Scotland's currency conundrum

This post considers some of the issues that would arise if Scotland were to vote in favour of independence. The timing of the referendum is not yet clear, and there are ongoing debates as to the actual questions to be asked of the Scottish people. This post only considers full independence, i.e. Scotland leaving the United Kingdom and becoming a separate sovereign country. Other proposals that stop short of full independence are also likely to be on the table, and I will return to these in a subsequent post.

One of the major arguments has been whether Scotland leaving the Union would in effect mean that the United Kingdom (UK) ceases to exist. The Scottish National Party (SNP) seems to think that it would have this effect, and appears almost gleeful at the prospect. But I concur with the writer of this paper from the Centre For European Reform (1999), who concluded that the principle of parliamentary sovereignty, which is fundamental to the UK's constitution (and historically one of the major areas of disagreement between England and Scotland), means that the Westminster parliament can simply change the rules. It would probably repeal the Treaty of Union and create a new Treaty redefining the UK as England, Wales and Northern Ireland: this is similar to what was done when Ireland was brought into the Union, and again when Ireland left it. It is completely wrong to assume that dissolving the existing Treaty of Union would destroy the UK parliament (which I think is what the SNP believe). Nor would it mean that the Westminster parliament would become the "English" parliament. Wales and Northern Ireland would still be represented there, although there would probably need to be fundamental changes to prevent them being swamped by the dominance of England.

As I am of the opinion that the Westminster parliament will have both the desire and the ability to ensure the continuation of the UK as an entity in the event of Scotland leaving the Union, I will assume in the remainder of this post that the UK would continue to exist as a union of England, Wales and Northern Ireland.

Much of the discussion around the economic case for Scottish independence has centred on its GDP and its claim to North Sea Oil. And much of the discussion around the political case for Scottish independence has centred on the Scottish people's historic and current grievances against the English. I don't propose to address those in this post, although they are serious matters. I want to look at the financial implications for Scotland, and in particular, the question of its currency. I appreciate that for many Scots this is a sideshow compared to their sense of injustice and their desire to run their own affairs, but I believe understanding the currency issue is essential if the Scottish people are to make an informed and rational decision on their future. If they make the wrong decision, Scotland could end up like Greece.

As I see it, the currency options for an independent Scotland are as follows:

- retaining sterling
- joining the Euro
- issuing a new Scottish currency

Each has significant economic and political implications.

1) Retaining sterling

There are in my view serious issues with Scotland retaining sterling. The relationship between the UK and Scotland would be fundamentally different from today. Alec Salmond's remarks the other day suggest that the SNP does not fully appreciate the extent of this difference, and this has been borne out in conversations I have had with members of the SNP. To them, sterling has historically been Scotland's currency and they don't see why they should have to change it - and indeed, as sterling is freely traded the UK cannot prevent them using it. The reality, though, is that if Scotland left the union it would also lose any right to issue sterling or control it in any way. It would in effect be using a foreign currency.

Adopting a foreign currency means giving up control of monetary policy to a foreign state. The value of sterling is controlled by the Bank of England through interest rate policy, base money creation and open market operations. At present, as a member of the UK, Scotland can reasonably expect to have its needs taken into account in the conduct of monetary policy - and indeed the SNP's 2011 manifesto contains a commitment to press for Scottish representation on the Monetary Policy Committee (MPC). But after independence Scotland would have no right to have its needs considered or to be represented on the MPC. It would simply have to suffer the consequences of the MPC setting monetary policy to suit the needs of the UK only.

The SNP argues that this is not significantly different from the present situation. But I'm afraid they are wrong.
Yes, the MPC sets monetary policy for the UK as a whole, not to suit particular parts of it. But the UK is a fiscal union. Monetary strains are offset by fiscal transfers, which in the UK are of the "shared taxation" variety: Scotland does not levy its own income and corporation taxes, but shares in the total "pot" of UK taxation. The formula by which Scotland receives back tax revenue in the form of a block grant is known as the Barnett formula. It is widely seen by English people as benefiting Scotland at the expense of England, and is one of the main reasons why Scottish independence is more popular in England than it is in Scotland.

An independent Scotland would levy its own taxes and would receive no money at all from the UK. It would still be in monetary union with the UK, but no longer in fiscal or political union.  As we have seen in the Eurozone, when there is monetary union without fiscal union smaller countries suffer because monetary policy is inevitably set to suit the dominant economy. In the case of the Eurozone, peripheral countries have suffered catastrophic loss of competitiveness because monetary policy for over a decade has suited Germany but been completely wrong for them. In the case of the UK and Scotland, this imbalance would be aggravated by the fact that monetary policy would actually be set by the dominant economy, which isn't the case in the Eurozone. If Scotland chose to run a looser fiscal regime than the UK - which from the electoral dynamics seems very likely - it would suffer the same loss of competitiveness as peripheral countries in the Eurozone. Because it would not be in any sort of political union with the UK, Scotland would not suffer externally-imposed fiscal discipline as peripheral Eurozone countries are experiencing. But it wouldn't get any help either. It would no longer have the protection of the fiscal transfers it currently receives. And its banking system would no longer automatically have access to "lender of last resort" support from the Bank of England - and I suspect that if the Bank of England were seen to be supporting Scottish banks after independence, there would be a political storm from English people already angry about the extent of the support that Scottish banks received from the UK government in the 2008 financial crisis.

