The debate about the currency is now well underway in Scotland, although not as yet in the rest of the United Kingdom (UK) and so far most of the current contributors are paying little or no attention to the legal issues. Instead , they are mostly focusing on a combination of economic discussion and some wishful thinking.

The choice of currency for a newly independent country is one of the most important issues but, as is discussed below, when it comes to Scotland there are some legal issues which need to be considered in the debate but which so far have been missing.

The current currency system within the UK is often described as a currency or monetary union and post-independence the Scottish government wants to retain sterling in a formal currency union with the rest of the UK, although those in the rest of the UK who have shown any interest in the subject are not very keen on such an arrangement. Indeed, the Welsh First Minister has even spoken out against it as not being in the best interests of Wales and the Chancellor of the Exchequer has regularly questioned whether this would be in the best interests of a UK minus Scotland.

It seems that many who do support Scottish independence do not understand the Scottish Government’s position on choice of currency and regard the idea of a formal sterling zone as being part of so-called ‘independence light’.

But as the Scottish Government’s position is that Scotland will be a Member State of the European Union (EU) it seems that any discussion about choice of currency must look at what this means. For the purposes of this paper let’s assume that gaining membership of the EU will not be problematic and that Scotland will have to apply for membership as a newly independent State (This, of course, may not actually be so straightforward – think of Spain and Catalonia). This is not what the Scottish Government wants to hear but the reality is that the rest of the UK will be treated as the continuing State with membership (and the euro opt-out) carrying on automatically.  Scotland, as a new applicant, will not be entitled to the existing UK currency opt-out.

The only long-term currency option for the newly independent nation as a Member State of the EU will be to commit to adopting the euro and this will form part of the entry negotiations.  Of course, it would take some time for Scotland to meet the so-called Maastricht Convergence Criteria and no doubt there would be room for some dilly-dallying along the way (look at Sweden, which contrary to the general perception does not have a euro opt-out). The idea that a newly independent Scotland would be in a position to negotiate an opt-out is simply not tenable. (For a differing view see Professor Drew Scott ‘An Independent Scotland Could Not Be Required to Adopt the Euro As Its Currency’.)

If Scotland does have to commit to eventually adopting the euro there is arguably even less of an incentive for the rest of the UK to enter into a formal agreement with regard to sterling.  A formal agreement in any event seems very unlikely because outside of Scotland there is no support for it whatsoever and considerable opposition from those who have shown any interest.

So from the time when an independent Scotland joins the EU until it could be ready to adopt the euro it seems the choices are likely to be straightforward - either an informal use of sterling or a new Scottish currency.

The informal use of sterling option would involve Scotland continuing to use the pound sterling but without any formal agreement with the authorities in London. There is nothing new about this type of approach and there are examples around the world. Panama and its use of the US dollar is one example. But why would a newly independent Scotland want to consider this type of approach?

Under this option an independent Scotland would have virtually no control over its monetary policy and that is something which is presumably undesirable, although a formal Sterling zone option may not actually give Scotland much more input.

What about a Scottish currency? An independent Scotland could take the decision to introduce a new national currency and this is an approach that the Scottish Government did originally support.  To many this is a logical step for a newly independent state to take. Having its own currency could be seen as a badge of honour and an esteem factor, while piggy-backing on the currency of the large neighbour from which it has recently separated may lack this and could look to many as a form of weakness rather than strength

While it can be argued that the currency of a smaller country may face more risks and, as a result, lack stability than for a larger one there are many examples of small countries with very strong and stable currencies; the Swiss franc, the Norwegian krona and the Singapore dollar being three examples.

A new currency would, of course, have short-term transitional costs. An independent Scotland would have to establish a new central bank and an independent monetary authority and decisions on exchange rates would have to be taken.

Adopting the Euro

Prior to the financial crisis in the eurozone adopting the euro was the preferred option of the Scottish National Party but it is now probably less politically attractive to the Scottish electorate to be told that they will have to give up their pounds to be replaced by a currency which has had so much negative publicity in the recent past. A commitment to joining the euro would presumably be seen as a liability with regard to securing a vote in favour of independence in the forthcoming referendum.   

