AN independent Scotland should create its own currency pegged against Sterling to retain political and monetary sovereignty, a new paper claims.

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A discussion paper prepared for the Common Weal think tank puts forward nine options for an independent Scotland post-Brexit.

The report, shown exclusively to The National, states that the currency debate was “one of the weaker aspects” of the Yes campaign prior to the 2014 ballot and, with the prospect of a second referendum on the table following the Brexit vote, stresses that better answers must be found this time around.

Yesterday First Minister Nicola Sturgeon insisted independence could now offer Scots “stability and certainty” as Prime Minister Theresa May prepares to invoke Article 50, triggering a complicated two-year process to remove the UK from the European Union.

In 2014, the SNP said a formal currency union with the rest of the UK was the best way forward, with then First Minister Alex Salmond stating: “It’s Scotland’s pound and we are keeping it.”

However, this was ruled out by senior UK Government figures including then Chancellor George Osborne.

The paper, written by activist and researcher Dr Craig Dalzell, states: “The strategy of adopting a Sterling union with the rest of the UK, even after such a union had been publicly dismissed by the pro-Union advocates, was deeply damaging in terms of both confidence in the pro-independence campaign itself and in uncertainty about the future of an independent Scotland.

“It is vital then that the questions which the 2014 campaign could not answer are answered now, before the second campaign is launched.”

The first major analysis of an independent Scotland’s currency options post-Brexit, the report covers the strengths and weaknesses of nine possible strategies, including currency union with the rest of the UK, “Sterlingisation” and using the Euro.

It also includes creating a “£Scot” pegged to either Sterling, the Euro, a “basket” peg or left freely floating, with the use of cryptocurrencies such as Bitcoin or an Oil Standard amongst the other suggestions.

The paper also examines the infrastructure required for establishing a Scottish Central Bank, including a Scottish foreign reserve fund, and includes analysis of other countries that have become independent or left a currency union and set up their own currency, including New Zealand, Norway and Slovakia.

It concludes that an Oil Standard would put other parts of the economy at risk, a formal currency union with the rest of the UK would be “impossible” practically, politically and legally and that joining the Euro could be beneficial but would take time and could mean forfeiting a measure of autonomy.

Advocating the creation of a £Scot pegged against Sterling at a 1:1 rate, the paper states that “no single option is ... riskier or less viable than any other”, adding “it is simply that the risks are different and should be managed accordingly”.

It goes on: “No single currency option is likely to remain the optimal choice for an independent Scotland for all time.

“When selecting a currency option Scotland should therefore consider, as a first principle, the options which allow the Scottish Government to capture and retain monetary and political sovereignty over the decision.

“This will grant Scotland the ability and power to change its mind and adjust monetary policy, up to and including currency arrangements, if required or advantageous to do so.

“In this sense it is clear that if and when Scotland enters another formal independence campaign, the advocates of independence should begin from the standpoint of using independence to launch a new, independent Scottish currency.”

It suggests the peg should remain in place for a period of years to allow markets to settle and prevent a run of money from the country, adding: “The political and social advantages of allowing the people of Scotland to aid in the design of the new Scottish currency should be embraced.

“Having made the choice to create one, the public should be able to invest some kind of ownership or belonging in it by allowing the expression of newly independent identity through it.

“This would greatly aid in the adoption and confidence of the new currency as well as go some way towards assisting the citizens of Scotland in settling into their new found place in the world.”


Economists caution against moving too quickly without due thought

Last night economists agreed with some of the findings but cautioned against adopting a firm position before Brexit negotiations have begun. Dr Jim Walker, founder and chief economist of Asianomics Group, which services the fund management industry, told The National: “I agree entirely with the view that a new currency would indeed be the best option for an independent Scotland but I think that the case for it being pegged 1:1 against Sterling for a protracted period is now very much more questionable.

“With Brexit, the Pound Sterling is likely to become one of the world’s weaker currencies. The Scottish Government should be exploring all the possibilities presented by the experience of small nations around the world.”

Citing the example of Singapore, which has managed its exchange rate against a basket of currencies for three decades, he went on: “It might be very foolish indeed for a Scottish Government advocating independence to tie the fate of our own currency to a sinking British Pound. It would be much more sensible to adopt a Singapore-style system where an independent monetary authority, not a central bank, would adopt a multi-currency basket against which to manage the Scots Pound. In that way the Scots Pound would reflect the movements in the currencies of its biggest trading partners.”

Walker said such an “opaque” system would reassure markets and prevent the creation of an inherently weak currency, adding: “As for sudden capital flight, I can only think that that would happen if Scotland’s economy were being horrendously mismanaged. So far, the experience of the Scottish Government is quite the reverse: cautious and prudent. International markets are very good at spotting mismanagement and sound management. I suspect Scotland’s biggest task would be to manage capital inflow rather than the reverse.”

Graeme Blackett, founder of Biggar Economics, called the suggested system “very workable”, but said it is “too early to know” the best option.

He said: “It depends on how the next couple of years work out and what the rest of the UK’s relationship with the EU and Scotland’s relationship with the rest of the UK is like.

“We are talking about very challenging times. There are two years areas of concern – one is the political uncertainty and, from a business perspective, companies need to know if they are going to have access to markets, globally and within the EU.

“Longer term, if the UK has no solution to important things like the UK position on science and investment. If we don’t have some way of working that out, that is a worry for the economy.

“Some of the fundamental things that we have relied on in the economy such as the drivers of growth coming from universities and innovation, we don’t know how that is going to be structured in future.”

Michael Fry, founder of the Wealthy Nation Institute, also urged against premature decisions, adding that continued use of Sterling for a transition period would allow the creation of a considered long-term strategy. “The biggest danger is not in one scheme or another, it is in pushing forward too fast,” he said.

Commenting on the report, Mike Danson, professor of enterprise policy at Heriot-Watt University, said the proposed model offers flexibility, stability, credibility and “room for innovation”.

He added: “Historically, Scottish banks were conservative, inventive and world leading; traditional sound banking practices would be nurtured again with a £Scots with quality, sustainable and ethical jobs and investment consistent with this currency model.”Currency union: Such an arrangement would see Scotland negotiate a formal currency-sharing deal with the rest of the UK, but it may be “practically, politically or legally impossible”. If achieved, Scotland would gain representation on the Bank of England Monetary Policy Committee and currency-based trade barriers with the rest of the UK would remain as they are, with no internal exchange rate issues.

However, money may flow to one geographical area of the union over others and the arrangement could “run contrary to the goals and aspirations of those who seek independence for economic reasons” by preventing economic divergence. Failure to underpin Scotland’s political sovereignty in the framework of such a deal could also prevent the right to withdraw, leaving the nation “trapped” within another union.



What are our options ... and are they any good?

Currency union: Such an arrangement would see Scotland negotiate a formal currency-sharing deal with the rest of the UK, but it may be “practically, politically or legally impossible”. If achieved, Scotland would gain representation on the Bank of England Monetary Policy Committee and currency-based trade barriers with the rest of the UK would remain as they are, with no internal exchange rate issues. However, money may flow to one geographical area of the union over others and the arrangement could “run contrary to the goals and aspirations of those who seek independence for economic reasons” by preventing economic divergence. Failure to underpin Scotland’s political sovereignty in the framework of such a deal could also prevent the right to withdraw, leaving the nation “trapped” within another union.

Sterlingisation: Scotland would import and use Sterling with or without authorisation, losing direct control over interest rates and external exchange rates as with a currency union, but without the same representation on the Monetary Policy Committee. Some form of monetary board would be required to monitor money supply within the domestic market because interventions in the form of capital controls or currency injections may be required if interest rates and exchange rates lead to the risk of capital flight from the country. However, any price paid for loss of control over currency may well be more than paid for in terms of stability with regard to primary trading partners and continuity of currency.

£Scot pegged to Sterling: Allowing Scotland to maintain relatively close ties with the neighbouring economy, this option assumes voters would “prefer some sense of continuity throughout the political upheaval of independence” and requires the establishment of a Scottish macroeconomic board to gain control over £10 billion foreign exchange reserves before the launch of the currency. The reserve would be claimed as part of Scotland’s share of UK assets or mortgaged against an equivalent value of UK debt, with the pegging making prices easily convertible and allowing the use of both currencies by retailers to enable cross-border trade, as in some European areas. The system, which uses a Scottish Central Bank, retains full monetary sovereignty and the ability to adjust interest rates and capital controls.

£Scot pegged to Euro: The peg signals intent to converge towards the European market but signalling this intent during a pre-referendum campaign could lead to a loss of confidence from voters and goodwill from the rest of the UK, jeopardising independence negotiations. However, the Euro is “substantially less volatile” than Sterling over shorter time scales and may be less prone to shocks, providing more overall stability.

£Scot with a basket peg: Allows the Scottish Government to adjust the peg in a fluid fashion as dictated by defined criteria. The new currency would be set to a group of existing monies rather than being dependent on any one, or could be weighted against the relative GDPs of Scotland’s trading partners – most likely Sterling and the Euro – to help ensure stability for business. However, this could ultimately cost too much in bank transaction fees.

£Scot freely floating: The market could set the price of the currency, but this may seriously affect the price in the early days of independence. However, this could be mitigated if an entire independence campaign was run on this basis, allowing the markets time to adjust. Scotland’s relatively small GDP size could lead to increased volatility in the exchange rate but also give Scotland access to other economic levers which compensate for the lack of exchange rate control, as with Iceland.

The Euro: Brexit means Scotland is unlikely to qualify to join immediately, meaning an interim position would have to be taken, such as pegging a £Scot to the Euro, or by simply adopting the Euro informally. This could benefit the economy but could also cost some political control, with no current withdrawal protocols in place, and Scotland would also be exposed to any “crisis” of the currency.

Oil standard: Such a commodity peg could lead to the growth of the oil economy at the expense of the rest of the economy, potentially causing “absolute harm”. Pegging to a finite commodity may also be imprudent and the political consequences of such a link may be unpopular, also opening the currency up to global shocks similar to that felt in Russia in 2014, with serious consequences.

Cryptocurrencies: The use of a decentralised fiat currency whose units are denoted by an identifying code may not be viable due to problems with widespread acceptance and problems in defining price. Reliance on an unknown verification system rather than a bank with a commercial reputation may also disincline people from making large purchases, undermining confidence and the value of the money. Other technical challenges may also arise, while many of the economic challenges would remain.