This column discusses what currency an independent Scotland could use.
"The currency we would use in an independent Scotland is an important issue. At the present time we use the pound sterling, the UK currency. Most countries in the European Union (EU) use the euro.
There would be three options for an independent Scotland: switching to the euro; retaining the pound; or introducing a new currency, which I shall call the groat. All have advantages and disadvantages.
The SNP’s original proposal was for the euro. However, as I wrote last month, that would depend on Scotland being accepted as a member of the EU, which would not be automatic.
In any case, the SNP has backtracked on using the euro, partly because of the recent financial and economic problems in the euro area. I used to be a strong supporter of euro membership, but as an economist I have been forced to change my opinions over the last few years.
The United States has a common currency which seems to have worked very well. That is not the case with the euro. It is clear from the last few years’ experience that membership has benefitted the stronger economies, notably Germany, but disadvantaged the weaker ones, such as Greece and Spain.
There are many reasons for that, but the main one is the inability of the weaker countries to use monetary policies to counter the competitive strengths of the likes of Germany. In the old days, devaluation of the local currency was often used to do that, but that is not possible within the euro.
The second option for an independent Scotland is to retain the pound. That would require an agreement with England and the other UK countries, which may not be forthcoming.
Nevertheless, I believe that this would be a second best option. The Scottish Government would have no control over the exchange rate of sterling, nor key monetary policy tools such as interest rates. In good times, there might be no problems, but in difficult times there would.
The sterling exchange rate is very important for businesses in the north of Scotland, particularly for exporters. The tourism industry is also heavily affected by the external value of the pound because it influences the numbers of overseas visitors.
Interest rates are mainly determined by the Bank of England, with most commercial rates being linked to the Bank’s base rate. An independent Scotland using the pound would therefore have no control over them.
The third option of a new currency – such as the groat – seems to me to be the best option. Most countries have their own currencies and arrangements such as the euro are unusual. A good example is Norway, which has a very strong currency in the krone.
An independent Scotland should have a strong currency to begin with, because of North Sea oil revenues. However, as those revenues decline, which I expect to happen after 2017, the currency would inevitably weaken. That implies increases in import prices and higher inflation.
The groat would be a very small currency compared with the likes of the dollar and euro, and therefore susceptible to big fluctuations in the exchange rate. Nevertheless, many countries of a similar size to Scotland have to cope with these issues. An option would be to peg the groat to the dollar or euro, but most economists now believe that is not a sensible policy and that allowing a currency to float is better.
The choice of the best currency for an independent Scotland would be a very important decision. It is also a difficult one and I have been disappointed by the quality of the debate on this issue so far.
It needs to be much better over the next few months if a sensible decision is to be taken."