Scotland Has no Feasible Currency Options on Independence

Originally written in response to an article by Monbiot here:

One immediate problem is that Monbiot begs the question, in that he assumes the conclusion he is trying to prove as a premise in his argument. This can be seen throughout the first four paragraphs. He aims to conclude that Scotland should be an independent country starting from a set of rhetorical questions premised on Scotland being a country. True but irrelevant, since the question at issue is exactly whether Scotland should be an independent country. To see this more clearly, note that his argument, if valid, goes through for anything you call a country: Wales, London, Pimlico, the local pub. Should Pimlico accept the hegemony of Westminster…?

A more serious problem is that whether or not Monbiot is right that there is a much better possibility in the offing depends on whether there is a feasible path to get there. Otherwise he is arguing that we would all be better off living on the moon in gold houses. True, but irrelevant, because we can’t do it. Here the currency problem comes to the fore. Monbiot concedes that Scotland might have no control over its currency post-independence, and seeks to minimise that difficulty by arguing that this represents no change against the status quo. Maybe, but the problem is much worse than that. Scotland in fact has no viable currency options post-independence.

The possibilities are a) keep the pound or b) join the Euro.

a). in fact splits into two possibilities. a1). is to obtain agreement from Westminster to retain the use of the pound on the same basis as the remaining-UK (RUK). a2), also known as Sterlingisation or the Panama option, is to use the pound without agreement from Westminster.

It is possibility a1). that all Westminster parties have ruled out. The pro-independence camp here argues that the Westminster parties are bluffing here. They are not. RUK cannot afford to bluff here. The pro-independence camp says they will not take on their share of UK debt (£100bn) if Westminster does not let them use the pound. Westminster is in fact going to bite that bullet if need be. RUK is already on the hook for the entire current amount of UK debt. This is because RUK has already been required by international bond markets to state that it will be standing behind all current UK debt because the international bond markets were not prepared to accept the risk that they might end up holding Scottish debt. (There is an interest rate at which they would be prepared to do so, but it is much higher than either the UK or RUK rates, because an independent Scotland would not have a Aaa rating.) So this option will not be available.

Possibility a2) is where the pound is just used to make retail purchases in Scotland. It is true that Westminster cannot stop this and nor need it. It is simply not a problem for RUK, just as it is not a problem for the US that Panama uses the dollar. However, Westminster can and must prevent Scotland from issuing pound-denominated debt. It cannot be allowed since Scotland would be issuing debt for which RUK would be responsible. (This is fact is the other way around. No authority could be given to Scotland to issue debt.) Similarly, the Bank of England will not guarantee Scottish banks because it would not be in a position to regulate them. Since Scotland will continue to be in a financial deficit position after independence, like the UK and RUK, it will need to issue debt. So this option will not be available.

Possibility b). is the Euro. This again splits into two possibilities like the above, but no one has proposed b2) (`Euroisation’) which has the same fatal problems as a2). So b) means EU membership.

The first problem here is that Spain would have to veto membership or risk fission, starting with Catalonia.

The second problem here is that you don’t join on UK conditions. You join on currently available conditions. That means no opt outs and no rebate. The latter in particular is going to be particularly expensive.

Thirdly, today’s letter from the former European Commissioner for Economic and Monetary Affairs:

is germane here. Key points:

– you can’t join the Euro if you just reneged on your debt as postulated above;

– you can’t join the Euro without a stable central bank (I imagine that means at least three to four years)

– you can’t join the Euro if you have been `sterlingised’ for the candidacy period.

So this option is also impossible.

There are no more options.

