An Independent Scotland's Currency Options Redux: Assessing the Costs and Benefits of Currency Choice

Abstract

This paper demonstrates that all of the currency options available to an independent Scotland come with the price tag of an austerity programme to the tune of £40bn. This is due to the need to accumulate foreign exchange reserves. So called Plan A - being part of a formal monetary union - comes with the added price tag of a 7% loss of competitiveness on average per annum. There will also be considerable volatility of competitiveness, similar to a separate currency. A formal sterling currency will end with a speculative attack and currency crisis which would costs Scotland alone anything in the region of £30bn to £200bn. The only currency option that maximizes the benefits and minimizes the costs of independence is that of a separate currency. All of the other options have none of the benefits but even greater costs than the separate currency option. However, this would also be a costly option in terms of the costs of redenomination and the need to build up an adequate stock of foreign exchange reserves. JEL-Code: F310, F320.