If Scotland leaves the Union, what will be its currency? Both the Bank of England and the UK Treasury have said that it won't be the pound (story here). The UK Treasury's analysis of the issue is here.
If Scotland votes for independence, they will need to come up with an alternative currency. The threat to Scotland's large financial services industry of leaving the pound is huge. It seems that the Scottish nationalists wants the best of both worlds - independence whilst maintaining the link with sterling. The members of the UK Parliament have categorically stated that this cannot happen. This is a major blow to the independence movement. In effect, the UK Parliament are saying to Scottish people, if you want to leave the Union, you leave it entirely - you can't cherry pick which bits you want to keep.
What are the other options available to Scotland? Joining the euro would be a disaster. They could form their own central bank and peg their currency to sterling. Or how about pegging their currency to a basket of commodities? Or even more radical, why not let Scottish banks issue their own currency redeemable into a commodity or foreign currency (e.g., sterling)? Given the recent collapse of RBS and HBOS, this may not be a good idea!
From the point of views of economics, the people of Scotland have one choice when it comes to their currency - stay in the Union!
