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Can Scotland be independent and keep sterling?

This week we are going to work with readers to tackle five of the key questions about Scottish independence. Yesterday James Ball asked how much debt an independent Scotland would have. Still to come:

Tomorrow: How would an independent Scotland defend itself?

Thursday: How would the BBC be divided if Scotland became independent?

Friday: Who would get the oil revenues if Scotland became independent?

Get in touch below the line, email your views to or tweet @KatieAllenGdn

The SNP has said that Scotland would keep sterling if its people voted for independence and only later use a referendum to decide whether to join the euro. Both options require the approval of other nations, so does it go without saying that Scots could continue to spend pounds sterling if the country broke away from the rest of the UK?

Unsurprisingly the view once touted by many in the SNP that an independent Scotland would join the euro has become increasingly unpopular in recent months. While all the talk is about who will be leaving the troubled currency union, it is hardly a vote-winning strategy to discuss joining up – at least not any time soon.

So the view from the SNP seems to be keep the pound to start with and then maybe join the euro several, or more likely many, years down the line, when hopefully there is still a eurozone to join and it is significantly more stable than at present.

SNP finance secretary John Swinney said in early February that an independent Scotland would keep the pound for the foreseeable future, pushing membership of the euro back into the mid-2020s.

In an interview with the Scotsman, Swinney said:

I can’t foresee a set of circumstances that will see the economic conditions being correct for the euro for some considerable time. It would be difficult to define that but it feels neither to me like the short term or the medium term.

Those comments prompted the Scottish Conservatives to accuse the SNP of flip-flopping on the euro as well as making too many assumptions about whichever currency it chooses for an independent Scotland.

Ruth Davidson, leader of the Scottish Conservatives, said:

Once again the SNP has been caught out making policy on the hoof in a crude attempt to persuade the Scottish public to their position. As each day passes, it’s becoming increasingly apparent that they have no coherent plan for Scottish independence. The SNP twist and turn in the wind, changing position to whatever suits them on a given day – where are their principles?

Alex Salmond cannot blithely assume that he can keep the pound and then join the euro at his own choosing. His tactic seems to be that if he says something often enough it will become fact. It’s high time he was honest with the public on what a separate Scotland would look like.

Is Davidson right that the SNP cannot assume an independent Scotland can keep the pound? Swinney says he will put in place deals with the Bank of England, what would the terms need to be? Or can Scotland just keep using the pound without any cross-border agreements? Such a move would not be totally unprecedented.

There has been a furious debate about this issue in comments on the Guardian website, such as in this exchange:

@stillstayingcool argued:

Scotland cannot be independent and still use the pound sterling. The central bank (Bank of England) would still be based in London, and set monetary policy, ie interest rates. This is not independence.

@maisiedotts replied:

Really? Ireland kept the £ from 1921 until it got its own Saorstát pound in 1928, then the Irish Punt in 1938, all of which was pegged to Sterling until it joined the Euro in 2002.

The question: can Scotland be independent and keep sterling?

I have outlined here three currency options that an independent Scotland would have. Please get in touch with anything you feel needs to be considered, any other currency options you can envisage, any pertinent examples of currency unions from history and any other information you think can help answer the question.

Get in touch below the line, email your views to or tweet @KatieAllenGdn.


Before we consider Scotland keeping or leaving the pound it is worth looking back over the long history of sterling in Scotland. The sharing of the pound sterling between England and Scotland is a monetary union that has “proved more enduring than any other between nations”, according to Angus Armstrong at the National Institute of Economic and Social Research. In a recent paper on Scottish independence, he laid out the background:

Political union between England and Scotland began with the Union of the Crowns in 1603 which marked the start of a monetary union with the pound Scots pegged to sterling at a rate of twelve to one. The Acts of Union in 1707 brought into effect the Treaty of the Union, where the two parliaments merged into the Parliament of Great Britain, and full monetary harmonisation with sterling replacing the pound Scots to become the legal currency of Great Britain.

Will that long currency union endure should Scotland become independent? Such a nation has three main currency options. Let’s consider each one briefly:

1. Join the euro

As mentioned above, it’s a time when most of the discussion is about leaving the euro for its current members rather than anyone new joining up. With problems in peripheral eurozone countries reverberating through the entire single currency area, Scots and Scottish politicians will be wary of joining the party when it’s possibly in its dying moments.

Still, joining the eurozone does not necessarily mean soaring borrowing costs; yields on government bonds vary greatly between eurozone members.

The euro has been touted as an option in the past by the SNP and is still seen as a long-term option. Back in 2009 Alex Salmond told Spanish TV that with the pound weakening there were growing arguments for joining the euro:

I think the argument for having strong fiscal powers, powers over revenue, powers to expand the economy within a monetary context, within a European euro context, will prove to be a very strong one for the people of Scotland.

Whenever an independent Scotland would want to sign up, joining the euro is not a mere formality. There are already questions about whether an independent Scotland would even remain an EU member. If it needed to reapply, it is worth bearing in mind that any enlargement of the EU requires unanimity among member states. In theory, countries with separatist movements such as Spain, with its Basque region, could take objection to sending certain signals by allowing in an independent Scotland.

Finally, swapping the pound sterling for the euro does not mean Scotland would be shaking itself free of outside controls. It would be swapping monetary policy set by the Bank of England for monetary policy set by the Frankfurt-based European Central Bank – policy that tries to fit to a myriad of different economies spread over a wide area.

2. Keep sterling

Again, keeping sterling is no mere formality. Unless Scotland goes down the Kosovo route. Kosovo is not a member of the eurozone but uses the euro. It is legal tender but the country is not even a member of the EU and has no formal currency agreements with the ECB and other European institutions. Such a path would be one way to keep the pound without having to wrangle with Westminster. But such a move is not without many risks, notes Ross Walker, UK economist at the Royal Bank of Scotland.

If Scotland pursued such a policy with the pound it would not benefit from the Bank of England as lender of last resort, says Walker. With bank runs and bailouts still fresh in people’s memories, Scotland’s sizeable financial sector and other businesses would not accept such a position.

The more likely path is for an independent Scotland and the rest of the UK to remain in a currency union, retaining the backing of the BoE. For that to happen Scotland would need agreement from Westminster and among other things the UK would require a stability and growth pact in place, says Walker. As for what such a pact means for independence and independent policy-setting, Walker adds: “You are hardly going to have George Osborne sitting in the Treasury imposing austerity and trying to retain the UK’s ‘AAA’ credit rating while allowing a free-for-all north of the border.”

Many experts argue keeping sterling does make economic sense.

NIESR’s Armstrong notes there are three common criteria used to assess the viability of an optimal currency area:

1. Integration of intermediate and final product markets with a high degree of cross-border trade relative to domestic trade.

2. Capital and labour market mobility to enable greater integration, specialisation and faster adjustments to shocks.

3. The extent to which nations have similar structures and cycles.

He concludes that on these there is “prima facie evidence that Scotland would benefit from continued use of sterling” because criteria 1 and 2 are easily met while 3 is harder to judge.

3. Get a new currency

This is the most risky option. Walker at RBS comments: “The risks over whether the fiscal policies for the rest of the UK under keeping sterling would suit Scotland are dwarfed by the potential risks and volatility that a new currency brings.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds