PLANS to keep using sterling in an independent Scotland are the worst possible option and the country should instead transition to a new currency on the day of independence, an expert on political economics has said.

The intervention comes after the SNP/Green government published the third paper in its Building A New Scotland series, which is meant to act as a “scene-setter” for an independent Scotland.

In the paper, published last Monday by the First Minister and entitled A Stronger Economy With Independence, the Scottish Government laid out its plans to keep using sterling after a Yes vote until certain criteria are met allowing for the transition to a new Scottish pound.

Dr Iain Hardie, a senior lecturer at the University of Edinburgh, told the Sunday National that this was “not a good place to be” and that the majority of the Scottish Government’s criteria for setting up a new currency should be met by the point of independence anyway.

A formal or informal currency union?

Ahead of the 2014 referendum, the then SNP government laid down plans to enter a “formal currency union” with the rest of the UK, which would likely have seen representatives from an independent Scotland take roles at the Bank of England to have input on the use of key economic levers.

However, then chancellor George Osborne said that was “not going to happen” in a dramatic intervention credited with having played a major role in No’s victory eight years ago.

Now, the SNP government is instead proposing an “informal currency union”. This would see an independent Scotland continue to use sterling, but without any say at the central bank or any control over things like interest rates.

This informal currency union – which the Government said will be in place for an unspecified amount of time after independence until the transition to a new Scottish pound can begin – has been branded the “worst possible” option after a Yes vote.

Professor Richard Murphy, an economist from the University of Sheffield who has previously been outspoken about his support for Scottish independence, said the plans for an informal currency union were “so wrong” they would lose the vote for Yes.

Hardie told the Sunday National that he agreed with Professor Ronald MacDonald, the pro-UK economist from the University of Glasgow, that an informal currency union is “without doubt the worst possible currency option for an independent Scotland”.

Hardie said: “[MacDonald’s] looking at it from a trade point of view and I’m trying to bring in what some people might call an up-to-date finance perspective, and I’m basically saying that he understates the problem.”

When should Scotland transition to its own currency?

The economic prospectus published by the First Minister last Monday states: “We would use the time between a vote for independence and day one of independence to put in place all the requirements for continued use of sterling.”

However, Hardie argued that that time period should instead be used to prepare for the transition to a new Scottish pound.

He pointed to the three criteria the Scottish Government said should be met post-independence before the transition to a Scottish pound begins: “that the Scottish central bank has established its credibility”; “that foreign exchange reserves and sterling reserves are sufficient”; and “that Scotland is fiscally sustainable”.

Hardie said: “Obviously that begs the question: is it not the intention that Scotland will be perceived as fiscally sustainable [at the point of] independence?”

He further said that requirements such as having sufficient sterling reserves were “largely irrelevant”, adding: “But the most important point is that most of them are going to need to be in place straight away.”

“They’re saying the central bank is going to have to be credible to everybody, it’s going to have the expertise to advise the government on monetary policy, it’s going to have to have the expertise to manage fiscal and financial stability.

“The jump to saying … we’ve also got to have the expertise to be an independent setter of interest rates doesn’t feel to me like a very big jump.

“I’m not saying we’re not facing a huge administrative challenge, but I just don’t see the jump to a new currency as being a massively significant additional jump.”

In a report penned for Edinburgh University’s Centre on Constitutional Change, Hardie argued that a new currency is the “only viable option” for an independent Scotland.

He further noted that sterling “will itself be faced with the uncertainty of the rUK’s new circumstances” after a Yes vote, arguing that a Scottish pound could establish stability “relatively quickly” in that context.

What about the impacts of Tory policies?

What would have happened if an independent Scotland had been in an informal currency union when Liz Truss’s Tories announced their disastrous “mini-Budget”?

If anything, Hardie says, Scotland would have been hit harder than the rest of the UK.

“We would not have had any meaningful protection,” the Edinburgh University expert said. “What were the problems? The currency went down, well it’s our currency still in that scenario so any impacts of a low currency would still be there.

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“Our pension funds would still be big investors in gilts [UK Government-issued bonds] etcetera, almost certainly, so our pension funds would be under as much potential strain.

“In terms of our government and our companies being able to borrow, the situation would have been almost certainly worse than the UK Government.”

Hardie summed up: “We would have no real protection from the consequences, and if anything we’d be in a worse position.”

What’s the Scottish Government saying?

A Scottish Government spokesperson insisted that the country would continue to use sterling even after independence, echoing the economic prospectus in saying the transition to a new currency could happen “as soon as practicable, guided by economic conditions rather than a fixed timescale”.

Hardie said this represented “meaningful change” from the previous position of using sterling indefinitely after independence.

“I think it goes from ‘if not when’ to ‘when not if’ in terms of that transition [to a Scottish pound],” he said.

“I take a number of things from that. One is that there is a clear recognition that the informal currency union is not a good place to be. I agree with that.”

The Scottish Government spokesperson went on: “As set out in A Stronger Economy With Independence, a Scottish Central Bank would be operational from day one of independence and would perform a range of functions, in line with typical central bank practice internationally, while Scotland continues to use sterling.

“On the introduction of the Scottish pound, the role of the bank would expand as it assumes full control over monetary policy and financial stability.”