Skip to main content

The world has embraced the loonie. But would it do the same for the Scottie?

As Scotland heads toward its Sept. 18 referendum with the pro-independence side edging into a narrow lead in the polls, a new currency becomes a distinct possibility.

Granted, the last thing a time-starved world needs is the distraction of yet another form of money, especially one backed by a tiny nation with only slightly more people than British Columbia. But, given the alternatives, a new national currency could emerge as the best path forward for Scotland Inc. The other obvious choices – continuing to use the British pound or switching to the euro – are riddled with problems.

The euro option, for instance, faces the immediate complication that Scotland has no guaranteed ticket to membership in the European Union. Among other obstacles, there's Spain, which is struggling to placate its own independence movement in Catalonia, and doesn't want to encourage its home-grown separatists by embracing a newly independent Scotland.

Even if Scotland's path to EU membership proceeds without a hitch, the euro option would force it into the same one-size-fits-all monetary straitjacket as the rest of the euro zone – an approach that has had dismal results in recent years. If North Sea oil prices were to plummet, oil-dependent Scotland would have no way to offset the shock with looser interest rates.

That's a problem. But the pound option is also looking less than, um, sterling.

While the Scottish National Party (SNP) has long insisted that an independent Scotland would continue to use the British currency, the power brokers in London have rushed to reject the notion.

All a bluff, sniffs the SNP. It says the English will come to their senses after the referendum, especially since the SNP insists it will repudiate its part of the national debt unless Scotland keeps the pound.

But that raises the question of whether keeping the pound makes sense for Scotland. There are two ways to do so – by simply adopting the currency (a process that goes by the unlovely term "sterlingization") or by striking a formal currency union with the remainder of the United Kingdom.

The problem with sterlingization (other than its name) is that it leaves Scotland without any voice at the Bank of England and without any backstop from the central bank if crisis strikes. It also gives Scotland no way to adjust monetary policy to suit its own economy.

A formal currency union seems equally awkward. As the smaller partner in the union, Scotland would have to agree to keep its budget deficit within bounds set by the rest of the U.K. so that there would be no danger of it shifting risk onto its larger partner through runaway spending. For similar reasons, Edinburgh would also have to cede control of banking regulation to the folks in London.

At that point, not much would be left of Scotland's new independence. "It is weird to tell the English you are desperate to be rid of them and, in the same breath, say you trust them so much that you wish to share a core activity of the state you are leaving," writes Martin Wolf in the Financial Times.

All things considered, the best move for an independent Scotland would be a currency of its own. That would allow the new state to adjust its monetary policy to suit its own needs.

The problem, says Ronald MacDonald, an economist at the University of Glasgow, is that setting up a new currency involves a painful period of winning markets' trust and building up foreign-exchange reserves. But in the long run it would seem to be the only policy that would make sense if Scotland does vote for independence.

The question that remains is what to call the currency. The Scottie? The Braveheart? I suggest the Thistle, since it's likely to be painful to hold, especially as North Sea oil revenues dwindle.