Explained: 9 new independent Scotland currency options revealed

Report outlines nine different currency options for an independent Scotland, including a free-floating Scottish pound and crytopcurrency

THE first major report into the currency options for an independent Scotland post-Brexit has been released, making recommendations for an independent Scottish currency initially tied to Sterling.

The report examines nine different currency options, considering the merits and drawbacks of each, but gave the following recommendation: “The political weight tends towards the recommendation of a newly independent Scotland adopting an independent £Scot, initially pegged to Sterling but with the option of moving, changing or floating the peg as and when required or desired.”

The report – released today by Common Weal and authored by activist and scientist Dr Craig Dalzell – stated the importance of exploring such questions before any future independence referendum, adding that the failure to do so convincingly was a major drawback during the first independence referendum of 2014.

A currency union would be “practically, politically or legally impossible.”

The report stated: “There is fairly wide acknowledgement that one of the weaker aspects of the 2014 Scottish independence referendum campaign were those debates surrounding currency. A poll conducted by Lord Ashcroft following the results of that referendum found that more than half of No voters cited currency as one of the top three reasons influencing their decision.”

During the first independence referendum, the SNP government proposed a formal currency union, meaning Scotland would retain the pound together with an official position at the Bank of England. Ben Wray, head of policy and research for Common Weal, dismissed this option for the future: “Brexit effectively kills off the case for a currency union, and therefore has provided the perfect opportunity to revamp the currency argument,” he said.

The nine options outlined in the report are:

Option 1: Currency union within rUK

On the assumption that Scotland kept its EU membership while the rest of the United Kingdom left the EU, the report suggests such a situation would be “practically, politically or legally impossible”. However, it does suggest that such an agreement – which would see Scotland given an official say on policy decisions regarding things like interest rates – would put it on a stronger footing than it is right now because Scotland’s position is not formally taken into account.

Option 2: Sterlingisation

This means Scotland would carry on using the Pound but without official permission. However, the reports suggests this would also mean that Scotland would its place on Bank of England boards, excluding it from having a say on key decisions

Option 3: Scottish Pound, pegged to Sterling

‘Pegging’ means tying the value of one currency to another. So, in this case, pegging the Scottish pound to Sterling would have an advantage because it would keep a “fixed exchange rate” with the UK, which is still Scotland’s largest trading partner.

The report suggests an exchange ratio of one Scottish pound to one pound Sterling would leave voters feeling more secure because it would provide a sense of continuity “thoughout the political upheaval of independence”. A set up like this would involve creating a Scottish Central Bank and a Scottish macroeconomic board to oversee the progress of the currency.

See also – Scotcoin: Meet Scotland’s digital currency, trading in a pub near you

Option 4: Scottish Pound, pegged to Euro

The report suggests that tying the Scottish pound’s value to the Euro would be less attractive to pegging with the pound because 60 per cent of Scottish exports go to the rest UK, while only 30 per cent go to Eurozone countries. However, a move like this would show a desire from Scotland to trade with European markets as quickly as possible, something the report suggests could risk jeopordizing independence negotiations because the UK would be worried about losing out to Europe.

Option 5: Scottish Pound, pegged to a basket of currencies

The currency’s value would be tied to a range of different currencies, but generally speaking “would likely weight towards Sterling and the Euro and could help Scotland trade in a relatively stable manner despite shocks which affect one or other of [the] partner currencies”. However, the report points out that this could result in higher business costs in Scotland.

Option 6: Scottish Pound, free-floating

This would give much more flexibility and mean the value of the currency would fluctuate along with economic circumstances, but it’s a riskier move. This is because it the early days of independence, market speculation could “seriously affect the price of the currency”.

Option 7: The Euro

While some commentators insist that an independent Scotland inside the EU would be obliged to join the Euro, the report points out that to qualify you first need to be in something called the ‘Exchange Rate Mechanism II’ for two years, which basically means that the exchange rate of Scotland’s currency would need to be the same as the EU’s for that period of time. Signing up to this agreement would be voluntary.

The report does not discount the advantages of joining the Euro: “The structure of the Euro gives richer, exporting countries a significant subsidy,” it says, but warns against the loss of control over interest rates, and tax and spending policies.

Option 8: Oil standard

The report touts the possibility of a currency pegged to the price of oil, one of Scotland’s key export commodities, but this would run the risk of “Dutch Disease”, whereby an oil boom could damage other parts of the economy by making other exports more expensive, which would limit efforts for economic diversification.

Option 9 – Crytocurrencies or Scotcoin

Cyrptocurrencies – also know as digital currencies – are still in their infancies. Examples include Bitcoin or Scotcoin (recently profiled in CommonSpace). It suggests that one of the major drawbacks would be that digital currencies are currently less trusted unlike those connected to banks, which benefit from their “commercial reputation”.

