Currency Union might not let an independent Scotland join the EU as the “Yes” front now leads

José Manuel Barroso, President of the EC, and Alex Salmond, First Minister of the Scottish Government (EC Audiovisual Services, 2/12/2009)

It is almost a week away now. Scotland’s independence referendum is next week, and the situation has never been as delicate and confused as it is now. The news came in last Sunday, and it was a shock: Scottish PM Alex Salmond’s “Yes” campaign is in the lead for the first time. A YouGov poll by The Sunday Times placed the “Yes” to independence campaign at 51 per cent against the “No” campaign with 49 per cent, overturning a 22-point lead for the “Better Together” unionist campaign in just a month.

The two-point advantage is clearly within the margin of error and probably shows a situation which is closer to a draw than to a triumph for one of the two parts, but the news run faster than light. And its echo is still audible. As the Queen is said to be “horrified” at the prospect of a “yes” vote, Chancellor George Osborne promised a “plan of action to give more powers to Scotland” should a “No” vote prevail in the referendum and Prime Minister David Cameron has announced that the Saltire will fly above Downing Street in a show of support for the Union.

But these were not the only reactions to the news. The pound slumped to a 10-month low on Monday as the “Yes” campaign took the lead, losing almost one and a half cents against the US dollar. Sterling reached $1.618, the lowest level since November 2013, and it was not alone while falling. Energy group SSE (Scottish & Southern Electricity), Lloyds Banking Group, Standard Life and Aberdeen Asset Management all fell 1.5% to 2.5% in early trading on Monday, with Royal Bank of Scotland as the biggest ‘faller’ in the FTSE 100 (3% down).

The situation is uncertain for sure, but uncertainty may all come from the same source: the currency that an independent Scotland would use. This is still a big knot and always the biggest question. As largely rumoured, an independent Scotland could not rejoin the European Union if it used the pound informally, as held out by the “Yes” side. This practice is generally known as “sterlingisation”.

Former EU Economics Chief Olli Rehn is one of the most prestigious voices to have confirmed that this theory cannot be taken into consideration. Indeed he declared that it would “simply not be possible” to combine a policy of sterlingisation with EU membership. Mr. Rehn, was quite direct though. In a letter to the British chief secretary to the treasury, Danny Alexander, he said that states applying for membership have to have a central bank. Mr. Rehn officially casted Alex Salmond’s plans of currency union with London, also without an agreement, as he said, into doubt. Therefore the absence of a central bank and not having a formal currency union could prevent an independent Scotland from joining the EU.

So we have the “Yes” front gaining ground on one side, and still no answer to the “what currency is an independent Scotland going to adopt?” question on the other. Not a common view of the thing at least. Mr. Salmond would say there’s no doubt about this, and that an independent Scotland would automatically adopt sterling as its currency.

But I ask: is the currency union option an actual and convenient one for Scotland indeed? And, most of all, is this an option that truly marries the idea of independence from the UK? Basically currency union is when countries with different political systems share a currency. This way there’s always a certain loss of economic – and, someway, political power for the country that adopts the currency in a “second moment”. High interest rates or general limits might be imposed by London, and this would be again some kind of dependency. A much more subtle and silent one, but still dependency. And this is something that should be taken into consideration by the Scots.

The other options seem to be quite hard work anyway. Adopting a new currency would bring total control and general independence from the Bank of England, but also some kind of “start from point zero” for Scotland, with markets to convince and investments potentially falling. The option of Scotland adopting the Euro seems now to be quite unrealistic, as the pro “Yes” campaigners are investing totally on a currency union option, making the Eurozone currency not so popular.

Scotland is running towards a historic moment, which might change its history forever, and the last few days apparently changed the scenario itself like never before. What sounded crazy just a few weeks ago is now shaking the markets, and maybe also the Parliament’s seats. The only risk is that there’s still too much uncertainty, as I said, and that this revolution could take place with unexpected consequences.

Too many question marks and slogans should be replaced by answers, while the referendum is less one week away. On 18 September Scotland votes on whether it is better to end its 307-year union with England and break up the UK. This is something that now has got a completely different sound and outreach.

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