Author: Tim Short

I went to Imperial College in 1988 for a BSc(hons) in Physics. I then went back to my hometown, Bristol, for a PhD in Particle Physics. This was written in 1992 on the ZEUS experiment which was located at the HERA accelerator in Hamburg ( I spent the next four years as a post-doc in Hamburg. I learned German and developed a fondness for the language and people. I spent a couple of years doing technical sales for a US computer company in Ireland. In 1997, I returned to London to become an investment banker, joining the legendary Principal Finance Group at Nomura. After a spell at Paribas, I moved to Credit Suisse First Boston. I specialized in securitization, leading over €9bn of transactions. My interest in philosophy began in 2006, when I read David Chalmers's "The Conscious Mind." My reaction, apart from fascination, was "he has to be wrong, but I can't see why"! I then became an undergraduate in Philosophy at UCL in 2007. In 2010, I was admitted to graduate school, also at UCL. I wrote my Master's on the topic of "Nietzsche on Memory" ( Also during this time, I published a popular article on Sherlock Holmes ( I then began work on the Simulation Theory account of Theory of Mind. This led to my second PhD on philosophical aspects of that topic; this was awarded by UCL in March 2016 ( -- currently embargoed for copyright reasons). The psychological version of this work formed my book "Simulation Theory". My second book, "The Psychology Of Successful Trading: Behavioural Strategies For Profitability" is in production at Taylor and Francis and will be published in December 2017. It will discuss how cognitive biases affect investment decisions and how knowing this can make us better traders by understanding ourselves and other market participants more fully. I am currently drafting my third book, wherein I will return to more purely academic philosophical psychology, on "Theory of Mind in Abnormal Psychology." Education: I have five degrees, two in physics and three in philosophy. Areas of Research / Professional Expertise: Particle physics, Monte Carlo simulation, Nietzsche (especially psychological topics), phenomenology, Theory of Mind, Simulation Theory Personal Interests: I am a bit of an opera fanatic and I often attend wine tastings. I follow current affairs, especially in their economic aspect. I started as a beginner at the London Piano Institute in August 2015 and passed Grade Three in May 2018!

4 thoughts on “Scotland Has no Feasible Currency Options on Independence”

  1. I found the argument that staying in the UK might force Scotland to leave the EU (if the UK exits) particularly frustrating. If Scotland leaves the UK then it won’t be part of the EU until it negotiates its way back in. So to argue `Unification might result in Scotland leaving the EU and this is bad’ when independence will result in a partial realisation of exactly this just seems utterly misdirected.


  2. Exactly. There is of course also the possibility that RUK vetoes the application, but I chose not to rely on that because Westminster might not play hardball like that. (It doesn’t have any choice about playing hardball on the pound as I say above.) That’s why I mentioned Spain who have compelling reasons to veto to avoid setting the precedent and no reasons to do favours for Scotland.


  3. Ok so stupid question: why is Scotland issuing its own currency not an option?

    I don’t know why this hasn’t been made a bigger deal during the campaign. I know there have been endless “tell us your plan B” sound bites, but I haven’t seen much in the mainstream media that is trying to say “this won’t work”. Maybe RUK doesn’t want to say during the campaign that they’ll bear the full debt because they’re hoping to have the chance to have Scotland take some of it.

    I just don’t understand why it’s been more like “your plan A is a bad idea, what’s your plan B?”, instead of “Your plan A won’t work, and the reason you don’t have a plan B is because that won’t work either”.


  4. It’s not a stupid question; it’s a good one. I agree with you that the dialectic ought to have been more the way you frame it.

    The first point I would make is that no one should confuse the instantiation and desirability of a particular status B with a proof that the route from status A to status B is desirable and feasible.

    Beyond that, you are of course right to think that a country with a population of 5.3m can have its own currency, because some do. It would not be a widely-traded or very liquid currency and anyone (i.e. Scotland) issuing bonds in it would pay a liquidity premium. But it could be done. The issue is how you get there. De facto, on day I+1 they would be sterlingised i.e. using GBP without consent from Westminster or the backing of the Bank of England. They would be running an immediate fiscal deficit. The UK deficit was £85.1bn for 2012/2013. Scotland is running something like 5.3/63.6 *1.16 of that = £8.3bn. (That’s the ratio of the population of Scotland to the UK multiplied by a Barnett weighting to take account of the fact that there is extra public spending per head in Scotland.) So they are short £691m per month.

    They need to fund that from day I+1 without being able to issue bonds. That means IMF bailout until they can setup a stable central bank and do a debut bond issue. Imagine you are a bond market investor. Do you want to buy RUK Aaa rated bonds backed by a country of 58.3m or a debut bond in a new currency backed by a new central bank from a country of 5.3m?

    I think that since RUK has already said it will stand behind all the existing debt, it is likely going to be better to assume it all (i.e. not much more than an extra year’s borrowing) than to allow Scotland to issue bonds backed by our bank. We know how much the former costs and it is a one-off.


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