Scotland's North Sea Oil.

Sept. 18 2014 (TSR) –  Scotland’s “Mini-Me” economy is far from an oasis of riches or a pit of despair within the UK. Levels of income, unemployment, labour productivity and inequality are remarkably similar to the combined average for England, Northern Ireland, Scotland and Wales.

Completely integrated after 307 years of union, Scotland shares the economic institutions of the UK, its tax system and its powerful insurance mechanisms that support troubled economic areas such as Northern Ireland and extract money from hotspots such as London.

The one big difference is oil. Scotland’s public finances would be a mess if it did not receive the vast majority of oil revenues after independence, leaving its initial prosperity and prospects dependent on the terms of divorce. Thereafter, an independent Scotland’s economic prospects would hinge on its ability to raise its game. The following five considerations will be paramount.

Currency

An independent Scotland should assume the rest of the UK would refuse to enter a formal currency union. Economists think the best available option would be initial unilateral use of sterling – soon followed by the establishment of a Scottish central bank and currency.

Such an option is unquestionably feasible and could bring currency stability if the Scottish central bank pegged the Scots pound against sterling, much as Denmark fixes the krone to the euro. The trade-off would be the requirement for higher foreign exchange reserves necessary to defend a currency peg and a lack of economic flexibility that floating exchange rates can bring.

The main risk is capital flight, from Scotland and its banks, from people who might fear future depreciation and would prefer their financial assets to be denominated in sterling, euros or dollars. As Neville Hill of Credit Suisse has said: “It’s not whether Scotland will stay in the pound, but whether the pound stays in Scotland.”

Reserves

To defend a currency peg, an independent Scotland would need foreign exchange reserves substantially in excess of the £15bn that Mark Carney, the Bank of England governor, says would be in the “upper end of the range” the country could reasonably expect to inherit from the UK. To match the level of reserves held by Denmark as a share of national income, Scotland would need £34bn.

Ronald MacDonald, a University of Glasgow professor who has been working with the pro-union campaign, says the need to accumulate reserves would represent “a recipe for austerity” that would result in the end of any pegged currency with sterling. Scotland might be able to borrow the money to build foreign exchange buffers at the cost of creating exchange-rate risk either for the Scottish people or its creditors. Such borrowing might therefore be very expensive.

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Lady MJ Santos is the Founder/CEO of The Santos Republic Systems. Her professional background is political and media strategy, asset and credit enhancement, international trade and development and public speaking. For two consecutive years, she was awarded by Silicon Valley's TRIPBASE as their favourite "writer to be revered and respected" of all the world politics blogs from across the internet for "displaying knowledge and temerity in her approach matched only by her success in the political and managerial circles".

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