Scotland may seek currency union with UK

An independent Scotland could take a stake in the Bank of England as part of a formal currency union with the remaining UK that would allow shared use of the pound and co-ordinated financial regulation, according to economists advising the Scottish government.

The proposed sterling zone is part of a policy framework drawn up by economists including Nobel Prize winners Joseph Stiglitz and Sir James Mirrlees to show how Scotland might manage its economy if it votes to leave the UK in a historic referendum next year.

Publication of the framework by the Scottish government is part of an intensifying battle over the merits of separation and continued union that also saw the UK government on Monday release a 108-page paper on the legal issues raised by independence.

Currency union could smooth the economic path of an independent Scotland and substantially reduce uncertainty faced by firms that do business there.

However, the UK paper stressed that formal currency union would require negotiations between an independent Scotland and the remaining UK. “At this stage it is not possible to know what the outcome of such negotiations would be,” the paper said.

Crawford Beveridge, chair of the economist working group advising the Scottish government, said currency union with Scotland – which accounts for about 10 per cent of the UK economy – would clearly be in the interests of all parties. The remaining UK would benefit from the balance of payments contribution made by Scotland’s exports including oil, gas and food and drink and highly integrated sectors such as financial services, Mr Beveridge said.

“I can’t see a future where the Bank of England and the rest of the UK would object to having this because there are significant advantages to them, both for individuals and for companies and for the government itself,” he said.

Mr Beveridge acknowledged that currency union would limit an independent Scotland’s autonomy on economic policy and financial sector regulation.

Even if the much larger remaining UK allowed the Scottish government to take a share in the BoE in proportion to its economic size and to have a voice in appointing members of its policy committee, Edinburgh’s influence is unlikely to be decisive.

“The Bank of England will remain a creature of the United Kingdom parliament, run by its laws and powers,” said Michael Moore, the UK’s Scottish secretary. “A 10 per cent share in an institution is a very small minority and how that is going to give you adequate control or influence is not at all clear.”

Currency union would also require financial sector supervision to be carried out on a “consistent basis across the sterling zone”, meaning that even if Scotland sets up regulatory authorities suggested by the group of advisers, the new bodies’ freedom of action would be highly constrained.

Still, the backing of high-profile economists for retaining the pound will give the Scottish government valuable ammunition in its efforts to persuade citizens that their economic future would be secure outside the 305-year-old union with England.

Mr Beveridge said technical discussions with BoE officials suggested they considered the currency union proposals to be “sensible”. However, the BoE is keen to keep its distance from the debate over post-independence arrangements.

“If the referendum should result in a vote in favour of an independent Scotland, the associated monetary arrangements would then be one of many matters needing to be settled,” Charles Bean, deputy governor of the Bank, said last February. “But the exact form of those arrangements would be for the Westminster and Scottish parliaments to decide, not the Bank of England.”

Differences over the implications of independence are sure to become increasingly acute as the 2014 referendum looms.

On Monday, Nicola Sturgeon, Scottish deputy first minister, dismissed as “incredibly arrogant” the argument in the UK government’s legal paper that an independent Scotland would have to re-establish its place in the international community as a new state.

Additional reporting by Claire Jones in London