The latest polling shows that there is a good chance that the population of Scotland will vote to secede from the United Kingdom, repeal the 1707 Act of Union, and become an independent state when the matter is put to a referendum on September 18. Of all the questions surrounding this referendum, perhaps none is so vexing as that of currency. Will or should an independent Scotland revert to its 17th Century practice of issuing Scottish Pounds that are separate from England's Pounds Sterling? Should it join the eurozone? Or should it attempt to continue in a currency union with England, Wales, and Northern Ireland even as it becomes sovereign in other aspects?
There are serious pros and cons to each option.
1) Establish a Scottish pound
In purely economic terms, the most sensible option might well be for independent Scotland to have its own central bank and its own currency that would trade freely on global markets. Other small developed countries (Norway, Iceland, New Zealand, Sweden) do this successfully, and it appeared to work well enough for Denmark and Finland in the past. Small countries are inevitably very exposed to developments in the global economy that are outside their control, and currency flexibility can help cope with that. If new discoveries or global market trends lead to a surge in Scottish oil export revenue, the Scottish pound would become more valuable, naturally "spreading the wealth around" to Scotland's schoolteachers and pensioners and cashiers and everyone else with a salary denominated in Scottish pounds.
Conversely, if Scotland's oil exports hit a bad run, the falling pound would turn Scotland into a cheap tourist destination and attract spending flows from summer holidayers south of the border (it would also boost whisky exports). This is obviously not as happy an outcome as one in which fossil fuel exports surge, but it's better than an outcome in which problems for the oil industry produce mass unemployment.
The downside of creating a new currency is that it would have no track record, and might be catastrophically mismanaged and destroy the value of everyone's savings. Independence campaigners appear to feel that these fears are widespread, and have not made the creation of a new currency part of their proposal for Scottish independence.
2) Join the euro
The big advantage of Scotland joining the eurozone is that the Scottish Government has firmly declared its intention to apply for membership in the European Union. Indeed, the notion that EU membership eliminates many of the potential disadvantages of being a small country is integral to the case for Scottish independence. And current EU rules state that new EU member states must join the Eurozone. The United Kingdom has negotiated an exemption from this rule for itself, and the EU has long tolerated de facto non-compliance from Sweden (Denmark has not formally joined the eurozone, but does peg the value of its currency to the euro and thus effectively latched itself to the project) but since Scotland would be a new member with little leverage, it's far from clear that they could do the same.
That's a problem, as the eurozone has been a huge economic calamity. The example of nearby Ireland should be a cautionary tale here. Before the financial crisis struck, the Irish and UK unemployment rates were similar. But since the crisis, the UK has managed to use flexible monetary policy to keep unemployment in check despite a poor growth record while Irish unemployment has soared far above the UK level. For the Irish, eurozone membership is a potent symbol of their hard-won independence from London — but in concrete economic terms it's a costly one, and could prove the same for Scotland. Currently the euro is very unpopular in the United Kingdom, and consequently the independence movement has not campaigned on eurozone membership. Instead, they are arguing that creating a new country won't require Scottish people to start using new money.
3) Keep the pound sterling
Scotland's First Minister Alex Salmond and his fellow pro-independence campaigners have an easy answer to the currency question — Scotland will keep using the pound sterling. The UK's main political parties have all tried to argue that they will somehow stop this from happening, but it's difficult to see how they could. Panama, Ecuador, and El Salvador have unilaterally adopted the US dollar as their currency. If an independent Scotland wishes to collect taxes and pay civil servants and government benefits in pounds sterling, then nobody is realistically going to stop them.
Yet while Scottish voters appear to find the idea of sterling continuity reassuring, many foreign observers do not. As Paul Krugman writes, this arrangement would have the same substantive problems as the eurozone. It might even be worse, as the eurozone is at least working (slowly, painfully) on building institutions around banking regulations and fiscal policy that could make it work better. A rump United Kingdom couldn't stop Scotland from using sterling, but it would have no particular reason to make institutional changes that would make a sterling union more workable for the Scots. On the contrary, if independent Scotland's lack of a credible central bank destroyed Edinburgh's viability as a financial services hub, that would arguably be in London's interest.