The EU dimension is very relevant for the choice of currency. What seems to be barely getting a mention in the debate so far is the requirement for all new Member States to make a formal commitment to join the euro.  Why would EU Members States agree to allow a currency opt-out for Scotland?  Although the UK does have a formal opt-out, and therefore Scotland is currently a part of that, it is submitted that by leaving the UK that opt-out would no longer apply.

As joining the eurozone requires that certain criteria are met obviously there would clearly be a delay before a new Member State could adopt the single currency. A new member needs to have been a member of the Exchange Rate Mechanism for two years and satisfy the Maastricht Convergence Criteria in relation to the following: price stability, sustainable public finances, durability of convergence, exchange rate stability and compatibility of national law with Treaty provisions.

Some final thoughts

The current preferred option of the Scottish Government to enter into formal sterling currency union with the rest of the UK is not going to be as straightforward to establish as the Scottish First Minister, and his colleagues, are suggesting.  It is clear that this would need a negotiated agreement with the London authorities and would inevitably involve, at least to some degree, a loss of control over monetary and fiscal policy.

Although the Scottish Government has put forward a well-argued and, in many ways, persuasive case from the Scottish perspective the question why would the rest of the UK want to enter into such an arrangement has still not been fully answered despite the publication of Currency Choices for an Independent Scotland. The possible advantages for Scotland are made out but there needs to be a clearer and more convincing case made as to why the rest of the UK would gain from this arrangement.

Introducing a new Scottish currency actually makes perfect sense for a newly independent country provided adequate safeguards are in place. Although it would not be without economic costs, at least in the short term, it would allow Scotland to have control of its monetary and fiscal policy and have its own Treasury and central bank. It would also demonstrate that the newly independent country has confidence in itself. However, there could be exchange rate volatility but that could also be a benefit to the Scottish economy; but that is for the economic debate.

However, for the reasons considered in detail earlier, the reality is that none of these options may be available in any event.  It all really depends on Scotland’s membership of the EU. The EU question is likely to be the ultimate deciding factor. The Scottish Government has made it absolutely clear that its policy is for Scotland to be a Member State. On the basis of the earlier discussion of this issue it is submitted that the rest of the UK would be the continuing state and Scotland would be a newly independent state which would have to apply for EU membership.  As a new state applying to the EU it will be obliged to commit to join the single currency in due course. As European Commission President Barroso has said ‘we must recognise that some countries do have opt-outs…..but they are the exception, not the rule’.  Any claim by the Scottish Government that the UK’s opt-out should still apply to Scotland is not likely to carry much weight at the European Commission.

What would happen in the period post-independence is quite uncertain. Would belonging to another currency union satisfy the EU or would it insist that Scotland use its own currency?

Of course it is likely that it would take several years at least before Scotland would satisfy the entry requirements for joining the eurozone and during that time it would have to make a choice of currency.

If Scotland does become independent the currency choices will have to be faced immediately.  The EU position is being barely discussed in the political debates and in the Scottish media. Most writers on the economic issues also tend to ignore the EU position but the reality has to be confronted.

But would joining the eurozone be such a bad thing for Scotland? The currency policy of the Scottish National party at one time favoured joining the euro, but that was when it was seen as a success and when Ireland, which was already using the euro, was seen as the ‘Celtic tiger’. Any new Member States have to commit to joining the eurozone and that requirement is not going to be waived for Scotland, as by doing so it raises the possibility of many other states applying for an opt-out. The euro has been through some very difficult times but appears to have weathered the storm and the many predictions of its demise have been wide of the mark.  It has actually been gaining in value against many currencies, including sterling, during 2013.

Andrew Campbell is Professor of International Banking and Finance Law at the University of Leeds.  For a much more detailed discussion of the issues raised here see Andrew Campbell ‘The Future of United Kingdom Monetary Union and Scottish Independence’ (2013) 7.5 Law and Financial Markets Review 239.