Independent Scotland Should Have Own Currency, Niesr Says

Scotland should adopt its own currency if it becomes independent as the nationalists’ plan to keep the pound could prove too costly, according to the National Institute for Economic and Social Research.

Keeping the pound would only be possible informally as the U.K. government has repeatedly said it will refuse a formal currency union, the institute said in a report today by Angus Armstrong and David McCarthy. That would create high liquidity-insurance costs for banks and Scotland would have “little scope” to be a lender of last resort.

“We’ve got an impasse in that the nationalists say they’re going to use the pound and the rest of the U.K. says we don’t want a formal currency union,” Armstrong said in an interview. “That means we’re looking at an informal arrangement and the cost of that is very high. One way is to have your own currency, as it’s the option that really delivers independence.”

The pound has emerged as the key point of contention between nationalists, who are campaigning for independence, and supporters of the union, with the U.K. government repeatedly saying it won’t allow Scotland to keep the British currency if voters back a split in the Sept. 18 referendum.

Former U.K. Chancellor of the Exchequer Alistair Darling, who is leading the “Better Together” campaign, attacked Scottish First Minister Alex Salmond’s currency plan in a debate this week in which polls declared him the victor.

‘Plan B’

Recent polls show supporters of the 307-year-old union remain in the lead, though enough voters remain undecided to sway the result either way. In the Aug. 5 debate, Darling repeatedly pressed Salmond, head of the semi-autonomous Scottish government, for his “Plan B” to keeping the pound, while Salmond said the U.K. stance was a “campaign tactic” and that Scotland had as much right to retain the currency as the rest of the country.

“To have an independent currency has big transitional risks but that’s where you can show you can be fiscally prudent,” Armstrong said. “If Scotland decides it wants to be an independent country and says, ‘By the way, we want our own currency,’ then it would be in the rest of the U.K.’s interest to help them achieve that.”

Choosing an informal currency union means financial institutions would not be sure they will have access to emergency liquidity in the a crisis, according to Niesr.

“The prospects for the financial sector matter for the balance of payments and for Scotland’s prosperity,” it said.

Opposition Labour Party leader Ed Miliband has also rejected the prospect of a currency union with an independent Scotland. Miliband will say in a speech in Glasgow today that the currency that Scotland uses is “crucial” to its future, according to prepared remarks released by his office.

“The Scottish business community is an incredible asset to Scotland,” he will say. “But you need the certainty that comes with the United Kingdom: open markets across the U.K. with no border and no barriers to trade, one regulatory regime with the same rules and the stability of keeping the pound.”

Before it's here, it's on the Bloomberg Terminal.