The Fourth Option

Trails of separation makes the Scots contented. The possibility of Scotland being a sovereign nation is coming to reality. The benchmark low interest rates are hovering around Europe and while USA is 2 years older in facing the recession than Europe it is evident Europe will need much longer than USA to recover.

Can Scottish independence be the forefront growth engine for Europe’s tattered economy or can the Scots make it at least good for themselves if not for Europe?

Scotland’s political liberty may not grant it the economic liberty and economic sovereignty. Independence would mean UK has to let go off its hands from the rich North Sea oil and gas fields many of which would then belong to the new nation. It’s unclear if the North Sea oil is the sole reason for the determination of self-rule in Scotland. Going by the SNP’s (Scottish National Party) ‘It’s Scotland’s Oil’ slogans in the 70’s, this may be the sole or the a vital economic reason for independence but it’s highly unlikely the skewness in the BoP can be solely filled with the profits made out of oil neither the newly independent country can risk creating an entirely new economic system.

Scotland thus has to decide on whether they have to shift to a complete new currency or inherit the Euro or keep themselves connected with the Pound (or decide to go back to the Sterling Pound). The Euro as the Scottish currency will not happen specially with the on going debt crisis and the turbulence in the European Union.
Bringing a new currency in usage would mean total dependence on Scotland’s own and abundant natural resources but pegging the new currency is likely to affect the standard of the currency.
Secondly, it can increase the debt liability of Scotland when it comes to debt sharing as Scotland is a resource rich geography and UK is likely to lose more than gain by making Scotland independent arguably. Leaving the newly adopted currency to the pressures of the capital market, which can be the largest determinant of its value, can weaken the currency thereby giving a blow to the Scottish economy even before they start. It is also questionable if Scotland can adopt the Euro as its currency because the convergence criteria to join the Economic and Monetary Union may be failed by Scotland in view of UK’s debt. This means Scotland has to coax itself to be the fourth country to join the G-3 (UK,France and Germany by choice and Scotland by force).
The third option is to adopt the pound as its currency, a union currency, which insures Scotland of the volatility it might face in restructuring the domestic economy. The Central bank can thus act as the lender of last resort in times of crisis. Scotland and the rest of UK have been principal trading partners of one another and a union currency for the two nations prompts a positive effect on their balance of payments (BoP). Also the massive exodus of financial institutions and banks from Scotland can be checked with this move. Recent developments cite that UK has remained dispassionate in a union currency with Scotland. This pushes us to analyse the Fourth Option-
Scotland can start up with a currency of their own with tender to the natural resources and assets of the country and keep the Pound as its another official tender for exchange – a dual currency system. Such a system holding up would well insulate Scotland from the external shocks they face as a newly independent nation, easier acquiring of loans for development and time to build the institutional infrastructure to suit Scotland’s economy. The dual currency model is not untested. Serbia- Montenegro which is one country share two different types of currencies. Serbia uses the Yugoslavian Dinar while Montenegro uses the Euro or El Salvador accepting USD. European principalities like Andorra and the Vatican use Euro denominations though they aren’t a part of EU. Acceptance of multiple or dual currencies will mitigate the effects of a large scale shock to the new currency linked to the peg system. The acceptance of multiple currencies needs to have a period of upkeep as long term lingering of such practices would stall the development of the local currency because sovereignty does mean economic freedom too.
©2013-2014, The Idea Bucket. Submitted by Mikky.
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7 Comments

  1. Will Britain let the Scots leave home with the oil?
    How much weight will a naked Scotland, even while the oil lasts, present in the world?
    Won’t it have to cuddle up to someone, likely Britain?
    Can the Scots govern themselves well enough to remain solvent as the oil declines?
    Seems to me: \
    Scotland can’t afford the Euro with its problems,
    It may as well stay with the UK if it plans use of the pound and
    Managing a Scottish currency with the ‘entitled’ attitude of Scots voters appears challenging, to say the least.
    An independent Scotland these days, while very understandable as a reaction to current reality, seems like the tail desiring to leave the dog…. Greater autonomy might be manageable and useful.
    But I don’t know much about it; my sole Scots ancestor died way back.

