Why a Scottish Currency Can’t Wait: Lessons from Keynes

German economist Jan Frederik Moos explains that the Scottish Government’s current position on an independent Scotland’s currency is simply wrong. Monetary independence is not the final stage in independence, it is the first.

When John Swinney argues that Scotland should attain independence first and introduce its own currency later, he risks inverting the very sequence that makes meaningful independence possible. Without its own currency, Scotland cannot exercise full control over economic decision-making. Independent fiscal policy is essential for ensuring economic stability and pursuing national goals without compromise.

Without it, Scotland would be forced to negotiate for the necessary funds from the UK government, trading autonomy for access to resources. The moment of economic self-determination—so central to the case for independence—cannot materialise if key policy levers remain externally governed.

This is not an ideological claim. It follows from a basic macroeconomic insight, first systematically formulated by John Maynard Keynes and later developed by post-Keynesian economists: capitalist economies, if left to market forces alone, tend to operate below full employment. In such systems, workers induce less demand than the amount of output they generate.

From this imbalance follows a persistent gap between the productive capacity of society and the level of internal demand in the economy. Closing that gap requires fiscal policy that is not merely reactive but proactive—capable of adjusting to structural shifts. And when we consider the economic transitions currently underway in Scotland, such as the loss of thousands of jobs linked to the closure of the Grangemouth refinery, the need for fiscal flexibility becomes even more acute than in normal times. The UK central government can provide funding, but it may prove insufficient—and it is likely to come with conditions attached.

One way to grasp the core insight of Keynes’s General Theory is by looking at monetary flows: private actors tend to save a portion of their income, which means they spend less than they earn through production. This creates a shortfall in demand unless another sector — typically the state — intervenes to fill the gap. Left to itself, the economy supplies more labour than it demands — supply does not automatically create its own demand.

This dynamic has intensified over the past three decades. Rising income inequality and corporate savings surpluses have constrained household consumption. Private investment, being driven largely by expected returns and business confidence, has not filled the void. In this environment, public spending assumes not just a corrective but a stabilising function.

Deficits are not in themselves problematic; they are necessary tools for mobilising idle resources, buffering economic fluctuations, and maintaining employment. What matters is not the absolute size of the deficit, but whether it sustains output and aligns with public purpose.

However, this capacity depends on one fundamental precondition: that the government issues its own currency. Fiscal policy can only address structural demand shortfalls effectively when it is backed by monetary sovereignty. Deficits denominated in the state’s own currency differ fundamentally from those dependent on foreign currencies or external lenders.

They are internally financed, and their sustainability is not a question of solvency. Far from imposing a burden on future generations, they constitute the financial assets of today’s private sector. Government deficits mirror private sector surpluses. They are not a burden, but the mechanism through which private saving desires are fulfilled.

We live in a state money system. When the currency is issued by a democratic state, money becomes a tool of public purpose — governed collectively, not merely managed technically. Absent a national currency, a country becomes a user of money rather than its issuer.

Sterlingisation, in particular, would leave Scotland dependent on the Bank of England. But this is not a neutral institution. This year again, the Bank of England has shown how its misguided framework continues to distort its reading of the economy. It has treated strong wage growth as a threat and underestimated the actual pace of GDP growth. In doing so, it has overlooked the fact that the resilience of the economy owes much to wage dynamics. The current pace of wage growth is not a problem—it is part of the solution.

“Not only would Scotland give up its own fiscal policy, it would also rely on a central bank that does not serve its democratic state”

After years of real wage losses, increases in nominal pay are essential to restoring purchasing power. From a post-Keynesian standpoint, wages are the main engine of domestic demand. Wages are also the most important cost factor, but current developments have nothing to do with cost pressure. Inflation becomes a concern only when pay settlements vastly outpace productivity or are set arbitrarily, not when they catch up with past losses.

The Bank of England has all the data it needs to understand what’s happening — but it applies the wrong theory, and so misreads the picture. The implication is clear: not only would Scotland give up its own fiscal policy, it would also rely on a central bank that does not serve its democratic state.

Some argue that if monetary independence is not immediately feasible, Scotland could adopt the Euro as an alternative. But this would only replace one form of dependence with another. The problem lies not in the idea of European integration—Scotland may well benefit from EU membership—but in the design of the euro itself. It is a currency without a state, and its architecture has proven unable to accommodate economic diversity.

Born as a political project to unify Europe, the Euro was implemented without the institutional structures necessary to harmonise divergent economies. In particular, it lacked mechanisms to coordinate wage growth. When wage dynamics diverge within a currency union, competitiveness gaps widen and imbalances deepen.

Germany pursued wage suppression over an extended period, keeping labour costs well below productivity growth. This amounted to an internal devaluation, boosting German exports and generating persistent trade surpluses. But every surplus has its counterpart: in this case, rising deficits, industrial decline, and unemployment in Southern Europe.

Countries like Spain and Greece could not devalue their currency, nor could they expand fiscal spending freely. Recessions became entrenched, and austerity was imposed—despite the fact that the imbalance was structural, not the result of fiscal excess.

Crucially, if governments do not engage in deficit spending to stimulate demand and invest in future capacity, they will still end up in deficit — only reactively and involuntarily, as falling tax revenues and rising social expenditure accompany the downturn.

Scotland should learn from this. The transition to a net-zero economy will require large-scale public investment — in energy systems, climate-resilient infrastructure, and employment creation in emerging sectors. For countries without abundant fossil resources, the ability to produce and govern green energy is not only an ecological imperative but a strategic one. In this context, energy policy and monetary sovereignty are deeply interlinked.

The same applies to the welfare state. It plays a vital role not only in ensuring social justice, but in macroeconomic stabilisation. Social spending cushions household income during downturns and prevents demand from collapsing further. But such stabilisers require fiscal capacity — and that, in turn, requires a sovereign currency.

True independence is not symbolic. It is substantive. It requires the institutional capacity to conduct long-term investment, close demand gaps, and guarantee employment and social security. These are not luxuries—they are the foundations of a modern and resilient political economy. And all of them presuppose the ability to issue, manage, and direct a national currency.

Monetary sovereignty is not a final step—it is the foundation that makes all others possible. It is not a detail to be postponed. It is the point from which the path to independence begins.