An independent Scotland would need a currency of its own
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The following editorial appears on Bloomberg View:
In less than a year, Scotland will hold a referendum on whether to remain part of Great Britain. Soon after that, it may face an even more consequential decision: what to call its new currency.
Could the pound Scots return after a three-century absence? It's important not to get too far ahead of events, of course: The pro-independence Scottish National Party favors retaining the pound Sterling, and a lot of voters still haven't made up their minds.
They'll get some useful information this week, when the SNP, which runs Scotland's devolved government, offers its vision of how an independent Scotland should be run. A lot of details will be missing, because terms of separation can't be negotiated until Scotland actually decides it wants out. One thing, though, should be understood right now: An independent Scotland shouldn't retain the British pound.
The currency issue isn't the only bone of contention by any means. Aside from being important in its own right, however, it complicates all the others.
Take the argument over public debt, for instance. Under independence, Scots would have to agree with their English cousins how much of Britain's public debt an independent Scotland would inherit. If the burden were shared in proportion to population, an independent Scotland would begin with debts of about 85 percent of gross domestic product. That's high, but not unusually so by current standards. The problem is that Scotland's longer-term fiscal outlook also isn't great.
It faces worse demographic pressures than the rest of Britain and declining revenue from North Sea oil, a big part of its tax base. Reducing the debt to 40 percent of GDP over the next 50 years, according to one estimate, would require a permanent cut in annual borrowing of more than 4 percent of GDP starting in 2020. That's a lot, and it's on top of the squeeze already proposed by London for Britain as a whole.
Here's where the currency comes in: Those estimates assume that Scotland could borrow at the same interest rate as Britain. In practice, this would depend on whether an independent Scotland retained the pound, adopted the euro or issued a new currency of its own.
The euro area hasn't been much of a model lately; Scotland, with its high debts, wouldn't qualify for immediate membership anyway. A brand-new currency, on the other hand, is a step in the dark, unlikely to appeal to those referendum waverers. To assuage these anxieties and ease the country's path to the right answer in the referendum, the SNP has been leaning in favor of retaining the pound.
Last week, the minister for Scotland in the British government said this wasn't going to happen. Nor should it.
If an independent Scotland retained the pound, it would also expect a share of political control over the Bank of England. In effect, there'd be a two-country sterling area analogous to the euro area. Why would the rest of Britain want to create such a system, with all the political and regulatory entanglements that would ensue, rather than retain full monetary independence? By the same token, an independent Scotland would resist the degree of political union with the rest of Britain that a successful monetary union requires.
An independent Scotland would need, and should want, its own currency. That's the proposal the SNP should put to Scotland for its consideration.