Scotland votes on the question of independence in September, and a Yes vote could have a significant impact on currency trading.
BOE governor Mark Carney commented warned about the currency union decisions. What is the best solution?
As the debate heats up towards the referendum, Alastair Cotton, head of corporate dealing at Currencies Direct, provides his interesting opinion on the potential rejection of the union and what is best for the UK in the long-run:
As Scotland and the UK already have free movement of capital, goods and services and a banking union, the key mechanism lacking should Scotland become independent is a common fiscal authority. The Scottish Government’s ability to borrow from the financial markets to fund itself, without the back stop of a central bank is the key issue in this debate. In normal market conditions there will not be a problem, but in a market panic like 2008 and 2009 control over ones currency was crucial. Without a buyer of last resort you are effectively borrowing in a foreign currency and maintaining the par relationship between UK and Scottish pounds, the reason for Scotland keeping the Pound, would be impossible for the Scottish government to achieve.”
What is best for the UK is that currency union is backed with the correct institutional framework, whether by the current system or an independent Scottish central bank’s political system. It’s clear that the current proposal may work in the short term, but at the first sign of trouble and without the correct stabilising mechanism the market will decide very quickly what is and what isn’t a Pound Sterling.
Further reading: Sterling dollar forecast.