chancellor, former
Chancellors and the First Minister of Wales have
all said that a currency union is unlikely to be
in the UK’s or Scotland’s interests and highly
unlikely to be agreed.
5. THEY SAY:
‘The UK Government would be obliged by the
Edinburgh Agreement to agree to a currency
union.’
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19
6. THEY SAY:
‘Scotland and the rest of the UK would remain an
optimal currency area after a Yes vote.’
THE FACTS:
• The plans in the White Paper are all about
divergence. Ending political and fiscal union,
different immigration policy, different business
taxes to change productivity.
• The problems in the euro area clearly illustrate
the risks and challenges of creating and
maintaining a formal currency union across
different states with differing economies.
• We need look no further than the Eurozone to
see that currency unions are difficult to make
work. As the Governor of the Bank of England and
dozens of experts have now said: they can only
really be made to work if you have fiscal, economic
and political integration. Independence is about
the very opposite of that; it’s about disintegration
of political union and economic and fiscal
divergence.
• The euro area is moving towards closer political
and fiscal integration to help overcome these
challenges. If Scotland left the UK it would
inevitably mean economic decision-making in
Scotland and the continuing UK would move
further apart – this is hardly a credible basis for a
currency union.
• The lessons learned from the Eurozone have
been clear: while these kind of arrangements
can appear successful in a period of stability and
growth they can lead to brutal readjustments in
times of economic stress and uncertainty.
• The Governor’s speech highlights the clear risks
of moving away from what we have now. In these
economic times the last thing we need is more
uncertainty.
implement this; we’re not the ones who are
elected to make decisions, very clearly.”
• If Scotland left the United Kingdom the Bank of
England would be governed by England, Wales
and Northern Ireland, not Scotland. A foreign
central bank and foreign government would
decide not only the interest rates on which our
mortgage and business borrowing depend, but
also the money supply, crisis interventions and
even employment targets so vital to our young
people.
• A crucial consideration here is in whose
interests would decision be taken. As Professor
Jo Armstrong has said: “To be honest with you if
you have one half of the currency union 90% in
value and the other side 10% it does make it look
like the UK or the rest of the UK would have the
upper hand.”
8. THEY SAY:
‘Scottish exports, particularly North Sea oil and
gas, make a substantial contribution to the UK’s
balance of payments.’
THE FACTS:
• Since 1997 the Bank of England has had a degree
of operational independence with responsibility
for the setting of interest rates. However, as the
Governor has made clear: the Bank of England is
a “financial technocratic institution” which exists
to “implement whatever monetary arrangements
[are] decided … once decisions are made, we
• This is just not true. Independent experts,
including Professor Brian Ashcroft of the Fraser
Allander Institute, have said that the impact of
independence on the UK’s balance of payments
would be likely to be neutral.
• The reason is because the Scottish Government
has chosen to ignore a number of important
factors, including:
– The fact that the majority of profits from
largely foreign owned oil and gas companies
are sent abroad, so they don’t help our
balance of payments now.
– Scotland has a deficit on its trade in goods
and services. This would provide a major
boost to the continuing UK’s balance of
payments in the event of independence
because currently trade within the UK falls
outside the measure.
– Around one fifth of Scottish GVA is produced
by companies headquartered or registered
in the continuing UK so profits are sent
elsewhere in the UK would therefore
enter the continuing UK’s balance of
payment positively in the event of Scottish
independence.
• Common sense tells you that the UK economy,
which is ten times the size of Scotland’s economy,
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Securing the pound in your pocket
7. THEY SAY:
‘The Bank of England has been operationally
independent and has set interest rates over the
past 10 years and more.’
THE FACTS:
20
is more important to Scotland that the Scottish
economy would be to the UK if we left.
9. THEY SAY:
‘An independent Scotland will refuse to take on
any national debt if the UK refuses to share the
pound.’
words what we have right now. Exactly what
SNP’s plans are all about breaking up.
• The idea that the biggest critic of Alex Salmond’s
currency plan is actually its biggest supporter
shows just how much of a mess the SNP’s
currency plans are and how desperate they are
becoming.
THE FACTS:
11. THEY SAY:
• This is a wildly irresponsible threat. It would
seriously jeopardize an independent Scotland’s
credit worthiness if the first act as a new state was
to default on our debt.
• If the first action of a newly independent Scottish
state was to renege on our fair share of the
UK’s debt, then the financial markets and other
countries would be asking serious questions
about its economic credibility and would likely
punish us with higher interest rates. That means
higher mortgage payments, higher credit card
bills and more expensive loans. That’s the last
thing we need right now.
• It would be in Scotland’s interests to honour its
fair share of debt, because other countries and
international lenders would be assessing how
trustworthy a newly independent Scotland was
in order to decide whether, and at what price,
they were prepared to lend to it. Given that, as
the Institute for Fiscal Studies have highlighted,
an independent Scotland would be starting out
with a multi-billion pound black hole in its public
finances, it would be even more important for it
to quickly build up good credit.
• What’s more the National Institute of Economic
and Social Research estimate that an independent
Scotland would “face additional interest rate
costs of between 0.72% to 1.65% above the UK
borrowing costs” – and that’s before factoring in
the damage a default would cause.
‘We can just use the pound anyway.’
10. THEY SAY:
‘Alistair Darling has described sharing the
pound as “logical” and “desirable.”’
THE FACTS:
• The thing is, he said nothing of the sort. This
highly selective quoting from a year-old interview
is desperate attempt to distort what he was
actually saying.
• The point he was making was that a currency
union is only logical and desirable when you also
have a political and economic union – in other
bettertogether.net/pound
THE FACTS:
• The SNP have flirted with the idea of using the
pound without the agreement of the continuing
United Kingdom – a process sometimes called
Sterlingisation – something the SNP’s own
advisers have ruled out.
• The SNP’s own expert commission explicitly said
that using the UK pound without agreement, in
the same way Panama uses the dollar, was a nonstarter. Why? Because it means no central bank
and nobody standing behind our savings, our
pensions, our businesses.
• Sterlingisation would mean we would have no
control over the currency we’d be using and its
monetary policy, and no central bank to act as
lender of last resort and to protect individuals’
savings and mortgages. It would also have a
massive impact on the thousands of people who
work in financial services companies Scotland.
12. THEY SAY:
‘71% of people in England and Wales and the rest
of the United Kingdom want Scotland to share
the pound after Scottish independence.’
THE FACTS:
• What the SNP-commissioned poll didn’t ask
was whether people in England and Wales
would be willing to have constraints placed on
UK Government budgets as a Eurozone-style
currency union would require. The additional
risks associated with such an agreement would
be extremely unlikely to gain public support.
• As the Governor of the Bank of England has
made clear that “a durable, successful currency
union” would require “some ceding of national
sovereignty.” Why would people in the continuing
United Kingdom want to do that, given the choice
not to?
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21
13. THEY SAY:
‘An independent Scotland will have a seat on the
Bank of England’s Monetary Policy Committee
(MPC).’
THE FACTS:
• This is yet more wild, baseless assertion from
the SNP. An independent Scotland would be in
no position to demand a seat on the MPC if it
had just voted to leave the UK and its monetary
arrangements.
• If Scotland were to become independent, the
Bank of England would continue to be the central
bank for the continuing UK but not for Scotland.
The Government of the continuing UK would be
responsible for nominating members of the MPC
and setting the objectives for monetary policy.
• The MPC is independent of Government and its
members do not represent individual groups or
areas, they represent the whole of the UK.
• The bottom line is: the only way for Scotland to
keep the UK pound as it is now is to stay in the UK.
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