Currency union and Scottish independence

Scotland is having a referendum on leaving the United Kingdom. For someone whose ancestors include mostly Irish people, this seems unexceptional. I can see points pro and con.

The odd thing was an article in the Wall Street Journal on currency union between the rest of the United Kingdom and Scotland if Scotland left the United Kingdom. There was an article by the BBC as well. Why would the United Kingdom – with about 59 million people – form a currency union with Scotland which has about 5 million people? What does the rest of the United Kingdom stand to gain from a currency union with Scotland?

It is similar in some ways to a petition by Puerto Rico to form a currency union with the United States if it became independent. Puerto Rico uses U.S. dollars and the U.S. government would have no problems with that continuing. The U.S. has no obvious incentive to share any seigniorage from money held by Puerto Ricans any more than it shares seigniorage with Panama, which uses U.S. dollars. The U.S. government also treats Panamanian banks the same as other foreign banks, at least as far as I know. Scotland would be in the same position.

Bottom line: The United Kingdom has no incentive to form a currency union with an independent Scotland. If Scotland leaves the United Kingdom, the Scottish government can attempt to choose a currency but I would be surprised if U.K. pounds did not prevail unless there were serious legal penalties. Apparently this is evident to Scottish politicians as well. They’d just rather have some of the seigniorage and probably don’t like the image of using foreign currency after becoming independent.

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