What Currency Would an Independent Scotland Use?

The leaders of the "Yes" and "No" campaigns clashed over what currency an independent Scotland would use in the final TV debate of the referendum campaign on Monday.

The question of whether Scotland could keep the pound if it voted for a split on September 18 has been one of the key issues.

Here are four scenarios which could play out if Scotland did vote to split from the rest of Britain:

-- Currency union with Britain

The favored option of Scottish First Minister Alex Salmond, leader of the "Yes" campaign. In the event of a "Yes" vote, Scotland and the remainder of the United Kingdom (England, Wales and Northern Ireland) would negotiate a currency union, sharing the pound with the Bank of England as their central bank. This would offer continuity and stability for Scottish business and the markets. However, both the British government and main opposition Labor party have ruled this out. Salmond in turn has threatened not take on any of Britain's existing debt if a currency union was refused.

-- 'Sterling-ization'

Nothing would stop an independent Scotland from using the pound without London's agreement. But this would effectively mean that monetary policy was set by the Bank of England, even though it would not be Scotland's central bank or lender of last resort. Countries with similar systems include Panama and Ecuador, which use the U.S. dollar, plus Montenegro and Kosovo who use the euro.

-- A Scottish currency

An independent Scotland could create its own currency, backed by a new Scottish central bank. This solution could look superficially attractive because of the political symbolism and autonomy it would offer over monetary and fiscal policy. But it would carry some risks. These would include uncertainty surrounding a variable exchange rate, which would make life difficult for businesses trading across the border, and the risk of capital flight. The government of an independent Scotland could peg the value of a new currency to the pound to try and reduce any volatility. But this would limit Scotland's autonomy on monetary policy.

-- The Euro

Salmond wants an independent Scotland to remain part of the European Union. But given the EU's current financial problems, he has steered clear of suggesting that an independent Scotland could join the euro for fear of turning off voters. However, if after a "Yes" vote, Edinburgh and London could not reach an agreement on Scotland using the pound, this could come back on the table.