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Academics believe Scotland heading for 'dollarisation'

Leading academics believe that, if Scotland votes for independence next month, it could be heading for monetary ‘dollarisation’, under which the nation continues to use the pound without any formal agreement with the rest of the UK.

In a new ebook, Economic Consequences of Scottish Independence, academics address the question of monetary union between Scotland and the rest of the UK, which the main Westminster parties have ruled out in the event of a ‘yes’ vote in the September 18 referendum.

Professor Angus Armstrong and Monique Ebell, of the National Institute for Economic and Social Research, argue in the book that Scotland could adopt ‘dollarisation’, named after the situation in nations such as Panama who use the US dollar outside any formal arrangements with the US Treasury.

“As we approach the referendum,” they say, “it appears that we are heading towards the option of 'dollarisation' almost by default. Yet this is an option that the Scottish government's Fiscal Commission Working Group does not consider a ‘clear option for Scotland’.”

The pair accept that, if the UK parties continue to rule out a currency union, Scotland would not have the Bank of England as lender of last resort and that most Scottish banks would then “migrate to the rest of the UK where they would have the backstop of a central bank”.

This would then leave Scots facing higher borrowing costs “since the supply of loans into a foreign jurisdiction is generally a riskier proposition than at home”.

However, Prof Andrew Hughes-Hallett, a member of the SNP government’s Fiscal Commission Working Group, says in the book that the UK would agree to a formal agreement to share the pound in the event of a ‘yes’ vote to independence.

“Facing a tight general election in 2015, it is hard to believe the UK government would choose to deny a currency union when the consequences would make their own supporters worse off, but Scotland better off,” he writes.

“After the referendum, there will be no incentive for either side not to agree a currency union as long as effective fiscal controls are put in place on both sides. Since the Scottish fiscal position will be stronger (a smaller public debt ratio, and a budget surplus when national accounts are recalculated to reflect the changed flows of taxes and public spending as explained below) this would not be hard to arrange.”

 

 

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