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Currency options promising for an independent Scotland

In Prague, the museum of communism is located in a busy shopping street, sandwiched between a branch of McDonald's and a casino:

a suitably humiliating juxtaposition for a discredited political system swept away by the Velvet Revolution. It's hard indeed to believe that, only 25 years ago, Czechoslovakia was a police state and part of the Warsaw Pact.

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It's hard to believe Czechoslovakia was a state at all as, 20 years ago, the Czech Republic and Slovakia went their separate ways in the Velvet Divorce and have never looked back. Czechoslovakia has been wiped from the collective memory more completely than by the Russian tanks that rumbled through the Prague Spring.

When I recently visited Prague, a city that seems to combine the best of Edinburgh and Glasgow, there was no visible sign of the old regime; except, surprisingly, in the currency. In this extraordinary city you still have to use the old koruna, a bewildering coinage in which coppers are worth more than silver and the face values of both are almost impossible to decipher. A one thousand koruna note is worth about £30. Over in the east, in Slovakia, things are a lot simpler for the traveller, who has the euro. Both republics are members of the European Union, but Slovakia joined the single currency in 2009, despite the worst financial crisis in 80 years, and seems to be reasonably happy with it. Some 70% of Slovaks think it has been good for the country, though they resent having to help bail out Greece.

For Slovaks, the euro became a tangible measure of how their small mountainous country of five million people got its own back over its complacent neighbour. When the countries divorced, it was the Czechs who were most enthusiastic about ending the marriage, because they felt "backward" Slovakia was a fiscal drain on their economy, much as English Tories think Scotland is a subsidy junkie dependent on English benefits. They're not saying that any more. With two decades of near double-digit growth, Slovakia is the world's largest per capita manufacturer of cars and is the second fastest growing economy in Europe.

Now, I don't want to draw too many facile comparisons between Scotland and this land-locked, former communist state. Slovakia has no natural resources to speak of, no world-class universities, little tourism and, despite prodigious growth, a much lower GDP than Scotland. However, the Czech/Slovak experience demonstrates just how dramatically the fortunes of nations can change when they become independent. It also shows how difficult it can be to predict how currency unions will fare after independence.

This brings us to the cryptic remarks of Bank of England Governor Mark Carney yesterday on the dynamics of currency union and the need for "pooled sovereignty" to make it work. He called for agreement between democratic parliaments to sustain common fiscal arrangements and risk management structures to avoid "moral hazard". Roughly translated, this means there has to be trust that one country won't spend like there's no tomorrow in the expectation the other country will bail it out.

It was pretty clear from his body language that the Governor wasn't over keen on Scottish independence. Bankers don't like instability and, any way you look at it, breaking up the UK would involve a degree of risk. Mr Carney also suggested that the SNP's vision of independence is not really independence but a form of federalism, in which UK institutions like the Bank of England would still have an overseer role and in which Scotland and England would have to "cede sovereignty", just as countries are doing in Europe, to ensure financial stability.

Better Together are claiming that the Carney speech is a "slam dunk" because he said that monetary union would require a degree of fiscal and political union. Hah! What kind of independence is that! However, pooled sovereignty is quite possible between independent countries. There is already a lot of pooled sovereignty in the EU, of which Britain is still a member (though perhaps not for much longer).

Moreover, the Governor didn't suggest that Scotland could be denied use of the pound or forecast a punitive reaction by the English Treasury if Scotland votes Yes, which is what many Unionists predict. Nor, crucially, did he look at the consequences of monetary disunion: what would happen if Scotland decided to look elsewhere if the UK negotiating terms were too onerous. An independent Scotland, like any country, would have options. It could pool sovereignty or look elsewhere.

When they separated 20 years ago, the Czechs and the Slovaks planned to have a currency union. It seemed the rational thing to do. Why erect barriers to trade, burden businesses with transaction costs and force Czechs to go through the hassle of changing currency every time they visited their relatives in Slovakia? But within six months the arrangement was breaking up, largely because of a flight of funds from Slovakia to the supposedly "advanced" Czech Republic. Trust broke down.

This just goes to how markets don't always behave rationally. Slovakia may have been a poor relation in Czechoslovakia but, in the European Union, it was a new frontier. If those investors had sent their money the other way they would have seen some of the most dramatic capital growth this side of the Asian sub-continent. The EU has been a success story for the 31 countries with average populations of five million people.

And the euro, which is supposed to be bad news for big old countries, still seems to work for small new ones. Lativa, another high-growth country, has just joined the euro, to the amazement of economists and commentators in the UK who've been waiting for the eurozone to break up. Even countries that aren't in the eurozone often have their currencies pegged to it. If for some reason the rest of the UK did try to play rough after independence, it might be Scotland that had the currency options.

Again, I don't to draw facile comparisons. The history is very different. Czechoslovakia was cobbled together early last century and then invaded and occupied successively by the Nazis and the Russians. The UK is a 300-year-old consensual union in which the Scots were very often the UK's most enthusiastic partner. As Mr Carney pointed out, in Britain there is sentiment, language, common heritage as well as there are pounds and penceuniting us; more so, he pointed out, than eurozone countries with different languages and historic enmities.

But the next time you hear people assert that Scotland would become an economic basket case if it wasn't for the beneficence of the UK Treasury and the Bank of England, invite them to take a reality check. Countries such as Scotland are what the new Europe is all about. An independent Scotland would not be cutting itself off, whether it kept the pound, adopted the euro or had its own nominal currency pegged to either. There are many ways to skin the monetary cat. It just depends who's holding the knife.

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