Bank of England governor says there are logical economic and
business arguments for currency pact, but also warns of dangers
Mark Carney raises doubts over Scotland's plan to share the pound
Bank of England governor says there are logical economic and business arguments for currency pact, but also warns of dangers
Bank of England
governor Mark Carney (left) meets Scottish first minister Alex Salmond
at Bute House in Edinburgh. Photograph: David Cheskin/PA
The battle over the Scottish government's plans for Scotland to share the pound after independence intensified sharply on Wednesday after the governor of the Bank of England warned about the risks of a eurozone-style financial crisis.
Mark Carney said Scotland would need to give up significant areas of its sovereignty and reach a watertight deal with the UK on banking, taxation and spending if a new sterling zone were to avoid the risks and instability which had plagued the euro.
Carney insisted he was neutral on the case for a currency union – a key issue in this September's independence referendum in Scotland – but the Treasury claimed that the governor's analysis had emphatically shown why a sterling pact "was highly unlikely to be agreed" by UK taxpayers.
The governor told business leaders in Edinburgh that Westminster would need to agree that the UK Treasury would help to bail out Scotland in any future financial crisis and act as a guarantor for Scotland's banks. That would be a political decision beyond his authority as governor of the Bank of England, he said.
"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," Carney told the Scottish Council for Development and Industry lunch in Edinburgh
"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."
Scottish first minister Alex Salmond's proposals for a formal currency union, which includes using the Bank of England as Scotland's central bank, are central to the Scottish National party case that Scotland can maintain sensible and mutually-beneficial ties with the remainder of the UK after independence.
Salmond, a former Royal Bank of Scotland economist, and Carney met for breakfast in Edinburgh before the governor's speech where Carney confirmed that Bank officials would continue giving the Scottish government technical information on sterling and banking regulations.
Carney insisted he would implement any agreement on a currency and banking union agreed by the two governments, arguing at one stage that there were some logical economic and business arguments for a currency pact involving countries with similar economies.
Echoing the case made by the Scottish government, Carney said in principle a pact would eliminate currency transaction costs, promote investment by reducing uncertainty about currency fluctuations, increase commercial competition and help labour movements, fostering internal trade and technology exchange.
"In these ways, members of a currency union can exploit more fully comparative advantage and ensure greater dynamic efficiency," he said. "Set against these benefits are the potentially large costs of giving up an independent monetary policy tailored to the needs of the region and a flexible exchange rate that can help absorb shocks."
Carney feels that a currency and banking union would require tight fiscal rules between both countries, which would probably include controls over government spending, strict controls over banking and guaranteeing peoples savings.
However, that would limit Scotland's independence to solely control its own fiscal policies on taxation, spending and borrowing – a key pledge in the Scottish government's white paper on independence.
The document, Scotland's Future, claims independence will allow the new state to take "responsibility for all its economic levers", "shape our own fiscal and economics policies" and have "fiscal flexibility" designed solely to meet Scotland's interests.
Salmond wants to set corporation tax rates at 3% below the UK rate to encourage businesses to set up headquarters in Scotland. The SNP also pledges to abolish air passenger duty, reform the tax and welfare systems and increase tax allowances in line with inflation.
Carney's intervention was seized on by the Treasury and opponents of independence. One Whitehall source said the tests set out by Carney had opened up a chasm between what was required for a currency union and the previously vague undertakings by the Scottish government to agreeing on borrowing limits and financial regulations.
But the Treasury in London said Carney's comments reinforced their doubts about a currency union between the UK and Scotland and increased pressure on Salmond to put forward an alternative currency plan if a deal on sharing the pound fell through.
"Governor Carney today highlights the principled difficulties of entering a currency union: losing national sovereignty, practical risks of financial instability and having to provide fiscal support to bail out another country," a Treasury spokesman said.
"This is why the UK government have consistently said that, in the event of independence, a currency union is highly unlikely to be agreed. The Scottish government needs a Plan B."
The Scottish Green party, an ally of SNP in the pro-independence Yes Scotland campaign, said Carney's speech substantiated their calls for Scotland to have its own currency.
But John Swinney, the Scottish government's finance secretary, argued that Carney had provided a "serious and sensible analysis" of how a currency union could work and had recognised that a deal was a political decision between the Westminster and Holyrood governments.
It was in the "overwhelming economic interests of both Scotland and the rest of the UK" to ensure that there was as much harmony and continuity as possible with its closest and largest trading partner, Scotland, after independence, Swinney said.
"Such a shared currency area is the common sense position as it is in the overwhelming economic interests of both Scotland and the rest of the UK," he said.
"An independent Scotland will control 100% of our own revenues, compared to the 7% of our tax base we are currently responsible for under devolution.
"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."
However, Alistair Darling, the former Labour chancellor who leads the anti-independence Better Together campaign, said Carney had "quietly demolished" Salmond's case for a currency union.
"This is a detailed speech but, make no mistake, the governor's judgement on currency unions is devastating for Alex Salmond's currency plans. Why? Because the whole point of independence is to break the fiscal and political union that makes monetary union possible," Darling said.
"The governor has spelled out in stark terms the problems of a currency union. Above all, it needs people living in the rest of the UK to agree to something they have never been asked about.
