Scotland Facing Currency Predicament

As a summer filled with significant developments in the international system that have been highly influential over global business comes to an end, the world now turns its eyes to the British Isles as the vote on Scottish independence draws nearer. Although inherently a political subject, the vote that will take place on September 18th will also have important ripple effects for international business in Scotland and the United Kingdom should the movement pass. One of the primary economic concerns facing an independent Scotland includes the unresolved question regarding what currency the new state would adopt, which could have significant impacts on the business environment in Scotland.

According to the Bank of England, a currency union between Scotland and the United Kingdom would be incompatible with international norms for sovereignty. The bank's governor Mark Carney stated that a currency requires a centralized bank and shared banking regulations, as well as common taxation and government spending. Other pro-independence critics of Scotland adopting the British pound added that adopting the currency would essentially be a foreign country maintaining control over the Scottish economy, leaving Scotland to either adopt the euro or establish a separate and unproven currency. Furthermore, the Conservative, Labor, and Liberal Democratic parties within the Parliament of the United Kingdom have expressed concern that allowing Scotland to adopt the pound would enable the new state to borrow on a scale that would degrade the sterling in order to attract trade attention.

Scotland's two other alternatives, which are adopt the euro following its proposed EU membership or develop its own currency, are viable but would complicate the country's ease of trading with the U.K., the region's current largest export and import markets. The arguments supporting the euro includes that the Central European Bank predicts that all EU member states will be required to adopt the common currency at some future date, that candidate countries typically peg their currency to the euro prior to their ascension, and that the EU requires fiscal management from candidate countries. As far as creating its own currency, the proposition has gained support due to the high level of government debt that Scotland is likely to have, estimated at 86% of GDP, which would be managed more easily without impositions by foreign central banks. Fiscal independence would also allow Scotland the ability to depreciate the currency to overcome potential budget shortcomings.

In summary, the aspiring Scottish state faces several possibilities with regards to adopting a new currency should the referendum pass next week. The main predicament facing an independent Scotland is the question regarding how far it is willing to sacrifice fiscal independence for dynamic trade relations with key neighboring markets. On one hand of the spectrum, you have efforts to retain the sterling pound that places nearly all of Scotland's fiscal control in the hands of the United Kingdom. On the other end, an independent Scottish currency would give Scotland full fiscal control, but at the price of isolating itself with an unproven currency. None of these options provide a high degree of financial trust in independent Scottish markets from the on-set, but many Scots view this sacrifice of economic confidence as a worthwhile price for an independent nation.