2) Joining the euro

Until recently, this was the SNP's preferred option, and it still remains their long-term policy - although in the conversation I had with Dundee SNP, they suggested that this might actually be indefinite.

The first, and most obvious question here is - as only EU members can join the Euro, would an independent Scotland retain its European Union (EU) membership, or would it have to apply for membership in its own right as an independent entity? There are differing opinions on this. The SNP assumes that Scotland would remain a member of the EU, but this stems from its belief that the UK would no longer exist and therefore the EU would have no basis on which to determine which of the four countries should inherit EU membership.  I've explained above why I think this belief is mistaken and the UK will continue to exist.  In my view the EU is likely to acknowledge the re-formed UK as simply a smaller version of the old UK - sort of Germany in reverse. But it is by no means certain that it would automatically recognise Scotland as an EU member separately from the UK. As the Centre for European Reform paper explains (op. cit.), accepting Scotland's membership independently from the UK would involve treaty amendment because the number of EU members is written into the treaties. Treaty amendment to increase the number of members requires unanimous agreement from all existing member states. I suspect that Scotland would formally have to apply for membership, but the ever-pragmatic EU would fast-track its application and attempt to waive the normal convergence requirements to get it approved quickly. There may be objections to this from existing EU members.

If Scotland retains EU membership, it would probably also retain the UK's opt-out regarding Euro membership, although it could apply for membership if it chose. However, if Scotland has to apply for EU membership, the EU leadership would be likely to make joining the Euro in due course a condition of membership.

Membership of the EU creates a problem if Scotland is still using sterling. The central banking model in Europe places the European Central Bank (ECB) as the "hub" of a system of national central banks. Scotland would have no central bank of its own but would not be represented or supported by the Bank of England.  It could not meet the ECB's requirement for submission of gold and foreign currency (FX) reserves unless it established its own central bank and persuaded the UK to relinquish a share of its gold and FX reserves at the ECB. But that central bank would have no currency-issuing powers. Even Eurozone central banks can issue Euros!

Joining the Euro is fraught with problems. Convergence criteria are strict, requiring public debt/GDP under 60% and cyclical deficit no larger than 3% (structural 0.5% or less). If Scotland were to take on its share of the UK national debt, its debt/GDP would be about the same as the UK's and its deficit between 5% and 11% depending on how much of North Sea Oil revenues it was able to claim. It would have to experience significant GDP growth to reduce these to the level required for euro membership.  If Scotland were able to negotiate taking a significantly reduced share of the UK national debt (perhaps as quid pro quo for relinquishing any claim to past North Sea Oil receipts) it might run close to the debt requirements. But even 100% of North Sea Oil receipts would not bring its deficit down to the 3% target.

Furthermore, Euro membership would not confer the fiscal benefits that membership of the UK does. It is not a fiscal union in any meaningful sense, and there are at present no plans to make it one, despite all the rhetoric from EU leaders. Scotland would receive no fiscal transfers as at present, but would be forced through sanctions and budgetary supervision to impose fiscal austerity even against the wishes of its electorate.  And it is clear from recent events that the EU leadership expects non-Euro members to meet convergence criteria too. This is much tougher than anything Scotland has experienced in the UK.

Scotland should think very hard before abandoning the UK's full fiscal union for the half-baked and increasingly authoritarian Eurozone.

3) A new Scottish currency

The three largest Scottish banks already issue Scottish pound notes that are widely accepted both north and south of the border, although not legal tender. An independent Scotland could therefore simply declare the "Scottish pound" as its legal currency. What value this would have internationally would be difficult to determine since Scotland would have no "credit history", and if Scotland was carrying a fairly high level of inherited debt in relation to GDP and a largish deficit the currency markets might not be too keen on the new currency. They would be even less keen on it if Scotland increased its deficit to support the SNP's social and investment spending commitments. To prevent the Scottish pound collapsing, therefore, Scotland might have to peg it to one with a more solid history, such as sterling, the US dollar or the Euro (although I would suggest pegging a new currency to one on the verge of collapse wouldn't be too clever).  The history of exchange rate pegs is not a happy one: economies have to be broadly equivalent economically for the peg to hold, as the UK's experience with the ERM shows, and if the peg is at an inappropriate exchange rate a serious trade imbalance can result. Holding a currency peg would require the same sort of fiscal convergence that retaining sterling or joining the Euro would need.

Having its own currency would at least give Scotland control of its monetary policy, although if the currency were pegged monetary policy would be largely defined by the need to hold the peg. In theory it wouldn't have to have a central bank (although this would probably be a requirement for EU membership). But its three currency-issuing banks would all be foreign-owned. Royal Bank of Scotland (RBS) is 84% owned by the UK government: Halifax Bank of Scotland (HBOS) is wholly owned by the English bank Lloyds TSB, itself 43% owned by the UK government: and Clydesdale is owned by the National Bank of Australia. Having all its currency issuance capability in foreign ownership may not be acceptable to Scotland's electorate, in which case setting up a central bank would seem to be essential.

There are also serious questions about the future in Scotland of its two biggest banks, RBS and HBOS. The SNP currently claims that Scotland should not have to accept any of the costs (paywall) of the bailout of those two banks: their arguments for this are that the banks were regulated in London, large parts of their retail operations are in England, and many of the activities that failed were south of the border or overseas. The counter argument is that although regulators bear some responsibility for failing to supervise banks properly, the failure of those banks was due to their appalling management. The view of many English people - and, it seems, some Scots -  is that they can't see why England should bear all the costs of the mismanagement of Scottish banks, especially when it seems that some of their disastrous decisions were supported and endorsed by the Scottish government. The destruction of a major English bank (NatWest) by a Scottish megalomaniac still rankles with many English people, and the fact that they are being expected to pay for this adds insult to injury.

Personally, I don't think the fight is worthwhile. The solution is easy. If Scotland refuses to accept any responsibility for the cost of bailing out Scottish banks, then it should not have any share in their ownership. The UK government should retain its current stake in both banks, and return them to the private sector in due course. Scotland would have no claim on any profits from their privatisation. I would also personally like to see the UK government repatriate the headquarters of RBS to London and rename it NatWest, in recognition that it would be a UK-owned bank with 90% of its operations in the UK.

General conclusions

There are no simple solutions to Scotland's currency conundrum. Economic convergence and some surrender of monetary and fiscal sovereignty seems inevitable under each scenario, although issuing a new currency would at least give the possibility of genuine financial independence once the credibility of the new currency was established. But whichever currency alternative is adopted, deficit spending by an independent Scotland immediately after independence would carry terrible economic risks because of the inflexibility of any form of currency peg and the negative view of sovereign deficits that bond and currency markets tend to have. In my view, therefore, current SNP spending plans would not be sustainable post-independence - which begs the question why they are apparently sustainable now. Maybe there is some truth in the prevalent English belief that Scotland is subsidised by England?

And finally, I question what, in a world where countries and corporations are increasingly interconnected and interdependent, "independence" really means. Can any country truly be said to "run its own affairs" any more? Or are nation states in reality subservient to the demands of supra-national organisations, international markets and multinational corporations? Across the world, the drive is for nation states to band together and form economic unions as a response to increasing globalisation. Scotland's demand for independence seems to run counter to this. But as the SNP wants a future in a different kind of union, namely the EU, I wonder whether "independence" is really what they are asking for, or simply decoupling from England and the political system that they hate? And would this give them real economic benefits? For me, the economic case for Scottish independence is not made, and the currency issue appears fatal.

If the call for Scottish independence is simply based upon ancient grievances, current injustices and dislike of the union as currently consituted, surely it would be better to address these issues and have a sensible debate as to how the union could be reformed to suit all its members better? For although Scotland can leave the United Kingdom, it cannot leave the British Isles. England and Scotland still have to coexist  peacefully.


  1. I actually thought Alex Salmond's answer was a moderate reply to a silly question.

    The answer - what currency will Scotland use after independence? is something to be worked out carefully and thoughtfully in consultation with the Westminister government, what-would-be the new Scottish banking system, and other financial entities as appropriate. As you've outlined here, all three options post-independence have advantages and disadvantages.

    What is entirely inappropriate is for George Osborne, Chancellor since May 2010, to raise the question as a tabloid-level scaremongering "WOO WOO!" Salmond clearly had to respond, and he said what would play best at tabloid level. Assuming that he meant it literally and had invented Scottish currency policy on the fly in response to a stupid comment by the Tory Chancellor - well, that I doubt.

    (According to international law, Scotland inherits 8% of the total UK debt. And while the revenues are of diminishing value, all of the North Sea Oil. So there's that.)

  2. Following up my comments on Twitter:

    I'm no Salmond fan. I'm not sure I want independence. I'm not a financial expert.


    I recognise when Alex Salmond is making a smart comeback to a stupid comment, and when he's announcing national policy. His crack back at Osborne's stupid scaremongering was a comeback.

    Financial policy for an independent Scotland should be, and will be, decided with forethought and consultation. If Scotland votes yes to independence in autumn 2014, I doubt if the Union will separate much before 2019 - there hasn't been a peaceful separation after so long a union like this before, but I would be surprised if it could realistically happen faster than four or five years.

