Independent Scotland could not join EU without central bank, expert says

Former European commissioner for monetary union says plan to use pound without formal currency deal is 'simply not possible'

theguardian.com, Severin Carrell and Katie Allen, Tuesday 2 September 2014

Olli Rehn said Scotland would not be able to join because it would not have a
 currency backed by its own independent central bank. Photograph: Geert
Vanden Wijngaert/AP

The former commissioner for monetary union has said it would not be possible for an independent Scotland to join the EU if it tried to use the pound without the formal currency deal that all three UK parties have repeatedly vetoed.

Olli Rehn, who stood down in July as the European commissioner for the monetary union and the euro, wrote to Danny Alexander, the chief secretary of the Treasury, this week to say it would not be possible because Scotland would not have a currency backed by a central bank.

In his letter Rehn wrote that Alex Salmond's "sterlingisation" plan to use the pound without the formal permission of London would "simply not be possible, since that would obviously imply a situation where the candidate country concerned would not have a monetary authority of its own and thus no necessary instruments of the EMU" [economic and monetary union].

The evening intervention came as pound fell to a five-month low against the US dollar and also weakened against the euro on Tuesday hours after a YouGov poll showed for the first time that the yes campaign needed only a three-point swing to win the independence referendum. With the vote due in just over two weeks, it showed support for independence now standing at 47%.

Alexander said Rehn's views were a fatal blow to repeated suggestions by the first minister that an independent Scotland could use the pound freely if the UK government refused to set up a formal sterling zone.

Alexander said sterlingisation "is not only a bonkers idea, which flies in the face of any reasonable notion of what independence means and which would impose costs and risks on people and businesses in Scotland, it is also incompatible with Scotland's smooth re-entry into the EU."

The spike in yes support in the YouGov poll published by the Times and the Sun came only a few days after Salmond scored a convincing victory in his final televised debate against Better Together campaign leader Alistair Darling on BBC last week.

The hit on the pound, which fell in value by 0.7% against the dollar to $1.6492 – its lowest rate since March and 0.6% against the euro after the poll, is now likely to feature in the no campaign's attacks on independence. The recent strength of the pound has dented British exports, but ministers will be anxious about any currency movements that show a lack of confidence in the future of the currency.

Analysts believed there was only a small chance of a yes victory, but the poll upset currency markets, raising the cost of betting against sharp swings in the pound's rise on the markets. Investors began to insure themselves against the impact of a yes vote and one measure of hedging costs notched up its biggest one-day rise for three years. Kit Juckes, a currency analyst at Société Générale, said a yes vote would raise a range of issues, but lead to significant impacts on sterling.

"A Scottish yes to independence poses far more questions – about the currency, the debt, the oil, the future – than it answers but my best guess is that a yes would trigger a 3-5% fall by sterlin