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Is a currency union really Scotland's best option?

The Scottish Government insist that if they don't get to share sterling then they will not accept any of Scotland's share of UK debt at the point of separation.

But the Fiscal Commission, which initially proposed a sterling zone as the best option, had nothing to say on what the implications for Scotland's share of the debt would be under differing currency options.

If the threat of refusing to accept any of the UK debt were carried through then this could have big implications for the type of currency option which would be preferred.

John Swinney, giving evidence to the Scottish Parliament's Economics Committee on Wednesday, suggested that the cost to the UK, in terms of extra debt servicing payments, of this occurring would be between £4-5.5 billion a year. His point was that the UK Government would be unwilling to shoulder this extra burden and would therefore relent in their opposition to a shared currency.

But put Swinney's point the other way round - why would Scotland accept its share of the debt and related interest payments if it could avoid them by setting up its own currency?

The costs to Scotland of having its own currency, including transaction costs and potentially higher borrowing costs, would need to exceed £4-5.5bn before a shared sterling currency zone is attractive. This is not something that the FC has publicly commented on, but the implication is that the Scottish Government believes the extra borrowing costs facing Scotland, starting with no historic debt, would be pretty high in order for the shared currency option to be preferred.

Prior to the current spat, most commentators had assumed that the currency choices were (A) a "shared sterling with a share of inherited UK debt" position and (B) a "separate currency with a share of UK debt" position. Now the Scottish Government is saying there is a third position, (C) a "separate currency with no share of UK debt". However, despite the potential savings associated with option (C), the Scottish Government still prefers a sterling currency zone.

Holding this view has the potential for weakening the Scottish Government's bargaining position as it appears to suggest that, regardless of whether or not an independent Scotland refuses to take its share of inherited UK debt, Scotland would still lose out by setting up its own currency.

What might make matters clearer would be for the Scottish Government's FC, which includes Nobel Prize winners Joseph Stiglitz and Sir James Mirrlees, to comment on if it thinks this debt versus sterling-zone trade-off position exists at all and, if it does, whether this would change their advice.

Currency options and alternatives exist, but it would be preferable if realistic rather than counter-intuitive ones were being debated.

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Finance

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