Exactly as the question in the title asks: which currency option is – objectively – the best one for an independent Wales?

Should there be a currency referendum?

Currency dictates many aspects of daily life despite being something we don’t really notice because we’re fortunate that things rarely go wrong. It’s a question as to whether something so fundamental to the foundations of the state needs the consent of the people?

The big argument against holding a currency referendum is that the issue – as you can probably tell from this series of posts – is incredibly complicated and beyond the understanding of the average citizen. It would be very easy to pull the wool over their eyes and we could be locked into making a bad choice because of populism (*cough* I can’t think of anything recent like that *cough*).

Therefore, holding a currency referendum should only happen if changing the currency is likely to either require altering the Constitution or taking a huge monetary policy gamble.

If Wales were to enter a formal currency union with the pound sterling, adopt the pound as a substitute currency or adopt a Welsh currency pegged to the pound, there would be no need for a referendum because nothing really changes.

However, it’s almost certain that if Wales were going to join the euro it would require a referendum because we would presumably have rejoined the EU and that will have changed any written Welsh Constitution.

You can argue that a floating Welsh currency straddles the line between the two.

Wales could, of course, hold a two-stage multi-option referendum where the two most popular options go to run-off vote 2/3 months after the first vote.

Summary of the Options

  1. Keep the pound in a formal currency union (Part II) – Wales negotiates to retain the pound sterling in a currency union with England/Former UK. The Bank of England would become the lender of last resort, there would need to be some – if not total – retention of existing financial service rules and budget guidance, with Wales retaining the same physical currency as England. While we wouldn’t need to establish our own central bank and disruption would be kept to a minimum, key monetary and fiscal powers for Wales would essentially be decided in/by England.
  2. Use a substitute currency (Part III) – Wales unilaterally adopts a currency as legal tender (presumably the pound) but without a formal currency union. While Wales would get most monetary and fiscal power levers, the value of the currency and key levers like interest rates would still be set by a foreign government and/or central bank. It’s also not a credible option for a developed nation that wants to be treated with respect on the international stage.
  3. Join the euro (Part IV) – This one we can be more certain of: an independent Wales couldn’t join the euro from the off. Firstly, Wales would have to rejoin the EU; like it or not Wales voted to leave in 2016 – that means another EU referendum – no thanks! Then we would have to voluntarily join in the ERM II fixed exchange rate for at least two years (which means having a different currency in the interim or adopting the euro as a substitute) and we would have to abide by strict eurozone budget guidelines which may eventually become a full fiscal union. However, we would be in a union of several big players in international trade and this may see a boost in exports and other investments.
  4. A pegged Welsh currency (Part V) – A similar policy option to the one the Republic of Ireland pursued between 1927-1979 and currently used by the likes of Denmark or being actively considered by Iceland. Wales would have our own currency and retain nearly all monetary and fiscal policies, but the value of the Welsh currency would be fixed to that of another currency (like the pound) ideally on a 1:1 basis. While this is safer than completely going it alone and provides a measure of fiscal independence, it would mean having large currency reserves and seeking to maintain the exchange rate ahead of other economic and fiscal priorities.
  5. A floating Welsh currency – (Part VI) – The “indy-max” option whereby Wales establishes our own free-floating exchange rate currency. We would have total control over monetary supply, interest rates, financial regulations, deficit management etc. but it also means Wales – if the economy is poorly managed – would be at risk of rampant inflation and lead to people and businesses moving their money out of the country; however, the opposite is also true and many small nations (Norway, Switzerland) operate their own floating currencies without many problems.

Which option’s best for Wales?

In order to give you a simple idea of how each option stacks up against each other, I’ve drawn up a colour-coded grid, with each of the five major currency options scored out of 10 for the key criteria (Part I) – so each one is scored out of 80 in total.

Although it scored the same as a pound currency union, because it didn’t have any “worst option” marks, a pegged Welsh currency (Part V) works out as the best option overall because we would have a bit more autonomy when it came to setting interest rates and financial regulations.

Next, and near enough equally credible, is a pound sterling currency union (Part II). This would probably be the easiest option overall and the option that causes the least disruption.

Currency is one of the issues that would need to be decided in the 2-3 year period of negotiations that’ll take place after an independence referendum and before an agreed independence day. If nothing’s agreed then the default option would be to unilaterally adopt the pound as a substitute currency as a stop-gap measure (Part III).

What of the remaining two options?

I’ve already said that for various reasons, joining the euro zone (Part IV) is currently impractical. So although it scores relatively well, there would have to be some dramatic political and economic developments for it to be put on the table.

As for a floating Welsh currency (Part VI), technically it’s the third best option and may be one worth pursuing if independence brings with it a measure of budgetary discipline and a sustained period of economic growth. Until then, however, it’s perhaps best to play it safe and not go any further than a pegged exchange rate.

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