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Economic experts: Scotland should start its own currency instead of trying to forge agreement to share sterling

Scotland should start its own currency instead of trying to forge a formal agreement to share sterling after independence, according to economic experts.

The view is at odds with the Scottish Government's aim of securing a monetary union after a Yes vote on September 18.

First Minister Alex Salmond has repeatedly rejected calls to set out a "plan B", such as a new currency or carrying on with sterling regardless.

Chancellor George Osborne ruled out a formal union last month.

Dr Angus Armstrong, of the National Institute of Economic and Social Research, said the Chancellor's position is "entirely rational".

He told Holyrood's Economy Committee: "The issue becomes, since that's been ruled out, what would be in an independent Scotland's best interests?

"Based on the aspiration, pointed out in the White Paper, to build a Scotland which reflects the values and aspirations of Scottish people, then I think you want to have something that allows you the policy levers to be able to do that.

"There is, in my view, only one option which allows you that full range and that would be your own currency."

Concern has been raised that a new currency would create new transaction costs to cross border trade.

Dr Armstrong said experience in other countries suggests there may not be a big difference, highlighting Norway, Switzerland, Sweden and what happened when Ireland broke its link to the UK currency in 1979.

"Looking at the trend of Irish exports to the rest of the United Kingdom... it's very hard to discern a break in the trend in exports," he said.

"That's not to say there's no effect, but it looks like the effect may be fairly small based on much of the evidence."

A new currency, pegged to sterling, would also be in the interests of the rest of the UK, he suggested.

Professor Jo Armstrong, an economist with the Centre for Public Policy for Regions at University of Glasgow, told the committee there are pros and cons for all currency options for Scotland.

"If I'm truly independent and I want full access to levers of power, I would want to try and make my own currency work," she said.

"That has got lots and lots or risks associated with it but it allows me to have absolutely full control of the fiscal levers, which is what an independent country would want."

The comments were welcomed by the Scottish Green Party, which backs independence but wants the SNP to consider a new currency for the country.

Green MSP Alison Johnstone, a member of the Economy Committee, said: "It is increasingly clear that a Yes vote opens up opportunities that a No vote is extremely unlikely to. The need to create a fairer and simpler system of taxes has never been greater, and if we want to make different economic choices from Westminster we will need flexibility on currency in the longer term.

"There are of course a range of views on the way forward but crucially Scotland would get to decide. If we want an economy that works for everyone we need to put democratic decisions at its core."

Professor David Simpson, a Harvard-educated economist who has worked for the UN, World Bank, European Commission and Standard Life, told the committee that a currency union is likely, however.

In a written submission, he said: "A currency union based on sterling remains the most likely outcome following independence because it is in the best interests of not just Scotland but of England as well.

"It has been suggested that to work properly, a currency union requires political union, but the historical experience of those monetary unions between sovereign states that have been successful provides evidence to the contrary.

"It would be quite possible for Scotland to keep the pound following independence without entering into any formal currency union.

"Indeed, this would not only be possible but, if Scottish interests alone were to count, it would be desirable.

"The Bank of England would not act as a guarantor for Scottish banks or the Scottish Government.

"This is an advantage, not a disadvantage. It was precisely the implied promise of a bailout from the European Central Bank that allowed so many eurozone banks and governments to get themselves into a crisis of excessive debt."

The committee later heard from the Fiscal Commission Working Group which provides advice to the Scottish Government on the macroeconomic options for an independent Scotland.

The group, chaired by Crawford Beveridge, last year recommended that a sterling monetary union was the best currency option for Scotland and the rest of the United Kingdom.

Mr Beveridge told the committee that he expects the group to reaffirm this position when it meets tomorrow.

He also told MSPs that Mr Osborne's rejection of a monetary union was a political position, and economics would "trump politics" in the event of a Yes vote.

The rest of the UK would face transaction costs for businesses and problems with the balance of payments if no agreement was reached, Mr Beveridge said.

The Treasury's acknowledgement of legal responsibility for the UK's debt would also be a factor, he told MSPs.

"I don't think any of us on the committee believe for a minute that the Chancellor is serious," Mr Beveridge said.

"We warned in our report last year that leading up to this there was going to be a lot of political statements, but in our opinion economics will trump the politics on this, and good heads will prevail if there happens to be a Yes vote.

"We would not want to even talk about a plan B at this stage of the game."

He added: "I think we would say there are lots of options, but our strong advice would be let's go down the path of recommending to the Government that they stick with the monetary union, and we will spend some time trying to help the rest of the UK understand the very strong advantages there are to that, and the very strong disadvantages there would be to go against that."

Mr Beveridge also told MSPs that advice to Mr Osborne from the Treasury's Permanent Secretary, Sir Nicholas Macpherson, gave "some wiggle room", as it stated he would advise against the monetary union "as currently advocated".

The Edinburgh Agreement, signed by the First Minister and the Prime Minister also suggests constructive negotiations would take place in the event of a Yes vote, he said.

"I just cannot believe that just out of sheer spite, someone would say they are not going to enter into an agreement along those lines," Mr Beveridge added.

Fiscal Commission Working Group member Professor Andrew Hughes Hallett told the committee that its recommendations on currency had not changed because the economic situation had not changed.

He also challenged analysis papers from the National Institute for Economic and Social Research and the Treasury which look at issues surrounding currency, debt and risk premiums which would affect interest rates.

The Treasury paper, he said, does not take account of economic growth or changes to fiscal policy, and only considers "risk premia" for Scotland and not the rest of the UK, Europe or the rest of the world.

Asked if the Treasury had "fixed the numbers", Prof Hughes Hallett said: "Put it another way, I would not let my students, even in their first year, get away with that.

"My bottom line is the Treasury needs to look at their recruiting policies."

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