Assessing the currency debate surrounding the Scottish referendum

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Dec. 4 2020, Updated 10:53 a.m. ET

The Scottish referendum currency debate

With the Scottish referendum drawing close, those investing in European equities through exchange-traded funds like the Vanguard FTSE Europe ETF (VGK), the iShares MSCI EMU Index Fund (EZU), the SPDR DJ EURO STOXX 50 ETF (FEZ), the iShares MSCI EAFE ETF (EFA), and the iShares MSCI Germany Index Fund (EWG) have become wary of their holdings.

If the Scottish referendum votes yes on September 18, it would mean that Scotland would become independent of the United Kingdom. One key issue that would arise from that would be currency. There are three lines of thought in this regard:

  1. Scotland would be allowed to retain the pound as its currency
  2. Scotland would join the European Union and use the euro
  3. Scotland would need to establish an independent Scottish currency

Switching to a new currency could lead to a run on banks in Scotland

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The creation of a new currency could lead to a run on Scottish banks. You can find evidence of this kind of trend in 1993, when Czechoslovakia broke into Slovakia and the Czech Republic, creating two currencies. Since savers wanted their money to be denominated in what they expected to be the stronger of the two currencies (the Czech currency), the move sparked a run on Slovak banks.

But in 2002, when the euro was introduced across participating nations, the old currencies ran in parallel with the euro for a period, giving savers and consumers time to adjust. But there were still fears regarding the devaluation of their money among European savers.

Again, in 2012, there were fears that Greece might withdraw from the Eurozone and re-introduce the Drachma. This led to a rush to remove cash from the country’s banks. Greeks withdrew €700 million (£560 million) over a fortnight from international banks and placed the money mainly into German banks.

Would Scotland have to use the euro?

The currency issue is further complicated by the desire for a newly independent Scotland to join the European Union (or EU) but opt out of the euro. Scotland could smoothly secure EU membership because it already subscribes to the key tenets of the EU. But Scotland wishes to opt out of the euro, which is now obligatory for any new member.

The Alex Salmond–led Scottish National Party in favor of independence points to the example of Sweden, which has been in the EU for 19 years but still uses the Swedish krona because the process is essentially voluntary. But currency could still be an issue if Scotland decides to use the pound without a formal agreement from the UK.

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