THE currency question was one of the dominant themes of the independence referendum. However, while various currency solutions were proposed (continued use of the pound, independent Scottish currency, adoption of the euro) there did not seem to be a clear plan of what would happen in the event of independence.
The referendum on the UK’s membership of the European Union has clearly demonstrated the problems of voting for something without a plan for what to do if you win. I feel it is important that in the event of indyref2 the Scottish people know what will happen following a vote for independence.
This was the motivation behind writing the document, How to Make a Currency, which describes how an independent Scottish currency could be introduced.
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While the United Kingdom has not changed its currency since decimalisation in 1971, many other countries have introduced new currencies or replaced existing ones since then. For example, there are 47 European countries that are members of the United Nations. Of these, 33 have replaced their currency since 1990 as a result of events such as introduction of the euro, break-up of the Soviet Union or break-up of Yugoslavia. In addition, five countries have re-denominated their currency during this period.
This means the process of introducing a new currency or replacing a currency is well known.
In the paper I have applied this process to Scotland to demonstrate how a Scottish currency could be introduced following a vote for independence.
The most important requirement is to have a fixed rate between the new Scottish currency and the pound for a transition period. In my paper I have proposed a transition period of three years (between the vote for independence and the introduction of the independent Scottish currency) during which an exchange rate of 1:1 would be used between UK pounds and the Scottish currency. This period would allow for the design and introduction of notes and coins and give the financial services industry time to convert bank accounts, mortgages, loans, etc, to the new Scottish currency. A three-year period was also used when the Euro was first introduced between 1999 and 2002 though more recently countries adopting the euro have used a shorter timeframe.
I have also proposed that a no compulsion rule be put in place as some people in Scotland may want to keep a Sterling bank account in addition to holding a Scottish currency one (for example, people living near the English border in the same way that many people and businesses in Northern Ireland have both euro and Sterling accounts if they work or do business in the Republic of Ireland). Though to ensure the introduction of a Scottish currency is a success all Scottish taxes and social security payments should be made in the new Scottish currency.
I have heard some doubts whether the UK Government would allow a transition period. However it is in the interests of the UK financial services industry (who have millions of customers in Scotland) for there to be a smooth introduction of a new Scottish currency. They would be the ones who would insist on a transition period and I believe they would get their way (as they did when the FCA investigation into banking culture was scrapped and as they are getting with their demand for making the city of London a special case in the Brexit negotiation).
One further point in reference to the euro: a country can only join the eurozone if there is economic convergence with the eurozone. This includes being part of the European Exchange Rate Mechanism. This would not be possible if Scotland kept the pound as the rest of the United Kingdom is leaving the EU. If the people of Scotland chose to join the eurozone this would only be possible if they had their own independent currency.
Whether the people of Scotland want a separate currency following independence is a decision for the people of Scotland; but if they choose to vote for a separate currency it is important to offer them a plan to demonstrate exactly what that means.