Could an independent Scotland peg the Scots Pound to the Euro?

pound to euro

The currency debate rages on, as ever, and probably will continue to do so even after Scotland becomes an independent country.  It goes without saying that in the immediate aftermath of independence, Scotland will continue to use the Scottish pound.

The Scottish pound, is already treated by many, as a unique and separate currency.  Many English stores refuse to take it, and look baffled and confused when they see a Scottish note.  It is pegged at parity with Pound Sterling.  The Bank of Scotland, the Royal Bank of Scotland, and the Clydesdale Bank are the only three Scottish banks authorised to print Scottish bank notes.

Pound Sterling is still translated as Punnd Sasannach (English pound) in Scottish Gaelic.

Scottish bank notes are not issued by the Central Bank in England, and are only issued by retail banks in Scotland.  They are not even classed as legal tender in the UK, therefore the Scottish Pound is indeed already treated like a separate currency in that regard.

The fact that Scottish bank notes are not legal tender, mean that they cannot be withdrawn from circulation by the English Central Bank.  Instead, the Scottish retail banks withdraw the notes as they are banked.  Any notes that are still in circulation therefore must still be honoured by the Scottish banks.

The Bank of Scotland actually almost lost their rights to print notes (as per the Bank Notes Scotland Act 1845) when HBOS was taken over by Lloyds banking group, until they agreed to keep their headquarters in Scotland.

And as for coinage, it is a little known fact that Article 16 of the Treaty of Union stipulated that Scotland was to keep its own mint.

"That, from and after the Union, the coin shall be of the same standard and value throughout the United Kingdom as now in England, and a Mint shall be continued in Scotland under the same rules as the Mint in England ; and the present officers of the Mint continued subject to such regulations and alterations as Her Majestie, her heirs or successors, or the Parliament of Great Britain shall think fit."
— Article XVI of the Acts of Union

Although Scotland still to this day, maintains the legal right to mint our own coinage according to the Act of Union, production of Scottish coins ceased a mere two years after 1707.

But anyway, back to the Euro.  Lots of countries have previously pegged their currency to the Euro, and some continue to do so to this day.  One country of note that still does this, is Denmark.  A good country to look at, because firstly they have a similar population, and secondly, the Danish economy has strengthened remarkably since pegging their currency to the Euro.

Denmark is widely regarded as one of the world's strongest economies.  On a GDP Per Capita basis, Denmark is the 9th richest country in the world.  Denmark's currency, the Danish Krone, is pegged to the Euro via the European Exchange Rate Mechanism.

Could this also work for Scotland?

Of course, the SNP's original plan was to have an official currency union with England in the immediate aftermath of Scottish independence.  But another option would have been to just peg the Scottish pound to Sterling, with or without the UK Government's permission.

Irish Free State Pound

This currency arrangement worked for Ireland.  The Irish Free State established the Irish Pound or Punt in 1928, and pegged it at 1:1 parity with Pound Sterling.  They maintained this arrangement for 50 years, and did not require permission from the UK Government, because it was not an official currency union.

Ireland simply printed their own distinctive notes, and minted their own distinct coins.  It wasn't until 1978 that Ireland broke the link with Sterling, and decided to have their own free floating currency.  Of course, Ireland eventually made the decision to join the Euro in 1999.

Some economists argue that the ideal scenario for Scotland would be to create our own central bank and have a completely independent currency.

Some have suggested that they would be comfortable with Scotland joining the Euro.  Whilst others are completely averse to the idea, because they seem to hold some irrational belief that the sky would fall in if Scotland were to do this.

Perhaps another option, rather than to fully join the Euro, would be to peg the Scottish Pound to the Euro, and to maintain the look and feel of our Scottish notes as is, and to mint coins almost identical to the ones we use now, but to make them more Scottish?

The current rate of inflation in the UK is 1.8%, whilst the rate of inflation in the Eurozone is only 1.3%.  In fact, ever since the 2008 recession, UK inflation has been much higher than the Eurozone's rate.

Perhaps the Scottish economy could therefore provide more stability by pegging itself to the Euro rather than the English pound?

There are many arguments against pegging to the Euro, and some economists would conclude that pegging to Sterling would be better, since we trade so much with England.

Economically speaking, floating our own currency with our own central bank is preferential, but in the meantime, in the early days of independence, we will be forced to peg to another currency, because the creation of our own currency can only happen after independence.

So for now, it makes sense that pegging to another currency will be our only viable option.

In 2014, the UK Government said no to a full currency union.  The SNP advocated a currency union, which gave the UK Government the option to say no.  It gave them the option to refuse, and they were perfectly entitled to refuse, after all, they wish to maintain the union, so why should they do anything to help us?

The currency union idea was therefore a mistake.  Instead, the SNP should have advocated simply pegging the Scottish pound to Sterling, which has been done before, and would NOT REQUIRE the permission of the UK Government.

But perhaps the SNP should also consider, and weigh up the option of pegging the Scots pound to the Euro, which has proven to be more stable than Sterling in recent years.

Investment banking company 'UBS' noted recently that the Euro has remained "remarkably stable" against the dollar, despite economic worries in individual Eurozone countries.

However, the Eurozone has outperformed Sterling for the past 10 years, and Sterling has weakened dramatically.

pound to euro

Another element to consider here, is the fact that the UK economy could continue to slow down, and could enter a Brexit recession.  Should the pound continue to weaken against other major global currencies, such as the Euro, then this would cause serious damage to the Scottish economy, if we were to peg our currency to Pound Sterling.

Let's say for example, that the UK were to agree a very distant relationship with the EU, it is highly probable that the UK economy would suffer a significant hit.  What if they UK were to enter a 20 year decline for example?  Would being tied to a larger currency therefore be preferable?

The UK economy is projected to grow by 1% in 2020, whilst the EU economy is projected to grow by 1.2%.  Not much difference, but then again, we are still currently EU rule takers, and still within the transition period.  The real damage of Brexit will only be known after the transition period ends in 2021.

In the long term, I'd say it's for certain that Scotland will develop our own central bank and currency, but that would definitely take a very minimum of 5 to 10 years, and so pegging to a larger currency would logically be the fallback position in the immediate aftermath of independence.

Before Brexit, pegging to the Pound Sterling would have been a no brainer, but taking the potential economic hit to the UK into account as a result of Brexit, might mean that we should become a little bit more open minded after all.

I must stress, I am not an economist, or a finance expert, but simply opening up the debate, and trying to establish an opportunity to challenge the scaremongering around the currency debate.  All normal independent countries have their own unique currency arrangements.

There seems to be lots of concern about what currencies Scotland should have, but not enough concern about maintaining the status quo, being tied down in Brexit Britain prison, and going down the rabbit hole with Boris Johnson, which in my belief, would be the most damaging scenario possible.


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