What currency for would-be independent Scotland – and at what cost?

The prospect of losing the British pound if Scotland votes 'yes' on September's independence referendum could slow the separatist movement's momentum.

This September, Scotland will vote in a historic referendum to decide if it should leave the United Kingdom to become an independent country. But seven months before the polls open, the big question is what coins Scots will carry in their pockets if they do vote "yes." 

The future currency of a would-be Scottish state has emerged as the key flashpoint of the independence debate here, fueled for years by the "yes campaign" waged by the Scottish National Party (SNP) and its leader, Scotland’s First Minister Alex Salmond. Uncertainty over whether an independent Scotland could keep the British pound – and looming economic consequences of a potential currency switch if it couldn't – may now be slowing the movement's momentum. 

Last week, British Chancellor of the Exchequer George Osborne told an audience in Edinburgh that no formal currency union would be possible between the rest of the United Kingdom and an independent Scotland. The announcement followed the agreement by leaders of Britain's three largest political parties – Conservatives, Labour, and the Liberal Democrats – that there would be no sharing of the British pound with Scotland if it votes to leave the UK, regardless of which party comes to power in the next UK elections.

In response, SNP leader Alex Salmond accused the unionists of "bullying" Scotland in the run-up to its historic vote.

What is Plan B? 

The SNP and supporters of the "yes" campaign have long reiterated their belief that a Sterling union would follow independence. But nationalists are coming under increasing pressure to outline an alternative course of action if London refuses to budge.

"There has to be a Plan B. The question is what the Plan B is," says Alan Trench, an expert on UK devolution. "There are three, maybe four options: sterlingization, a currency board, joining the euro, and an independent currency."

Sterlingization – effectively adopting the pound unilaterally – is the "least attractive option," says Mr. Trench, because it would leave Scotland without a lender of last resort and with little or no control over its monetary policy. And since nationalists have already ruled out joining the euro, "the two front runners for a Plan B are a currency board and an independent currency."

Under a currency board, Scotland would use a separate Scottish pound, pegged to sterling and convertible on a one-to-one basis. A similar system operated in the south of Ireland after it left the UK. But critics have pointed out that Scotland’s economy, heavily reliant on oil and financial services, is very different from that of the largely agrarian Ireland of almost one hundred years ago. 

"A currency board looks like a currency union, but you transfer a lot of the risk onto the Scottish tax payer – and that’s a lot of risk," says Trench.

Some in the "yes" campaign, including the Scottish Green Party, are in favor of introducing a new currency. As one supporter of Scottish independence told the Sunday Herald on Sunday: "Nobody likes what Osborne said, but his speech cannot be ignored. Going into a referendum campaign with a policy that has been ruled out is not a great strategy. There is a patent need to discuss an independent currency." 

But an independent currency would be a somewhat different and more daunting political step, according to Trench. "It will scare the horses. It is a long way from the model of 'independence lite' that we have seen," he says. The SNP advocates keeping the queen as head of state and retaining aspects of the existing British state, such as a financial regulator, while gaining autonomy over tax policy and spending.

"It is a difficult position for the SNP, having been elected into government on the basis of talking soft independence and more autonomy. And now they are being forced into talking about hard independence," says Trench.

Salmond has said that he would share the rest of the UK’s sizable debt, but some "yes" supporters suggest that an independent Scotland could abrogate its debt obligations if the rest of the United Kingdom refuses a sterling currency union.

"If London can’t persuade Scotland to accept a fair debt agreement by being reasonable, Scotland is free to walk away," says Robin McAlpine, director of the Jimmy Reid Foundation, a left-leaning think tank that favors a "yes" vote. "We would be a state with massive natural and human resources, a great geostrategic position, and no debt."

Economy to the fore

The independence referendum is likely to be won and lost on the economy. Over half of Scots say that they would vote in favor of leaving the United Kingdom if that made them better off by at least £500 a year, according to a January survey by ScotCen, a social research organization. Just 15 percent would support independence if they expected it to leave them worse off by the same amount.

The currency question could prove decisive. Unionists have indicated that they expect to lose support in the short term in the wake of Osborne's speech in Edinburgh. But they believe that in the long run, taking a formal currency union off the table will fatally undermine the nationalists’ economic case.

Recent research by the University of Edinburgh scholars found that for the Scottish industry leaders, the uncertainty around the currency in the event of a "yes" vote represented the most significant risk to their businesses. 

Whether Scottish voters share such fears about post-independence currency remains to be seen. Jane Carnall, a website manager in Edinburgh, says that she is still undecided about how she will vote in September.

The currency "is not an argument against voting yes," she says. "But it is an argument for saying that the SNP haven’t really planned properly for what will happen after the referendum.... Neither side is trying to convince us on issues. They are both trying to convince us on soundbites."

"Alex Salmond is very good at convincing me to vote no," she adds. "But David Cameron, George Osborne, and Nick Clegg are all very good at convincing me to vote yes."