    Your answer on Twitter that you weren't sure which was worse - Salmond having no financial policy set yet for independence, or Salmond having made financial policy on the fly in an argument with Osborne - well, I think that's a very silly comment. It's not Alex Salmond's place to make up his mind what Scotland's currency will be and tell the rest of us - he's just the First Minister, not the absolute ruler! Nor would it be a good idea to have currency plans set in stone before independence is a given and before the date of separation has been settled.

    The consultation on the independence referendum hasn't yet been published. I'd be very disturbed if I thought Salmond had already made up his mind about the currency!

  3. Edinburgh Eye

    I don't believe I made any suggestion, either here or on Twitter, that Salmond should have financial policy or currency plans "set in stone". But I would expect him, or rather the SNP leadership, to have considered the pros & cons of the various alternatives. Until recently he was on record as saying - more than once - that the SNP's plan was to take Scotland into the Euro. Now he's talking about retaining Sterling. I am not criticising him for having cold feet about the Euro - far from it, actually. No-one in their right mind would be planning to join the Euro at the moment. I'm simply bothered by the fact that "plan B", retaining sterling, didn't seem to have been thought through. Surely all alternatives should be considered before one is adopted as SNP policy?

    I'm afraid Scotland doesn't automatically have the right to 100% of North Sea Oil under international law. The maritime boundary between England and Scotland was changed in 1991 by agreement between Donald Dewar (then first minister) and Tony Blair. Prior to that it had followed the 55 degree latitude line. It now extends the line of the land border (approx 45 degrees) out into the North Sea. Ownership of the oilfields to the south of that line is disputed.

    1. Untrue. The internal division of territorial waters is of no relevance to the drawing of maritime boundaries between states. The rule of a line of equidistance is clearly established under international law - see "Prospective Anglo-Scottish maritime boundary revisited" Eur Journal of Int Law Vol 12 2001 (full article at

  4. Thanks for amending your post!

    "But I would expect him, or rather the SNP leadership, to have considered the pros & cons of the various alternatives."

    So do I. I'm not assuming that he hasn't, based on a chance comment to Osborne. IME of Salmond, little though I like him personally, he tends not to make policy on the fly in big issues - though he is one for the crowdpleasing gestures, it tends to be on smaller matters.

    "I'm afraid Scotland doesn't automatically have the right to 100% of North Sea Oil under international law. The maritime boundary between England and Scotland was changed in 1991 by agreement between Donald Dewar (then first minister) and Tony Blair."

    Yes, I anticipate that this maritime boundary change pre-devolution will be one of the many topics of discussion!

  5. The value of any Scottish currency would be largely based on oil and therefore somewhat volatile. The Scottish economy would then be dependent on the policy of the UAE and other oil rich nations wi whom it has no influence rather than it has at present within the UK.

  6. Donald Dewar was not first minister in 1991. He was shadow Scottish Secretary under Neil Kinnock at that point. The role of first minister was not created until May 1999 - just after the first elections to the Scottish Parliament. Dewar took the role then, leading a coalition government with the Liberal Democrats. So it was either someone else who changed the maritime boundary, or you may have your dates wrong. (btw this is a thought-provoking blog).

  7. Thanks Ian. And well spotted - it's a typo. The correct date is 1999.

  8. Eye Edinburgh

    As you will see from Ian's comment and my reply, I got the date wrong. The maritime boundary change was post-devolution. Which will no doubt make the oil debate even more intense.

  9. EyeEdinburgh
    I'm not sure why Scotland would feel the need to consult with Westminster on what currency would be used should the Scots choose Inedependence.

    Choosing Independence means making your own decisions. Presumably, once the referendum vote has been counted, there would be a number of years between the Yes vote announcement and the 'Day of Independence'

    Scotland could consult with any government willing to participate in that consultation. Why not China? Canada? South Africa? Iceland?

    I what remains of the UK insists on taking Scotland's oil, what responsibility would that UK take for protecting Scotland's shore line from spills such as we saw in Gulf of Mexico?

    And why are people paying so much more attention to oil? Should Scotland leave, they would be entitled to a fair and equitable share of everything they have contributed. That includes resources such as the BBC, the Foreign Office, the Post Office, every government building owned by the UK, their share of the Olympics Stadium (did they contribute to that or was that simply England/London tax payers?)

    Perhaps we, as Brits should have taken far more interest in ensuring the United Kingdom really was a United, fair and equitable place. If we had, we certainly wouldn't be facing the Scots packing their bags and taking what is rightfully theirs with them.

    It will be a measure of the UK's character to see what British fairness really means. So far, looking in from the outside, it certainly does not look too good. No wonder the Scots have had enough.

