Global Markets

Independent Scotland could face euro-like troubles

12 February, 2014 | Posted By: Oren Laurent

By Oren Laurent
President, Banc De Binary

An independent Scotland is no longer the distant dream of Scottish right-wingers, but has now become a realistic prospect. So much so that the topic has sparked fierce debate over whether the currency will also be separate from the British pound, and what best suits the interest of both Scotland and the remainder of the United Kingdom. And you know I can’t resist joining a good debate.
On September 18, Scots will vote in a referendum on whether the country should end its three-century-long union with England. This comes after the ruling Scottish National Party unveiled plans for independence, according to which Scotland would keep the pound and remain in the EU but would collect its own taxes and have its own military.
This is what the SNP are proposing. They are encouraging Scots to vote for independence on the grounds of keeping the pound. Of course, Edinburgh wants this. Scotland would not want to join the shaky euro, and it would struggle to support its huge banking industry if it were to create its own, probably weaker, currency. Yet the pound can certainly not be taken for granted. What is to say that the rest of the UK will allow an independent Scotland to share it?
When Bank of England Governor Mark Carny addressed Scottish business leaders at the end of January, he was careful not to take sides on the topic of independence and ideology, but he did deliver a cautionary tale about economic realities and practicalities. He warned that a fully independent Scotland with the pound would be exposed to similar risks as we have witnessed in the euro zone, from debt crises to divergence in economic performance. Carney’s opinion is that a currency union could only be effective if the country relinquishes some degree of national sovereignty and abides by tight fiscal rules.
The Scottish National Party was quick to use his speech to promote their agenda; finance Secretary John Swinney said that Carney provided a “sensible analysis of how a currency union can work”. I’m not convinced. Carney listed both the potential advantages and disadvantages of currency union. To me, his conclusion was clear: that if Scotland votes in favour of independence, a decision which is beyond his control, and if they are permitted to continue sharing a currency, which has not yet been decided, then the less economic independence and the greater banking cooperation, the better. That is not to say that if they do become independent and share the currency, that this would be more economically beneficial than the current status quo.
British Prime Minister David Cameron also voiced his opinion last week, urging Scots to stay in the union. Politically and economically at least, I am convinced that this option is the most beneficial to all. The United Kingdom is a respected global authority, with strength in numbers. Besides, the deep economic integration between Scotland and the rest of the UK is a natural consequence of being the same sovereign nation, and is advantageous to all parties.
Currently, the number of Scots opposed to independence outnumbers those in support, but as the debate becomes heated, more are turning to a ‘yes’ vote. A recent poll revealed that 37% are for independence, 44% are against and 19% remain unsure. Let’s hope that come September, Scots will understand that the SNP is not just waging an ideological campaign, but proposing a flawed economic plan.