Can Scotland use Sterling?

A great deal of the Scottish independence referendum has centred on the question of currency and the economy – the ‘yes’ camp say they will enter a currency union with the rest of the UK, while the ‘no’ camp say that wouldn’t be in the best interests of other countries so would be blocked.

A currency union would be something similar to the euro – a common central bank, working for the benefit of all members.  It looks increasingly likely that Scotland, in the absence of a full currency union, would instead just either use Sterling as it is, or would peg its own currency to Sterling.  Some on the ‘no’ side have said that Scotland wouldn’t be allowed to do even this.

So how could the rest of the UK prevent Scotland from using Sterling as their currency?

They can’t.

However,  if Scotland continues to use the pound in the absence of a currency union, they are similar to a country such as Ecuador or Panama, which use the US dollar.  They have no say in policy on interest rates or money supply, and are restricted to fiscal policies instead.  If the Bank of England decides that the best thing for the rest of the UK (in terms of savings domestically and also encouraging exports to the rest of the world) is to raise interest rates to 5%, this might have a catastrophic impact on the Scottish economy if it had been pursuing a policy of encouraging personal lending.  Similarly around money supply – the amount of money issued is carefully controlled to avoid excessive inflation, with other policies in place to keep that in check.  This massively limits Scotland’s abilities to vary its economic policy from that of England; if they did they could face inflation of 35% at the drop of a hat.

Some have compared it to Greece or Ireland within the euro.  But the ECB has an obligation to base its decisions around making sure that all eurozone countries are not going to suffer unduly from any decisions made.  The Bank of England would have no such obligation.  As a short-term measure it might work, but in order to have a strong economy in the longer term, Scotland will need to find another answer, whether it be forming a new currency or joining the euro.

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