  10. I Can allso see a 4 option.
    The option of when independence come they kepp having the 3 Scottish banks issuing currency pegged to the English pound until a Scottish central bank is formed.
    Then after a Scottish central bank is formed they will take over the responsibility to issue the new Scottish pound pegged to the English pound, while the Scottish currency is backed by energy.
    The Scottish bank would be able to adjust there interest rates by buy and selling its reserve of future energy taxeincome. By having the currency backed by energy Scotland would not be able to print more money then what energy they produce, and by this removing the problem with fiat money. The down side would be that the only way to produce more money is to increase energy production.

    Have country before adopted another country currency. Yes Dolarization
    have smaller countrys pegged there currency it a major one and still been abel to addjust intrest rates. Yes denamrk have there krone pegged to the euro.

    And when it comes to the bailout of RBS and HBOS now Lloyds group,
    Unionist politicians have used the banking collapse to trash Scotland many times before now. Brown, Murphy, Cameron…they’ve all had a go so often, the assertion has become received wisdom. But they are wrong.

    The Newsweek team on BBC Radio Scotland have for the last two programmes lined up experts to prove just how wrong. First was Andrew Hughes Hallett, Professor of Economics at St Andrew’s University who described Moore’s answer as a nonsense.

    “By international convention, when banks which operate in more than one country get into these sorts of conditions, the bailout is shared in proportion to the area of activities of those banks. In the case of the RBS…roughly speaking 90% of its operations are in England and 10% are in Scotland.”

    The Federal Reserve stepped in to bail out US operations linked to RBS and HBOS. In Europe the governments of France, Belgium The Netherlands and Luxembourg joined forces to help the Fortis and Dexia Banks operating across their borders.

    George Walker, Professor of International Finance Law at Queen Mary University, London and also Glasgow University, supported this position. So did Andrew Campbell, Professor of international and finance law at Leeds University.

    Professor Walker said it was inconceivable that the Treasury would not have stepped in to save RBS’s English operations, even if Scotland was independent. “This decision was not taken to protect either RBS or HBOS, nor specifically the Scottish markets, but to protect the financial stability of the UK financial system as a whole.” he explained.

    He went on: “Many of those (RBS) subsidiaries operate out of London and only out of London.  I don’t think you can, simply, look at it purely on the basis of where, as you point out, the brass plate of the holding company is.

    But now it was resqued under the uk umbrela what would happend when scotland and england splitt?

    I think there might be a fight on who get to keep rbs and the shares in lloyds group, and the debt realated to the bailout. I dont see England goverment giving away thath control and where a scottish goverment could sell or hurt english jobbs, specialy if in 2013 rbs and lloyds are posting profits.

  11. 'And much of the discussion around the political case for Scottish independence has centred on the Scottish people's historic and current grievances against the English. I don't propose to address those in this post, although they are serious matters.'

    Utter nonsense. The desire for Scottish independence is a desire for Scotland to join the family of nations as an equal. There is an anti-British Establishment concensus - but that does not equate to an anti-English sense of grievance.

  12. Richard

    I said I would not address this in this post. But as you have chosen to rubbish my statement I feel that I need to justify what I said.

    I have lived and worked with Scots and spent considerable amounts of time in Scotland. I said what I did on the basis of what I have heard and what I have read over many years. Much of the Scottish nationalist writing is very bitter and very angry: there is a deep-rooted sense of injustice going back to the terms of the original union, which is now compounded by a widespread belief that the rightwards drift of English politics in effect disenfranchises Scots within the Union. On a personal level, I have myself experienced verbal abuse from Scots who resented me simply because I was English. Don't tell me that there is not an anti-English sense of grievance. My own experience - which among other things includes 11 years of marriage to a Scot and 2 years working for RBS in Edinburgh - tells me otherwise.

    1. Frances,
      Racism is what? Perhaps what the Egyptians's feel towards the Americans? Disenfranchised, powerless as the western over-lords dictated policy?

      Is that what you mean?

      I would suggest that possibly the Scots have not time for the English, who regularly abuse the Scots as no more than drunkards, tight fisted, spongers who can't speak coherently. I've sat in London, Manchester and Hastings, with Scottish friends and had to correct many an Englishman. The Scots dare not object, being acccused of having no sense of humour if they do. The Scots seem, it is clear, to know their place, to know they are not permitted to defend themselves, in my experience.

      The latest term of abuse I've come across is 'porridge-wog' As a Canadian of Scots descent I find the whole attitude towards the Scots, the lies, the abuse, the disenfranchisement disgusting. I've yet to hear a Scotsman abuse an Englishman.

      Perhaps determing the source of such allegations would be far more rational than accusing the minorty of those very 'crimes' your own nation have perpetrated for many a decade.

      It looks to me, you feel your economics is your strength. Perhaps you should return to what you seem to have more expertise in, debate on safer, more comfortable ground. Because racism certainly is not it, not for you.

