Pound, Euro or Punt?

During the Scottish referendum debate in 2014, we heard a lot of discussion of what would happen to monetary policy. The Scots already issue their own banknotes, but these are ultimately backed by the Bank of England. Issuing Welsh money would be a new development, but it’s an area where independence would allow us to make the choice that’s right for our own economic circumstances.

There are at least five currency options, each with their own pros and cons:

Keep the pound in a formal currency union

This would cause minimal disruption, but it would mean retaining the Bank of England as the lender of last resort and the Bank of England setting interest rates. As it would require a fiscal union with England, questions would be raised on whether Wales were truly independent.

Keep the pound (or another currency) as a substitute currency

Nations can legally use whatever currency they want without being in a currency union. In these circumstances, a substitute currency is used instead of, or in parallel with, a local currency. At present, nobody uses the pound as a substitute; the main currency substitute is the American dollar (though some European countries like Montenegro use the euro without being in the eurozone or EU).

A Welsh currency pegged to the pound (or another currency)

Wales would have its own currency – the punt – with a 1:1/equal value to the pound. It would require Wales to establish its own central bank (and issue its own coins and notes) with pound sterling remaining legal currency. However, it would mean that the value of the Welsh currency would rise and fall in line with another currency regardless of its impact on the Welsh economy.

This is in line with what Ireland did for many years and then over time let their currency free-float with sterling until Ireland finally joined the Euro.

A Welsh currency with its own exchange rate

This would mean Wales having complete control over monetary and fiscal policy, setting interest rates and controlling the money supply. While this might take more work to implement than some other options considered here, the benefits of having full monetary sovereignty are vast, as the budget is not constrained by the need to run a balanced budget over time.

In the short-term, to avoid large currency fluctuations, it may be expedient to peg a new Welsh currency to an existing currency. Switzerland, though a member of the Single Market via its bilateral trade agreements, has its own currency which is largely pegged to the Euro to avoid large increases in the valuation of its currency, and is seen as a safe haven for money during financial difficulties in Europe. Wales could do something similar to this with Sterling (or another currency such as the Euro) to avoid an overheated currency which could bring difficulties to exports and tourism.

Join the euro

This would be an option only if Wales decided to be a member of the EU, and it would still require a Welsh currency in the interim period, with controls on public spending deficits and voluntary membership of the European Exchange Rate Mechanism (ERM II) for two years. It would, however, make it easier to trade with the EU and could boost foreign tourism; but it could also mean being dragged into a European fiscal union and a potential rerun of the 2016 EU referendum campaign.

At the end of day, this would be a matter for us all to decide, as part of independence negotiations. Making the right choice would be about choosing what best suits our economic circumstances. But the point is that there are plenty of options available. There’s no need to listen to scaremongering about Wales being forced to adopt an unsuitable currency against our will. Independence is about using the tools we have to help us choose the option that works best for Wales.