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No pound for you: U.K. gives Scotland ultimatum

"Ganging up to bully Scotland" raged Alex Salmond, the Scottish Nationalist Leader, and it certainly looked a bit like that in Westminster today.

A London triumvirate led by George Osborne, the Chancellor of the Exchequer, his Liberal Democrat deputy, Danny Alexander, and Labour's shadow chancellor, Ed Balls, stepped up to the podium to collectively trash the SNP's proposal of a post-independence currency union between Scotland and the U.K. "If Scotland walks away from the U.K., it walks away from the U.K. pound," said Mr Osborne, while his Labour opponent chimed in, suggesting that currency union "will never happen".

The all-party trashing of Mr Salmond's no-pain vision of "independence plus the pound and the Queen too" was clearly designed to rattle the Scottish cage and it explains why the Canadian Governor of the Bank of England, Mark Carney, felt comfortable weighing into a private British quarrel two weeks ago with his doubts about currency union. It is not just Mr. Carney's political boss who doesn't like the proposed sterling zone. All the political bosses in Westminster don't like it.

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However, it shows they have been rattled enough by Scottish opinion (some private polling, perhaps) to come together with a blunderbuss, arguing that Britain doesn't want a mini euro zone round its neck and won't agree to prop up Scotland's banking system without extensive controls over Scottish public spending and taxation. The Westminster attack could fatally wound Mr. Salmond's campaign or, counterinuitively, the "bullying" could provoke a nationalist reaction. The answer lies firstly in whether the SNP has a plan B but more profoundly, it raises another question: why the currency issue has become so important and what lies behind it.

If Scotland cannot keep the pound, what are the alternatives? The SNP is a bit vague but it does have options. The simplest and crudest is "dollarization", where people simply adopt the currency of another country for use in everyday transactions out of preference. It frequently happens in countries suffering hyper-inflation, such as Zimbabwe. The obvious disadvantage is that the adopting country loses all control of monetary policy and it would probably require that Scotland's banking system came effectively under British control, if there was no Scottish Central Bank, capable of being lender of last resort.

Scotland could have its own currency, a truly nationalist option but one fraught with exchange-rate risk and the possibility of an initial flight to safety by the unpatriotic and consequential devaluation. It would also entail the cost and complexity of establishing new institutions, a central bank and regulatory authorities. Alternatively, Scotland could set up a currency board whose task would be to peg a new Scottish currency to the pound at a fixed rate by holding sufficient sterling reserves to enable conversion at the established rate.

This option might provide some certainty as Scottish interest rates would shift up or down in response to appetite for conversion into sterling or vice versa. However, it would preclude the printing of money by Scotland and the Scottish would find that their borrowing costs were in fact set by the Bank of England with little room for manoeuvre if Scotland's economy began to drift apart from Britain's, perhaps due to oil price swings.

Finally, there is the euro with all its travails. No doubt, Scotland would be invited to join but it would not be an automatic process, there would need to be a vote by other member states and a binding treaty to ensure Scotland met the euro zone's public deficit rules. It would be an odd choice, given the much greater importance of trade with Britain than with mainland Europe.

It is truly bizarre that in a decision about national independence, so much of the argument now seems to be turning on the currency. Only seven months from the crucial referendum and we hear little about the Scottish language, culture, politics, the underlying economy or even that old chestnut: who gets the oil? Over the past century, countless nations have fought for independence but one cannot think of any movement which lost its way over an argument about monetary policy.

Could it be that in a materialistic and technocratic world, the currency and its intrinsic value has come to mean as much to people as the language they speak, their cultural habits and the political institutions by which they govern themselves.

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Or, could it simply mean that the Scottish people are quite happy, broadly speaking, with the way things are and simply want to know whether independence will add up to more or less porridge.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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