    2. Well, English me has lived and worked in Scotland for 25 years, and have never heard an anti English word. Plenty of people in England take it upon themselves to traduce Scotland when I'm down there though. And I strongly contest your assertion that case for independence is based on greivane - not so, it is based on aspiration and hope

    3. The Scots do not have a term of abuse for the English. But the English often offensively dismiss the Scots as 'sweaties'.

    4. Anonymous

      I am English. I have never used that term about the Scots, nor have I ever heard it used despite 11 years of marriage to a Scot.

  13. Amy

    Your entire post is a fine example of exactly what I meant when I said there were ancient and current grievances against the English. You've listed many of them.

    Why should I not speak of my own personal experience? I'm not denying the reality of Scottish experience either. There is anger and bitterness on both sides.

    I don't know why you have used the term racism. I did not. Are you accusing me of racism? Because if so it is laughable, given that I was married to a Scot.

    Your comment is very close to trolling, frankly. I've left it in because it is such a good example of exactly what I was talking about in my reply to Richard. Resentment against English, not just against the British Establishment, as Richard thinks.

  14. Oh, and I should make it clear that I don't regard the abuse that I received from some of my husband's friends and relatives as racist. They resented me because of what I represented to them - one of the people they regarded as their oppressors.

    1. There are close to half-a-million English born people who live and work in Scotland, and Scotland is the better for it. Some of them are SNP MSP's, councillors and party members.

      99% of Scots make no distinction, and I regard English people who have settled here as being as Scottish as me. Which is as it should be.

      I'm sorry that you may have met some of the 1% but are you really so unaware of the level of arrogance and petty racism that so readily flows through so much political and cultural discourse in England, day in, day out."Frogs", "Krauts" ... and of course "the jocks". The Daily Mail and The Telegraph has been channelling all that suppressed dislike of Scots this past 10 days or more.

      I would suggest you look at cleaning up your own backyard before throwing mud on ours !

    2. James,

      In the post itself I acknowledged the real grievances that I know many Scots have against the English. I don't regard these as unreasonable: I regard the behaviour of some English, and some sections of the British media, towards the Scots as unacceptable. I did not wish to discuss them in this post, as I wanted to focus on the currency issue. Unfortunately someone decided to rubbish the one comment I made about this, and I defended myself. Perhaps I should have said nothing - but why should I keep silent about my experience? This, after all, is my blog, and you - not I - are a guest here. If I can't speak freely here, where can I?

      Since then various people have taken it upon themselves - unfairly - to describe me as either naive (as you do) or racist. I find the whole thing completely depressing. There is zero chance of any kind of rational debate or amicable settlement while people are slinging mud at each other.

    3. When Scots complain about English attitudes it is not normally as 'oppressors' but as ignorant loudmouths with little understanding of Scotland, the nature of the Union and often, with astonishingly poor understanding of England's role. The thing that really winds Scots up about individual English people (as distinct from Westminster) is the idea that England and Britain are the same thing; that Scots who decide not to support England are 'treacherous' and 'disloyal'; that there is a Queen of England; that sterling is an English currency etc...

      It is the same kind of offence that a wife might feel if she received a letter addressed to 'Mr and Mrs John Coppola'...

    4. Anonymous

      And your point is....?

      I don't think I have suggested any of those in this post. And as you were not present on the occasion when I experienced being insulted simply because I was English, you cannot possibly know what the motives of those people were. One of the things that was criticised was my accent - apparently my vowels were not as "pure" as Scottish vowels. What has that to do with any of the points you raise?

  15. Anonymous

    Really interesting idea, that - an energy-backed currency. It shouldn't be linked only to oil, since North Sea Oil is declining. But Scotland has many other energy-generating opportunities. I think your idea should be seriously considered.

    As I said in the post, I don't think it is worth arguing about who was responsible for the failure of HBOS and RBS. They were bailed out by the UK, of which Scotland is part. The financial liabilities and assets arising from these bailouts now form part of the UK balance sheet, which in the event of Scotland leaving the UK would be divided between the countries on some basis to be decided. If Scotland refuses to accept a share of the financial liabilities arising from the bailouts then they should also relinquish their claim to the associated assets - i.e. the government stake in those banks.

    1. There are still new finds of North Sea oil being announced. The decline will be a slow and ++long one, and the likelihood is the the unit price of oil will rise as production drops, Scotland is also well placed for renewable energy, and we have a super-abundance of water - a commodity becoming increasingly scarce in Southern England. All of these resources should form an adequate backing for a currency, even before agriculture, industry, fishing ans other sources of wealth are taken into account.

      I am sorry that your experience of Scotland was not positive, but I have to say that it was not representative, either. Nor is Scotland an earthly paradise - there is racism, as the tragic Chhokar murder case reveals. But there are many worse places to live as an immigrant

  16. There was a comment from Anonymous which is showing on the stats as Published but for some reason not showing on the blog itself. I'm reposting it here with my response.

