Keeping the £

Lesley Brennan

10 March 2014

It appears that Alex Salmond's likely option for Plan B for "keeping the £" after independence would see Scotland go it alone and use the £ , but without an agreement with the rest of the UK to do so.

George Eaton's article in the New Statesman headlines spells out the consequences of what would be known as "sterlingisation" :

Nobel Prize winner , Paul Krugman, referred to by George Eaton, comments:

"Whether it’s overall a good idea or not, however, independence would have to rest on a sound monetary foundation.

" And the independence movement has me worried, because what it has said on that that crucial subject seems deeply muddle-headed.

"What the independence movement says is that there’s no problem — Scotland will simply stay on the pound. That is, however, much more problematic than they seem to realize.

" Scotland-on-the-pound would be in even worse shape than the euro countries, because the Bank of England would be under no obligation to act as lender of last resort to Scottish banks. "


The UK Government and the UK’s three main political parties have already ruled out a currency union between Scotland and the rest of the UK (the rUK) if Scotland votes “Yes” in September’s Referendum.

The response of the SNP hierarchy was not to respond to the serious case against a currency union.

Instead, they resorted to attacking the messenger rather than message with cries of “bluff, bluster, and bullying ”.


The SNP Government has never made known publicly its preferred second option in the event of a refusal by the rest of the UK (rUK) to agree to a currency union - a “sterling zone “ – if rUK believes it is not in the best interests of rUk to do so.


This gridlock has arisen because the SNP Government has wished to portray to voters the passage to independence as a fast-track, risk-free, smooth process where important features of the UK state such as the monarchy and the £ remain intact. 

According to their assertions, the economies of a future independent Scotland and the remainder of the UK state ( rUK) would co-operate in  a harmonious “sterling zone” where both countries would “share” the £.

However, contrary to their assertions, independence would fundamentally change the relationship between Scotland and the rUK.

In determining the policy of how the sterling zone would operate, Scotland would be very much a minority partner because its economy is so much smaller than the economy of the rUK.

Scotland’s “freedom” to operate as an “independent” state, as the word “independent” is generally taken to mean,  would be restricted by the power of much larger rUK, which by then would be a foreign country, having the right to determine how Scotland was to be run.

Brian Quinn is a Scot and a former Deputy Governor Director of the Bank of England has described the plan as “fundamentally flawed” adding :

“By choosing to announce its preference to retain sterling as the currency of an independent Scotland, the current Scottish Government has effectively surrendered its freedom to determine monetary policy and severely circumscribed its freedom of action in the area of public finance.”

As for the Scottish Government’s assertion that the £ belongs every bit as much to Scotland as it does to the UK, let Professor Adam Tomkins of Glasgow University clarify :

“The Scottish Government’s independence white paper appears to be have been written without regard to the distinction between institutions (on the one hand) and assets and liabilities (on the other).

“As a result, Scotland’s Future falls into legal error in numerous places.

“On the pound, the white paper states that the pound is Scotland’s currency just as much as it is the rest of the UK’s” (page 7).

“This is incorrect.

“The pound is Scotland’s currency now precisely because Scotland is part of the UK now.

“If Scots vote to leave the UK they will be voting to leave the UK’s institutions, including the pound.

“As we all know, Scotland could then seek to negotiate its way back into these institutions but the rUK would agree to this only if it was persuaded that it was in the national interest of the rUK do to so.

“And, as we further know, the current UK Government have indicated that it is ‘highly unlikely’ that it would be in the interests of the rUK for it to enter a formal currency union with an independent Scotland, at least without a binding fiscal pact.

“This does not mean that Scotland would be unable to use the pound: any State may use the currency of another State (as Panama uses the US dollar).

“But for a State to make this choice means that that State has no control over its monetary policy or interest rates: rather, these matters are effectively surrendered to a foreign power.”

Ronald Macdonald, Adam Smith Professor of Political Economy at Glasgow University, has already described "sterlingisation" - using the £ without reaching an agreement with the rest of the UK as an option that "  can be ruled out as a runner pretty quickly. "

He continued :

"Scotland post independence would have a complex trading set up with both North Sea oil and our traditional exports vying for the correct policy decisions.

"his would be impossible if we were to adopt another country’s currency as we would have no control over interest rates, our exchange rate or inflation, and there would be no central bank to provide day to day liquidity in the money markets as the demand for money changed and act as a lender of last resort in times of crisis.”

So on the crucial issue of currency which determines interest rates, trade, jobs, wages, pensions and every conceivable important aspect of everyday life, there are two messages

A clear short one from the pro-UK campaign – if you want to keep the £, stay with the UK. 

And a less distinct one from Mr Salmond  - It's not a question of keeping the pound, it's a question of whether there would be agreed a currency union."