What If Scotland Had Voted for Independence in 1997?

Scotland voted for its own parliament in 1997. But what if we had instead voted for independence? This is, of course, what the SNP wanted at the time. How would Scotland's history up until the present day be different if we had made such a choice back then?
Some things might have turned out for the better for both Scotland and the rest of the UK (rUK). it is hardly likely that rUK would have accepted two Scots as Prime Ministers, if Scotland had become an independent state. Both Scotland and rUK might thus have avoided Tony Blair's wars in Iraq and Afghanistan and rUK might have avoided Gordon Brown's attempts to wreck the economy. In attempts at counterfactual history however, it is generally better to focus on fundamentals rather than the details of what this or that leader might or might not have done.
An independent Scotland in 1997 would have faced many of the same choices as it would in 2014. The most important choice would have been about its currency. Scotland would have had really three options in 1997. It could have tried to remain in a currency union with rUK, it could have created its own currency, or it could have decided to join the Euro.
It is almost certain that Scotland would have chosen to join the Euro in 1997. For example, In 1999 Alex Salmond said:
"I think that being outside the euro area is already penalising the Scottish economy. In the medium-term, the longer we stay out, the more damage will accumulate. The euro is an example of why Scotland needs membership status so that it can take a decision on entry into the single currency" (10 November 1999 in the Scottish Parliament (Official Report))
It is worth investigating however, the alternative scenarios of Scotland setting up its own currency and remaining in a currency union with rUK.
One of the most important events in post-war history began on September 15th 2008. The trouble had been brewing for some time, but on that date, with the bankruptcy of Lehman Brothers, began the present economic crisis, with which we are still living. This crisis would have affected Scotland whether we had been independent or not. But let's imagine how an independent Scotland would have coped under the three possible currency scenarios.
If an independent Scotland had been part of the Euro in 2008, our position would have been very similar to that of Ireland. The bankruptcy of Halifax/Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS) would have been for an independent Scotland, the same sort of situation which Ireland faced when it had to bail out the Anglo Irish Bank and Bank of Ireland. The problem for Ireland was that its banks were too big to be bailed out by a country of its size and in attempting to bail out its own banks Ireland soon found itself bankrupt too and itself in need of a bailout. This happened in November 2010 and led to the Irish economy effectively being run by the European Central Bank and the IMF. The terms for this bailout were onerous and led to a massive loss of sovereignty on Ireland's part. Scotland's position if it had been in the Euro would almost certainly have been like Ireland's. Scotland could not have bailed out HBOS and RBS on its own and so would have had to turn to funding from other members of the Eurozone and the IMF. As we have found with the examples of Greece and Portugal. These fellow European countries have not been particularly generous. They have set terms for the bailout which amount to never ending austerity and recession with little possibility for growth. The interest rates on any bailout loans have been high. Each country, which has been bailed out has lost a great deal of sovereignty and control of its own affairs. Electorates have faced a gun to their heads and threats from abroad when deciding how to vote and so they have really lost their democratic rights as well.
If Scotland had remained in a currency union with rUK after becoming independent in 1997, the Bank of England would have been forced to bail out the Scottish banks. This, of course, is one reason why rUK might not consider it to be in its own interest to maintain a currency union with an independent sovereign state called Scotland. However, just as the European Central Bank imposed onerous conditions on Ireland, when Ireland was forced to seek help, so the Bank of England could have imposed whatever conditions it chose on an independent Scotland. If Scotland had refused these conditions, the resulting bankruptcy would have forced Scotland out of the pound zone and led to Scotland defaulting on its debts.
One of the main advantages Scotland gained from being part of the UK in 2008, was that the bailout of the Scottish banks occurred without conditions. No austerity was imposed on Scotland, no conditions, no rules, no control over Scotland's economy or parliament. No foreign bank would have been so lenient. We were incredibly lucky that the Bank of England at that time was not a foreign bank, it was our bank. Because we were part of the UK.
If Scotland had chosen to have its own currency in 1997, Scotland's position in 2008 would have been similar to Iceland's. When faced with the bankruptcy of its banks and its inability to bail them out, Iceland chose the route of default and devaluation. In the short term, of course, this was disastrous for the Icelandic people. The value of savings and salaries was drastically reduced. The cost of living rose. However, one of the main advantages of being a sovereign state is the ability to have one's own currency. By defaulting and devaluing, Iceland went through a traumatic operation, but it came out the other side with an economy far more healthy and with much greater potential than either Ireland or Greece.
The best option for an independent Scotland in 1997, with the benefit of hindsight, would have been to set up its own currency. The lesson that we have learned from the Eurozone crisis is that monetary union without fiscal union and political union is a recipe for disaster. Either you end up in the position of Greece, dependent on subsidy, enduring permanent austerity and recession, or you end up in the position of Germany, having to permanently transfer money to your poorer neighbours. The problem with setting up your own currency is that it is something of a risky business. New currencies are liable to fall at least initially, while markets assess their strength. Thus if Scotland had announced that it was setting up its own currency, Scots would be liable to wake up the day after independence to find that their salaries and savings were worth much less than they had been previously.
The financial crisis would have been a disaster for an independent Scotland. In a storm it is always better to be sailing in a battleship than a yacht. Likewise, when the economic storm hit Scotland and the Scottish banks in 2008, we were fortunate that we were part of a large economy which could deal with the crisis effectively and protect the UK economy from much of what has happened in the Eurozone. The help that Scots gained from their fellow countrymen was without conditions, we would not have gained such help from foreigners.