read about the scottish dropping the pound when they broke away from the british so as not to be affected.
In: 4
Loans generally have to be paid back in the currency they’re taken out in. That means if a country borrows pounds it needs pounds to pay back the loan. If it borrows in dollars it needs dollars.
It’s relatively easy for the UK government to get pounds. Most economic activity in the country is done in pounds, so it can be taxed, and the government gets pounds. The UK government If it really needs to, the government can create more money to pay these debts (which may or may not be a good idea).
Now let’s say Scotland becomes independent from the UK. It will have to take a share of the UK’s national debt, in pounds sterling.
Scotland could continue using pounds. This is simple from one perspective, but comes with complications, like “who is able to make new pounds?” The government in London has said it won’t give Scotland that power (though in practice I think they probably would come to an agreement). Let’s say the UK government wants a “tight” monetary policy because inflation is high. It restricts the supply of new pounds and the Bank of England increases interest rates.
That makes it harder for both the UK and Scotland to pay off debts in pounds. It might still be the right policy for the UK, but is it right for Scotland? Scotland’s economy might be doing something different, or the government might want to prioritise keeping the cost of debts low, over other things. But it’s lost this control over “monetary policy.”
This problem already exists in the eurozone and has caused massive problems.
Speaking of the euro, let’s say Scotland switches to use that currency. But it still needs pounds to pay off its sterling debts. So it has to get pounds from somewhere.
There are some complications to exactly how this works, but ultimately it means selling stuff to people who have pounds. That mostly means exporting goods and services to the UK. The Scottish government then either taxes transactions made in pounds or buys pounds in exchange for euros (or whatever other currencies it has).
This is fine as long as exports are good and the relative values of the currencies remains stable. But if exports fall or the pound gets stronger against the euro, the Scottish government has a problem. Neither of these things are entirely under the control of the Scottish government. For example, if the UK economy was very strong and the eurozone weak, the pound might go up in value against the euro – so it takes more euros to buy each pound. The cost of the Scottish government’s sterling debts has now gone up.
So there are risks both ways for Scotland. The lowest risk option is to have debts denominated in a currency that your country controls.
Latest Answers