The
Geographer
Independence: Money
Currency and exchange rates
6-7
Spring 2014
Professor Gavin McCrone FRSGS
There are reasons for thinking that
a small independent country may
sometimes do better economically
than if it were a region of a larger
country. This applies particularly
if it has a very different economic
structure or is at a different stage
of development. The ability to tailor
economic policies closely to its
needs can give it a better chance
of success than relying on the
one-size-fits-all policies of a larger
state. This applies particularly
to the exchange rate. A country
has to pay its way with its trading
partners, and movements in the
exchange rate are one of the
principle ways in which it
ensures it is competitive.
A region does not
have to do this:
its surplus or
deficit will be
evened out
by the larger
country of which
it is a part. A
competitive exchange
rate can ensure that
there is investment in
the economy and low
unemployment, but a region has
to work with whatever the exchange
rate happens to be for the larger
economy, whether or not that suits
it.
Scotland’s economy, without North
Sea oil, is similar to and closely
integrated with that of the UK as a
whole. Independence would affect
that integration and would involve
costs. Moreover, because of the
substantial but declining income
from the North Sea, Scotland
could be subject to very different
pressures from the rest of the UK.
Both its balance of payments and
the government’s budget would be
subject to volatility.
The Scottish Government’s
declared policy is to retain
monetary union with the rest of the
UK after independence. This is a
central issue in the independence
debate, but the intervention by
the Chancellor in a speech in
Edinburgh in February, and the
rejection of a currency union by
spokesmen for the other two main
UK parties, make it most unlikely
that a formal union, whereby the
Bank of England would act as
central bank and lender of last
resort for both countries, would
be negotiable. There could be
advantages in an independent
Scotland having its own currency,
even if it were pegged to the pound
to give it greater stability, because
it would mean that the exchange
rate could be altered in a major
crisis.
But it would also mean that
Scotland’s currency would be
exposed to many of the pressures
of a petro-currency. Moreover, those
doing business across the border
with the rest of the UK would face
transactions costs and at least
some degree of exchange risk.
This would also apply to
those who had mortgages
or pensions in sterling.
A mortgage with a UK
lender would be in
sterling, while the asset
against which it was
provided was in pounds
Scots. To avoid the
exchange risk, borrowers
would need to remortgage with a Scottish
lender or a branch of a UK
lender able to lend in Scots
currency.
This is just one of a number of
major uncertainties as Scotland
goes into the referendum. Another
is whether or how quickly Scotland
could become a member of
the European Union in its own
right, thereby safeguarding its
position in the EU single market.
Would it have to take its place in
a queue of candidate countries
seeking membership, with much
uncertainty over its position in
the meantime? Or would it be
possible to ret