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Why a currency union would be bad for Scotland and the UK

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

A background briefing note on proposals for a currency union.

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The Scottish Government claim that a currency union between Scotland and the rest of the UK would be in the interests of both. This is wrong.

A currency union may not be in the interests of either Scotland or the rest of the UK. This has been shown by both the UK Government’s analysis and independent experts.

The Chancellor and the Chief Secretary, the Shadow Chancellor and former Chancellors, have all said that it is highly unlikely that a currency union could be agreed or be made to work.

Here is a reminder of the problems:

A currency union is not in Scotland’s or the UK’s interests because:

  • Currency unions don’t work without close political and fiscal integration, whereas independence is about disintegration: the lesson of the euro area crisis is clear – currency unions are very difficult without fiscal or political union, and can expose all their members to significant risks. Euro area countries are moving towards closer political and fiscal union to address these challenges.
  • The Scottish Government are proposing the exact opposite – currency union without fiscal or political union. And independence would inevitably mean the continuing UK and Scotland moving further apart. This is hardly a credible basis for a monetary union Divergence of our economies: the economies of an independent Scotland and the UK would be very different, and would diverge over time. This is particularly because Scotland would have a significant dependence on North Sea oil. Changes in the oil price would therefore affect the countries differently and a one-size fits all monetary policy would not suit both.

A currency union is not in an independent Scotland’s interests because:

  • Constraints on an independent Scotland’s economic policies: even if it could be agreed, a formal currency union would severely limit an independent Scotland’s economic freedom – to ensure that risks to the rest of the UK were managed an independent Scotland would not be able to set its own interest rates and would have to accept the rest of the UK having oversight of its tax and spending plans as is increasingly the case in the euro area.
  • Economic resilience and credibility: if financial markets sensed that the Bank of England’s monetary policy did not suit Scottish circumstances they might doubt both countries’ commitment to the currency union. Financial market speculation could lead to capital flight and higher interest rates. Ultimately, if markets weren’t calmed, Scotland might have to adopt its own currency in a time of crisis – as happened when the UK left the ERM and as happened 33 days after the Czech Republic and Slovakia separated from one another.

A currency union is not in the UK’s interests because:

  • Giving up economic sovereignty: Joining a currency union with another state would involve the UK giving up some of its sovereignty in monetary and fiscal policy. Why would it agree to this?
  • Risk of bailout: The continuing UK would comprise around 90 per cent of total GDP in a sterling currency union, with Scotland as 10 per cent. The continuing UK would therefore bear much more risk of having to bail out an independent Scotland if it got into fiscal difficulties.
  • Why take the risk? Negotiating a sterling currency union would be far more important for an independent Scotland than for the continuing UK. The rest of the UK accounts for 70% of Scotland’s total trade, whereas Scotland accounts for 10% of the UK’s trade. As Carwyn Jones, the First Minister of Wales, has asked, what gain is there to the rest of the UK from having an independent country share its currency, other than uncertainly. It would mean difficult decisions having to be taken across two different governments which is a recipe for instability.

No one should vote for an independent Scotland on the basis that they will get to keep the pound. Independence means leaving the UK’s monetary union and leaving the pound. The only way for Scotland to keep the pound as it is now is to stay in the UK.

Published 26 November 2013