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Scotland’s Currency Options
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DP415: Scotland's Opitmal CurrencyRelated Themes
Productivity, Trade, and Regional EconomiesPaper Category Number
415
This paper considers which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency union, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important. Recent events around the world, particularly in Europe, have shown that fiscal sustainability and currency arrangements cannot be considered in isolation. Hence, the share of the existing UK public debt that an independent Scotland would inherit is central to understanding its currency choices. We consider how the debt may be divided, and the ability of an independent Scotland to pay its share. For an independent Scotland to prosper it requires a 'hard' currency, one in which investors are willing to hold long-dated Scottish government debt at a reasonable price. A necessary condition for a ‘hard’ currency is that government solvency is always beyond doubt.
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