    "Untrue. The internal division of territorial waters is of no relevance to the drawing of maritime boundaries between states. The rule of a line of equidistance is clearly established under international law - see "Prospective Anglo-Scottish maritime boundary revisited" Eur Journal of Int Law Vol 12 2001 (full article at"

    The present boundary was the result of a negotiation the UK government and the devolved Scottish Government, and as such is the recognised boundary today. The paper you cited does NOT suggest that the principle of equidistance is the only way of determining maritime boundaries, and in fact points out that equidistance in practice is only one of many considerations. Furthermore, the paper dismisses a line of equidistance in this case as distorting, and proposes instead a line of perpendicularity - which as it happens benefits Scotland more than England, as it runs further south than the equidistant line. The paper therefore does not support your statement.

    I did say that the ownership of the oil fields to the south of the present boundary is disputed. In the event of Scottish independence the boundary would in my view have to be renegotiated and an equitable agreement reached between the two parties.

    1. It was negotiated between two Labour governments. Of course the boundary would have to be negotiated upon independence but if negotiation failed there would be an arbitration by reference to international law, unless you are advocating war. my point is that, pace your implication, equidistance is the worst possible outcome for Scotland.

    2. Sorry Anonymous, it appears I misunderstood. As you say, simple line of equidistance is almost the worst outcome for Scotland (the present boundary is worse still, of course).

      Yes, if negotiation failed there would have to be legal arbitration. I really hope there would not be war!

  17. The only really informative precedent is that of Czechoslovakia. It was recognised on independence there that both successor states were ongoing stakeholders in the old currency before both came round to issuing their own. There's no good reason why the same shouldn't be the interim arrangement in the event of Scotland forming their own sovereign state/dissolving the old one.

  18. The issue of pegged currency is an interesting one, as I understand it (I may be wrong), currently there isn't actually any form of legal tender here in Scotland, not Scottish notes nor English note (nor Northern Irish notes for that matter) have legal standing in Scotland. What relevance does this have in an independent Scotland you ask? Well, if memory serves, notes issued by the Scottish banks must be backed up, pound for pound, by the individual bank's holdings of BoE notes. This is why there are the likes of £100,000,000 notes, so that Scottish and Northern Irish banks don't have to have stacks and stacks of £10 notes in vaults dotted around the country. The consequence of this is, if you imagine that Scottish notes became an independent currency, is that the Scots pound is pegged to the UK pound, but through multiple issuing authorities.

    As regards the negotiations and this is the bit that is really getting me riled. The plan is currently that we have the referendum and if we vote yes, we then begin negotiations on the specifics, such as oil boundaries, RBS, LTSBHBOS, the national debt, citizenship, EU membership and so forth.

    My first big problem with all this is that the basis for the arguments in the referendum, both for and against, are going to be purely speculative. As we've seen with this currency debate, one sides arguments are based on negotiations going one way (i.e the BoE being part of the rump UK government) and the other side another way (i.e. the BoE becoming some sort of joint owned company between Scotland and the rump UK, or being split between the two). This means that Unionists will argue against an independent Scotland which has come of badly out the negotiations, and Nationalists will argue for an independent Scotland which has got the best possible deal out of the negotiations. Neither of these two will be the independent Scotland that we get IF we vote yes. We'll actually be voting for a complete unknown quantity.

    The second problem with this post-referendum negotiation is the way in which it will be conducted. Alex Salmond will walk into the room smirking gleefully, he’s won, the negotiating team from the UK gov sitting opposite is the conquered foe, suing for peace, and Salmond will start laying out his demands. However once beaten the UK team are essentially there to fight for the interests of the rump-UK left post independence, while Salmond's team is there to argue the interests of independent Scotland. Even if the UK team want an amicable divorce, imagine the pressure they will be under from the English, Welsh and Northern Irish public. They will be rather reluctant to give way on much at all.
    However if the negotiations were conducted in their entirety or in part, prior to the referendum the UK government is obligated to work in the interests of the entire UK including Scotland. Now I'.m sure cybernats will disagree with me on this however I ask them, thinking cynically, to remember that during the referendum campaign, the UK government will be trying to ingratiate itself as much as possible with the Scottish public, and will want to avoid at all costs being seen not to be concerned with the Scottish peoples interests. Thus it will try to be fair minded in negotiations, so as to appear so to the public who are deciding which way to go...

    1. Max,

      While Scotland remains in the UK all bank notes issued by the Bank of England and coins issued by the Royal Mint are legal tender in Scotland, as these are UK not English currency. England doesn't have its own currency. Whether the Scottish government recognises UK notes and coins is really irrelevant at the moment as its devolved powers don't currently include issuing its own legal tender.

