Belfast Telegraph

Friday 19 September 2014

Mark Carney warns sharing Scottish currency may lead to crisis

Bank of England governor Mark Carney gives a speech at the George Hotel in Edinburgh during a Scottish Council of Development and Industry event.

Bank of England governor Mark Carney has warned that sharing a currency between an independent Scotland and the rest of the UK could lead to a eurozone-style crisis unless the "necessary foundations" are put in place.

Speaking at a business lunch in Edinburgh, the governor said a shared currency would force a newly-independent Scotland to hand over some national sovereignty.

Mr Carney (below) said: "If such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place.

"Those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance.

"The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources.

"In short, a durable, successful currency union requires some ceding of national sovereignty.

"It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK."

He added: "Decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics. For those considerations, others are better placed to comment."

Mr Carney, who became governor last July, focused on the implications of Scottish independence in his speech just hours after his first face-to-face meeting with Scotland's First Minister, Alex Salmond, as voters in Scotland prepare to decide whether to leave the UK.

The pair met for private talks at Bute House, Salmond's official residence in Edinburgh.

The Scottish government wants to retain the pound if the country votes for independence, establishing a "sterling zone" with the rest of the UK. Other pro-independence groups argue for a separate Scottish currency.

Technical discussions on sharing sterling, which started under Mr Carney's predecessor Sir Mervyn King, are expected to continue. UK ministers including Chancellor George Osborne have cast doubt on whether the arrangement is possible.

Mr Carney insisted that such negotiations are for Westminster and Holyrood, and the bank would not intervene.

He added: "Any arrangement to retain sterling in an independent Scotland would need to be negotiated between the Westminster and Scottish parliaments.

"The Bank of England would implement whatever monetary arrangements were put in place."

In his speech, the governor said a currency union's success also rests on a good banking union, a term covering the range of institutions needed to support an efficient financial sector.

These include common supervisory standards, access to central bank liquidity and lender of last resort facilities.

"The existing banking union between Scotland and the rest of the United Kingdom has proved durable and efficient," he said.

"Its foundations include a single prudential supervisor maintaining consistent standards of resilience, a single deposit guarantee scheme backed by the central government, and a common central bank, able to act as lender of last resort across the union, and also backed by the central government.

"An independent Scotland would need to consider carefully how to develop arrangements with the continuing United Kingdom that are both consistent with its sovereignty and sufficient to maintain financial stability."

Carney highlighted comments by the presidents of the European Council, European Commission, Eurogroup and European Central Bank, who argue that monetary union will not be complete until mechanisms are built to share fiscal sovereignty.

Scottish Finance Secretary John Swinney welcomed Mr Carney's intervention.

"We welcome the bank's commitment to further technical discussions with Scottish Government officials which will refine the work already undertaken, including the Fiscal Commission's publication of their report on a macroeconomic framework for an independent Scotland, which encompasses proposals for a shared sterling area," he said.

And he added: "A shared currency will mean an independent Scotland having control of tax policy, employment policy, social security policy, oil and gas revenues, immigration policy and a range of other levers to suit our own circumstances, helping to grow our economy, create jobs and secure a more prosperous and fairer society."

BACKGROUND

Scotland and England were joined in union officially on 1 May 1707. Scots will be asked to vote on unravelling the union on September 18 by answering the simples question: "Should Scotland be an independent country?"

It's backed by the SNP, Scottish Greens and one independent MSP. The Westminster government is against an independent Scotland.

Further Reading

Scottish independence could bring big challenges, says top business director

Implications of the Scots going it alone... key questions answered 

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