HM Government: Scotland Analysis: Assessment of a Sterling Currency Union - Cm. 8815

Book excerpt: This assessment finds that the UK is a successful union because taxation, spending, monetary policy and financial stability policy are co-ordinated across the whole UK. It means risks are pooled, there is a common insurance against uncertainty and no one area or sector of the larger economy is too exposed. Within a sterling currency union, an independent Scottish state would find it more difficult to adjust to the effects of economic challenges. The continuing UK would become unilaterally exposed to much greater fiscal and financial risk from a separate state. Greater fiscal risk would come from UK taxpayers being asked to support the wider economy of another state and also financial risk were banks from that state to fail. The experience of the euro area in the financial crisis highlighted the challenges of creating a durable and effective currency union, illustrated by the very difficult economic adjustments required by some members and the financial risks that have been accepted by other members and their taxpayers. On the basis of the scale of the challenges, and the Scottish Government's proposals for addressing them, HM Treasury would advise the UK Government against entering into a currency union. There is no evidence that adequate proposals or policy changes to enable the formation of a durable currency union could be devised, agreed and implemented by both governments.