Best option for Scotland is to create its own currency

Economists warn Scotland over keeping pound if independence goes ahead

New research suggests a formal currency union with the UK would be neither practical nor desirable
David Cameron says he will not resign if Scotland votes for independence

• Angela Monaghan
• The Guardian, Thursday 8 May 2014

Scotland has been warned that keeping the pound would create an unstable currency regime. Photograph: Alamy

An independent Scotland that votes to keep the pound would be forced into an unstable currency regime resembling the dollarisation seen in countries such as Panama, new research has concluded.

Economists at thinktank the National Institute of Economic and Social Research (NIESR) argue that if Scotland kept the pound, a formal currency union with the UK would be neither practical nor desirable because the two countries are so different in size.

It would leave Scotland with the pound, but with no banking union and with no public spending constraints – limits on fiscal deficits and debt levels – between the two countries.

The population of the rest of the UK is more than 10 times the size of Scotland's. "Because the UK and an independent Scotland would be so different in terms of size, it may be difficult to justify fiscal constraints or banking union," argue Angus Armstrong and Monique Ebell of NIESR in the report.

Armstrong, NIESR's director of macroeconomic research, said there were considerable risks for a country with high debt levels adopting another country's currency, in this case the pound, in an informal way. He said that with no control over monetary policy, an indebted country would be left few options to respond to a future financial shock because it would have little flexibility on spending and tax measures.

"You have to make sure your currency arrangement has enough flexibility to deal with a crisis when that day comes," Armstrong said.

He pointed out that Panama, which has used the dollar since the early 20th century, required 17 bailouts from the International Monetary Fund between 1973 and 2000, second only to Pakistan over that period.

NIESR has argued in the past that the best option for an independent Scotland would be to create its own currency.