"As the governor makes clear, in a currency union both sides have to agree to each other's taxes, spending and borrowing. This is what is happening in the eurozone today. It is highly unlikely that the people living in the rest of the UK would agree to this. And remember, in a currency union like this, Scotland has 10% of GDP and the rest of the UK would have 90%. It is clear who would call the shots."
Mark Carney said Scotland would need to give up significant areas of its sovereignty and reach a watertight deal with the UK on banking, taxation and spending if a new sterling zone were to avoid the risks and instability which had plagued the euro.
Carney insisted he was neutral on the case for a currency union – a key issue in this September's independence referendum in Scotland – but the Treasury claimed that the governor's analysis had emphatically shown why a sterling pact "was highly unlikely to be agreed" by UK taxpayers.
The governor told business leaders in Edinburgh that Westminster would need to agree that the UK Treasury would help to bail out Scotland in any future financial crisis and act as a guarantor for Scotland's banks. That would be a political decision beyond his authority as governor of the Bank of England, he said.
"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," Carney told the Scottish Council for Development and Industry lunch in Edinburgh
"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."
Scottish first minister Alex Salmond's proposals for a formal currency union, which includes using the Bank of England as Scotland's central bank, are central to the Scottish National party case that Scotland can maintain sensible and mutually-beneficial ties with the remainder of the UK after independence.
Salmond, a former Royal Bank of Scotland economist, and Carney met for breakfast in Edinburgh before the governor's speech where Carney confirmed that Bank officials would continue giving the Scottish government technical information on sterling and banking regulations.
Carney insisted he would implement any agreement on a currency and banking union agreed by the two governments, arguing at one stage that there were some logical economic and business arguments for a currency pact involving countries with similar economies.
Echoing the case made by the Scottish government, Carney said in principle a pact would eliminate currency transaction costs, promote investment by reducing uncertainty about currency fluctuations, increase commercial competition and help labour movements, fostering internal trade and technology exchange.
"In these ways, members of a currency union can exploit more fully comparative advantage and ensure greater dynamic efficiency," he said. "Set against these benefits are the potentially large costs of giving up an independent monetary policy tailored to the needs of the region and a flexible exchange rate that can help absorb shocks."
Carney feels that a currency and banking union would require tight fiscal rules between both countries, which would probably include controls over government spending, strict controls over banking and guaranteeing peoples savings.
However, that would limit Scotland's independence to solely control its own fiscal policies on taxation, spending and borrowing – a key pledge in the Scottish government's white paper on independence.
The document, Scotland's Future, claims independence will allow the new state to take "responsibility for all its economic levers", "shape our own fiscal and economics policies" and have "fiscal flexibility" designed solely to meet Scotland's interests.
Salmond wants to set corporation tax rates at 3% below the UK rate to encourage businesses to set up headquarters in Scotland. The SNP also pledges to abolish air passenger duty, reform the tax and welfare systems and increase tax allowances in line with inflation.
Carney's intervention was seized on by the Treasury and opponents of independence. One Whitehall source said the tests set out by Carney had opened up a chasm between what was required for a currency union and the previously vague undertakings by the Scottish government to agreeing on borrowing limits and financial regulations.
But the Treasury in London said Carney's comments reinforced their doubts about a currency union between the UK and Scotland and increased pressure on Salmond to put forward an alternative currency plan if a deal on sharing the pound fell through.
"Governor Carney today highlights the principled difficulties of entering a currency union: losing national sovereignty, practical risks of financial instability and having to provide fiscal support to bail out another country," a Treasury spokesman said.
"This is why the UK government have consistently said that, in the event of independence, a currency union is highly unlikely to be agreed. The Scottish government needs a Plan B."
The Scottish Green party, an ally of SNP in the pro-independence Yes Scotland campaign, said Carney's speech substantiated their calls for Scotland to have its own currency.
But John Swinney, the Scottish government's finance secretary, argued that Carney had provided a "serious and sensible analysis" of how a currency union could work and had recognised that a deal was a political decision between the Westminster and Holyrood governments.
It was in the "overwhelming economic interests of both Scotland and the rest of the UK" to ensure that there was as much harmony and continuity as possible with its closest and largest trading partner, Scotland, after independence, Swinney said.
"Such a shared currency area is the common sense position as it is in the overwhelming economic interests of both Scotland and the rest of the UK," he said.
"An independent Scotland will control 100% of our own revenues, compared to the 7% of our tax base we are currently responsible for under devolution.
"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."
However, Alistair Darling, the former Labour chancellor who leads the anti-independence Better Together campaign, said Carney had "quietly demolished" Salmond's case for a currency union.
"This is a detailed speech but, make no mistake, the governor's judgement on currency unions is devastating for Alex Salmond's currency plans. Why? Because the whole point of independence is to break the fiscal and political union that makes monetary union possible," Darling said.
"The governor has spelled out in stark terms the problems of a currency union. Above all, it needs people living in the rest of the UK to agree to something they have never been asked about.
"As the governor makes clear, in a currency union both sides have to agree to each other's taxes, spending and borrowing. This is what is happening in the eurozone today. It is highly unlikely that the people living in the rest of the UK would agree to this. And remember, in a currency union like this, Scotland has 10% of GDP and the rest of the UK would have 90%. It is clear who would call the shots."
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