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  2. Dual currencies have been used in the past, for example the Belgian Francs ‘Fin’ and ‘Con.’ However dual currencies require strict Regulation and Exchange Controls, else the old saw applies, in reverse. Gresham’s Law is; ‘Bad money drives out good.’ If there are not strict legal tender laws, (in which case Gresham’s Law applies), nobody accepts the inferior currency for anything. Wild inflation ensues. Without strict exchange and legal tender controls, (incompatible with EU membership), the ‘Scottish Pound’ would soon be valueless. There Is No Fourth Option.

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    1. Hi, thank you for your feedback. Here is what the author, A. S. Prashanth has to say about it ..

      “As I mentioned here the option of dual currency needs to have a limited period of upkeep. Using the new currency to peg itself against the currency basket would undervalue the new currency (which has been the case with the Kenyan currency) and also further problems would arise determining the face value of the currency..the Scottish currency in linkage to the capital market thus leads to a downward spiral even before they start out.. given such disturbances it is better the Scottish currency remained aloof from creating money of it’s own in cash but remained dependent on the British pound. Scottish currency can be thus issued in futures to start with, creating newer laws, thus raising the value and sensing the demand of the currency before the upkeep period of the British Pound expires… when the period expires the Scottish govt can then take to pull out the British pound and introduce Scottish currency in a full swing.”

      I hope it was of help..

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    2. No, Gresham’s law is when a government undervalues one medium of exchange and overvalues another, the undervalued currency is hoarded or exported and the overvalued currency floods into circulation. Without a government mandate as to the relationship between the values of the two currencies (your strict exchange controls) it is impossible for the undervaluation of a currency to even occur.

      The classic example is paper money against precious metals; when a government tries to use legal tender laws to forcibly increase the value of its printed paper vs. gold or silver, people will refuse to convert their gold into paper, instead hoarding it or selling it in foreign markets where it is not forcibly undervalued. It is not bad money driving out good, it is a price ceiling in exchange rates driving suppliers of the stronger currency out of the market, exactly as any other price ceiling would.

      It is impossible to even create a Gresham’s law problem without government interference in the exchange rate between two currencies. Left to themselves, the public will find a natural exchange rate which reflects their actual confidence in each and its subjective valuation. If this leads to the abandonment of a worthless currency in favor of a more stable one, that is all to the good. The only reason for a more sound currency to actual decrease in circulation is that an exchange control is in force that prevents it from being exchanged at its full value, and the only reason a Scottish Pound could not coexist as a parallel currency would be serious mismanagement, such as strict exchange controls or inflationary activity.

      If it were true that multiple currencies cannot coexist without strict controls, how is it that both ancient and modern international systems of floating exchange rates failed to become dominated by a single, nearly worthless currency? How is it that border towns where two currencies are routinely used are both totally functional without such controls, and generally favor the stronger currency? It is because without legal tender laws forcing the overvaluation of a weak currency, the consumer preference for a strong currency prevails and is reflected in the exchange rate. The whole point of Gresham’s law is that a strict exchange control or legal tender law is the only thing that preserves “bad money” at all, and that the prevalence of bad money is an unexpected negative outcome of enforcing such controls.

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      1. As I said, without government interference, Gresham’s Law applies in reverse, in that nobody will accept a pound drawn on a Scottish Bank. (Just try passing a Bank of Scotland £10 note in the South of England even today. No chance.)

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        1. Pound notes drawn on Scottish banks have their value legally fixed to that of those drawn on English banks; they ARE under exchange controls. Any problem these notes have can’t be used to demonstrate what happens without interference, since they’re already well-interfered. And it certainly doesn’t demonstrate that the Scots can’t have their own currency and another currency in circulation at the same time like a thousand border towns all over the world, as long as, like those towns, they use an exchange rate and not a legally-pegged relationship between the two.

          The adoption and success of a Scottish currency is down to its sound management (non-inflation), and the confidence of the public in the currency. Neither of these are certain to exist, but if these requirements are fulfilled, exchange controls and interferences can only hurt, not help.

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