Goldman Sachs senior economist Kevin Daly has warned that uncertainty over Scotland’s currency if the country becomes independent could result in a euro-style crisis for sterling that would impact the whole of the UK.
Politicians appear to have reached a stalemate on the currency issue with Westminster stating that it would not agree to share the pound in a formal currency union while the Scottish government remains adamant that using sterling is the best option for the UK and Scotland.
Scotland’s first minister Alex Salmond has also threatened that Scotland will walk away from its share of UK debt if it is not able to negotiate a formal currency union and has suggested that the newly independent country may use sterling on a unilateral basis that does not require Westminster’s permission.
Daly describes this lack of clarity over currency has become the “most important specific risk” surrounding Scottish independence which could result in “severely negative” consequences not just for Scotland but for the UK too over the short-term.
He says: “The most important specific risk, in our view, is that the uncertainty over whether an independent Scotland would be able to retain sterling as its currency could result in an EU-style currency crisis occurring within the UK.”
This speculation over the future of sterling following Scottish independence could trigger a “strong incentive” for investors to sell Scottish based assets, according to Daly, and deposit holders to pull money out of Scottish banks.
The issues faced by the euro area also reveal why Westminster may also be right to say that it could not share the pound with Scotland, according to Daly, because of the lack of political and fiscal union involved in this type of currency union.
“In our view, the threat to disband the sterling monetary union with Scotland is credible,” he adds
”One of the main lessons from the euro area crisis is that a reasonably high degree of fiscal and/or financial integration is necessary, as a means of effective risk sharing, for a monetary union to work. Without political and fiscal integration, it is difficult to see the rest of the UK agreeing to provide a monetary and financial backstop to Scotland.”
However looking beyond the short-term Daly expects that an independent Scotland could go onto “prosper”. He says: “In the long run, we see little reason why an independent Scotland could not prosper: there is no evidence to suggest that smaller countries are richer or poorer, on average, than larger countries.”
The most recent polls have shown a significant increase in ‘yes’ votes to 47 per cent since the start of August with Scotland’s first minister arguing that independence is now “within touching distance.”
But even with this boost to the ‘Yes’ campaign Goldman still expects that independence is “unlikely”, according to Daly.
“We continue to believe that a ‘Yes’ vote remains unlikely for two reasons,” he says.
“First, although the ‘No’ camp’s lead in the polls has narrowed and is likely to narrow further, even a 4/5 percentage point gap remains substantial in the context of a campaign that has only two weeks to run; second, in the UK’s limited experience with televised debates (and in jurisdictions in which such debates are more commonplace), the post-debate bounce experienced by the ‘winning’ side often fades in the subsequent days and weeks.”