      After independence, if Scotland had its own central bank it could if it wished issue "Scottish pounds" without pegging them to the UK currency, because those Scottish pounds would then be legal tender in Scotland. As I discussed in the post, the reason for pegging the Scottish pound to the UK pound would be to ensure international credibility. But an alternative, which someone above has suggested (and I admit I did not think of, but rather like) is backing the Scottish pound with energy (a Scottish "petro-pound"). If this were done then it would not need to be pegged to any other currency.

      I agree that negotiations will have to include arrangements for central banking in Scotland. I did discuss this a bit in the post. The idea of two independent countries somehow jointly owning a single central bank is fraught with problems in my view. The only model we have for that really is the Eurozone, and the ECB is undoubtedly completely dominated by Germany - as would be likely in this case too, simply because the "rump UK" economy is so much larger than Scotland's. I think there would have to be a separate Scottish central bank, really - especially if there is a separate Scottish currency.

      You are so right about the political posturing that will go on both before and after the referendum.

    2. That is simply not right. "Legal tender" does not mean "lawfully used currency". It is a legal concept. A creditor can be forced by a debtor to accept payment in legal tender. See . I recalled that the only legal tender in Scotland for a debt of any value was the two pound coin but it appears that the pound coin is too.

    3. Anonymous

      I stand corrected! Omitting Scotland from the Act making BoE-issued bank notes legal tender was presumably because that would undermine use of Scottish pound notes?

  19. As regards the legal tender I was merely pointing out that no notes are legal tender in Scotland, as the act making BoE notes legal tender doesn't apply outside of England and Wales,I stand corrected as regards coinage. I only mentioned it as often small states with small currencies can experience problems due to foreign exchange issues(I recently studied in Iceland and was made acutely aware of this fact on numerous occasions. Scotland would suffer the lack of foreign currency that Iceland has as all existing notes are backed up by BoE notes. This would enable an independent currency to start from a stronger footing than if this wasn't the case.

    I love the term 'petro-pound' but the potential to mean that Scotland undergoes massively fluctuating inflation and deflation i think could damage the ability for businesses to plan for future investment.

    I agree that Scotland would need to set up a separate central bank no matter what route it took post independence, it is I think a vital part of the organs of a modern state.

  20. The implication of your post is that Scotland is unlikely to gain economically from political Independence. Being Independent legally does not free you from the greater power of other nations. It is ironic that the great Scotsman Adam Smith made this the foundation of his economic theory in 1776, that integration by trade is the logical result of division of labour and the foundation of increases in the wealth of nations! The union with England seems to be a logical result of this theory. The euro follows too, but there was no political union with the euro and a shared treasury as in the UK case. So if the eurocrats had done their home work they would have applied the British method of creating a single currency.


  22. You missed a big issue:

    Scotland will remain liable for a portion of UK Public Sector Net Debt. This liability MUST be denominated in the Pound Sterling.

    Scotland therefore cannot adopt a non-Sterling currency - or a currency which is not pegged directly to Sterling - until that debt is substantially repaid or somehow replaced. To adopt, say, the Euro, would risk devaluation against the Pound, which would raise the real debt burden. If the debt burden starts at upwards of 70% of GDP (in GBP) that is a risk nobody (sane) would take.

  23. There's a very interesting counterpoint to your argument at . In short, all users of sterling would benefit if it was adopted by a country with the asset base that an independent Scotland would have. After all, the ratings agencies have said more or less explicitly that it is that asset base that has allowed the UK to retain its triple-A rating when others with much healthier debt to GDP ratios have been downgraded.

  24. David W. Lincoln5 February 2012 at 22:36

    Good question that you raised, and frankly as long as countries are in competition for anything to back currency (David Ricardo nailed this when he wrote about currency having quantity), a dollar sterling backed by the natural resources of the Commonwealth is the best option.

  25. An independent Scotland should have its own independent currency
    through its own independent Scottish bank in my opinion.

  26. If Scotland starts it's own currency, won't there be a run on the pound as it loses 10% of it's currency base? So as Salmond and Sturgeon say (laughingly and adamantly), there is no way rUK can sensibly object to the currency union? And that a shared pound is the best solution by far for both countries?

    Putting the petty stuff to one side, I'm sorry you had a mixed experience of Scotland. I find that people have matured far more and that anti-Englishness is diminishing rapidly, being recognised and treated as racist. On my course after we were asked to define, in groups, what it meant to be Scottishness, we were told that only in the last few years had people ceased to say: 'Not English'. As has been said a lot of English people up here are in favour.

    Independence is relative, what we want is political separation from Westminister's scandalous waste and inefficiency, obsession with global wars, nuclear weapons and lack of long-term economic strategy. And to make our own decisions, build a more equal, egalitarian Scandinavian model country with support for it's citizens and a spirit level.

    In the UK, that just isn't happening.

  27. So the refusal of a currency union was a bluff and all three of the main parties were lying? How do you think Scots feel about Westminster now?

  28. How much would iScotland need in currency reserves to start its own currency? Could they get buy with their "per capita share" of the boE assests?


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