Institute warns on cost to Scotland of informal currency union with UK

A newspaper stand in Edinburgh displays a "Yes or No" advert referring to tomorrow's referendum on Scottish independence from the UK. Polls showed yesterday that the unionist and independence camps were neck and neck. Photo: EPA

A newspaper stand in Edinburgh displays a "Yes or No" advert referring to tomorrow's referendum on Scottish independence from the UK. Polls showed yesterday that the unionist and independence camps were neck and neck. Photo: EPA

Published Sep 17, 2014

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Andy Bruce

London

An independent Scotland would struggle to maintain an informal currency union with the rest of the UK for more than a year if it walked away from its share of the UK’s national debt, a think tank said yesterday.

Scottish nationalist leader Alex Salmond has said an independent Scotland might refuse to take on its share of the debt if it was not allowed to share the pound in a formal currency union.

In such a case, Scotland would be better off adopting a new currency rather than using the pound informally, the National Institute of Social and Economic Research said.

If it defaulted, Scotland would face punitive borrowing costs from international financial markets.

“This

would imply an immediate return to a fiscal surplus and unprecedented austerity,” the institute said in a report, questioning whether Scots would accept this for the sake of keeping the pound.

“We would expect the currency arrangement to fail and Scotland would be forced to introduce its own new currency within one year.”

Scotland’s future currency is one of several disputed issues in the run-up to tomorrow’s referendum over whether to dissolve the 307-year-old union, the outcome of which opinion polls now suggest is too close to call.

All three main Westminster political parties are opposed to a formal currency union.

Even if Scotland took on its share of British government debt, an informal union would be shaky given the twin fiscal and external deficits an independent Scotland would most likely inherit, the institute said.

It said Scotland would have around £7 billion (R125bn) of foreign exchange reserves to defend its currency set-up.

“Introducing a new Scottish currency has always been the most sensible option. We would recommend this is carried out before losing £7bn of foreign exchange reserves rather than after,” the report said.

Bank of England governor Mark Carney said last week that an independent Scotland would need big stockpiles of sterling if it adopted the pound without an agreement with the rest of the UK, since the Bank of England would no longer be the lender of last resort for the vast Scottish banking industry.

Salmond says Westminster’s opposition to a formal currency union is part of a campaign of fear.

Nobel Prize-winning economist Joseph Stiglitz, an adviser to the Scottish government, has said arguments about the currency were “a lot to do about nothing”, since many arrangements could succeed. – Reuters

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