The report warns that this would discourage people from spending, which could “undermine confidence”. The report also argues that there are still too many “technical challenges” associated with digital currency for this to be a viable alternative right now.

Picture courtesy of: Flickr / dun_deagh

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Arthur Blue's picture

Arthur Blue

Tue, 07/26/2016 - 18:22

I think that we'll all go to digital currency sooner or later, but for Scotland the question is what could be used in the interim. Especially as it might be foolish to expect much co-operation from the UK Treasury.

Scottish Scientist

Tue, 07/26/2016 - 19:47

Considering "Option 6: Scottish Pound, free-floating".

I question Stuart Rodger's claim "but it’s a riskier move. This is because it the early days of independence, market speculation could “seriously affect the price of the currency”.

Firstly, it is deluded to expect there to be no "market speculation" with a currency pegged to another, such as options 3, 4 and 5.

Speculation with a pegged currency works like this.

The speculator borrows a lot of the Scottish £s from the Scottish banks and exchanges them for the currency to which it is pegged, say Bank of England £s.

Very soon the Scottish banks run out of Bank of England £s and ask the Bank of England to exchange Scottish £s for Bank of England £s at the pegged rate.

However, the Bank of England is under no obligation to honour the pegged rate and then refuses to exchange the Scottish £s for Bank of England £s at a one for one rate and at best offers a market exchange rate.

At this point the Scottish banks can no longer honour the pegged rate either because they have run out of Bank of England £s.

The only way to exchange Scottish £s for Bank of England £s is at the market exchange rate, with Scottish £s being worth less than Bank of England £s.

Supposing for simplicity, the Scottish £ falls to the value of half the Bank of England £s on the market.

The speculator then uses half of the Bank of England notes he bought with the previously borrowed Scottish £s and exchanges them at the new market rate of 2 for 1 to buy back all the Scottish notes he borrowed in the first place uses them to pay off the loan, making a 50% profit for the speculator and a 50% loss for the Scottish banks.

The moral of the story is that whereas I know enough to run a Scottish central bank, Stuart Rodger doesn't seem to, not yet anyway.

"In politics and economics, Black Wednesday is 16 September 1992, when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed lower limit in the ERM. George Soros, the most high-profile of the currency market speculators, made over £1 billion in profit by short selling sterling."

Scottish Scientist

Wed, 07/27/2016 - 09:32

Now if this is just Stuart Rodger's mistake that is one thing. However, he may be reporting more or less from the Common Weal's Scottish Currency Options post-Brexit (2016) by Dr Craig Dalzell.

In other words, Dr Craig Dalzell may not know enough to run a central bank either.

Checking out his website, Craig turns out to be a physics PhD who has only "awakened to politics in 2012".

So Craig doesn't even claim to have the limited relevant academic accreditation of having an economics or banking PhD, not even with the limited academic credibility conferred by the Chancellors of the likes of Edinburgh University and Aberdeen University - some ignoramus member of the royal family.

Try to remember that Scotland is still run as part of the UK and nothing the UK does - awarding PhDs, appointing professors or anything - is up to the highest standards of the best universities in the world.

The UK has suffered a brain drain. Many good academics have gone abroad and many of the good academics still in Scotland are banned from universities because academic freedom has been crushed by the UK. Some good academics are even political prisoners, because the courts are run by the same royalist fascists who run the universities.

The UK is a basket case and that includes its universities, its courts - all its institutions, those in Scotland too.

The only way out of this is to defend academic freedom and allow the really clever academics to rip the credibility of UK-approved academics to shreds in an open debate.

All our Scottish Universities should dismiss members of the royal family from any role in their governance. The royals should be banned from all Scottish universities as a prelude to banning the royals from all of Scotland and the establishment of a Scottish republic.

Scotland's future must be based on democracy and free and open academic debate.

Scots cannot trust our future to royalists in the SNP, like Nicola Sturgeon and her hanger on UK-university approved so-called "experts", like Professor Anton Muscatelli, another person who has sabotaged Scotland's economy with his recommendation to accept the rotten fiscal framework which prevents the Scottish government borrowing for investment for growth.

If Common Weal sticks to an open debate then fine, that will help.


Mon, 08/01/2016 - 13:31

I think we're missing a trick here. We should consider using a complimentary currency immediately, regardless of which option we choose for our main currency. Something along the lines of the Swiss WIR.

I personally like the idea of something along the lines of stamp scrip, like the one used in Wörgl, but modernised to use blockchain tech that automatically applies the demurrage. Introducing it as a complimentary currency allow people to ease into using it without having to worry about moving from the traditional bank-based systems. It still galls me that people see banks as trustworthy after LIBOR etc.

If you've never heard of Wörgl, this is absolutely worth a read for the amazing opportunities a carefully crafted currency can open up.

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