• Scotland 'can't set tax and spending if it keeps pound'

  
  Bank of England governor's warning raises fresh doubts over SNP pledge of Scottish responsibility
  
  
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    “• Mark Carney, the governor of the Bank of England, has warned that an independent Scotland would need to give up a significant amount of its freedom…” Today's political developments

    Independent Scotland 'needs to cede sovereignty' for currency union with UK

    Bank of England governor's warning raises fresh doubts over SNP pledge that independence would give Scotland responsibility for all its economic levers

    
    

    • Severin Carrell, Scotland correspondent
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    • theguardian.com, Wednesday 29 January 2014 13.15 GMT

    

    Mark Carney, governor of Bank of England, meets Alex Salmond, first minister of Scotland. Carney later told business leaders he believed the current structure was the best model. Photograph: David Cheskin/PA

    The governor of the Bank of England has warned that an independent Scotland would need to give up a significant amount of its freedom over taxation and spending if it wants to form a currency union with the rest of the UK.
    In a speech on Scottish independence in Edinburgh on Wednesday, Mark Carney repeatedly warned that a successful, durable deal to share sterling and the Bank of England would need close integration between the Scottish and UK governments' economic policies and significant sharing of risks.
    Speaking after a private breakfast meeting with Alex Salmond, the first minister of Scotland, Carney told business leaders that Scotland would need to "cede sovereignty and limit [its] autonomy" to ensure the success and stability of the currency union.
    Losing control over its currency exchange rates would likely mean that Scotland's public spending, wage levels and employment would be the first to suffer if there were any economic shocks.
    In turn, parliaments and voters in the rest of the UK would also have to agree to backing up Scotland financially by bailing it out during a crisis – that, he said, would be a political decision beyond his authority as governor of the Bank of England.
    "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 said.
    "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."
    His warnings will raise fresh doubts about Salmond's pledge to Scottish voters that voting for independence in this September's referendum would allow Scotland to pursue distinctive and radical economic policies, many of which are designed to compete with the rest of the UK.
    The white paper on independence told voters that independence would give Scotland "responsibility for all its economic levers" and "shape our own fiscal and economics policies for Scotland's needs and circumstances".
    Although few specific policies were outlined in that white paper, Salmond wants to set corporation tax rates at 3% below the UK rate to encourage businesses to base their headquarters in Scotland, abolish air passenger duty, reform the tax and welfare systems, and increase tax allowances in line with inflation.
    Economists have repeatedly warned that while currency unions can be sensible in principle, they require far greater economic and fiscal integration than Salmond allows, and would also require explicit consent by voters and governments across the rest of the UK – agreement which is far from guaranteed.
    Carney began his speech, likely to be one of the most significant yet in the independence debate, by saying there was a strong rationale in principle for a currency union, particularly between two countries with very similar economies.
    It eliminates currency transaction costs, promotes investment by reducing uncertainty about currency fluctuations, would help promote integration, increase commercial competition and help labour movements, promoting 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 told the Scottish Council for Development and Industry lunch.
    But he added: "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 repeatedly hinted that he believed the current structure of the UK was the best model for a currency, fiscal and political union, allowing risk sharing, pooling resources and maximising open and free trade.
    "The existing banking union between Scotland and the rest of the United Kingdom has proved durable and efficient," he said. Having a single regulator, a single deposit guarantee scheme and a common central bank "help ensure that Scotland can sustain a banking system whose collective balance sheet is substantially larger than its GDP".
    He then added: "The euro area has shown the dangers of not having such arrangements, as well as the difficulties of the necessary pooling of sovereignty to build them.
    "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."
    Scotland would need to guarantee its banks were solvent, as well as consider a "banking union" with the rest of the UK. It would need a credible bank guarantee system, strict common banking and dispute regulations, and access to the Bank of England's reserves in case of a crisis.
    Carney said an effective and stable currency union would need a centralised fiscal authority and shared fiscal policies – a strategy which would have a direct impact on Scotland's ability to set policies that meet its needs rather than the UK's.
    That would be important because Scotland would be unable to set its own currency exchange rates to help in economic difficulties.
    "Being in a currency union can amplify fiscal stress for individual nations, limiting their ability to perform this valuable role just when it is most needed. So it makes sense to share fiscal risks across the whole currency area.
    "A localised shock is less likely to stretch the fiscal position in a larger more diversified currency area, especially if it shifts demand between different parts of the area. That makes a given shock to Nova Scotia less severe than the equivalent to Portugal.
    "The second justification for shared fiscal arrangements is that problems in one country are very likely to spill over to others. For example, the threat of default by one country may trigger a generalised crisis, particularly if the liabilities of the crisis country are held by the banking system of the broader currency area.
    "It will be in the interests of other countries in the union to bail out a country in crisis, and that reduces the incentives for countries to run their finances prudently in the first place. At a minimum, this 'moral hazard' problem suggests the need for tight fiscal rules, to enforce prudent behaviour for all in the union, although credible sanctions for breaking those rules are hard to develop."
    Responding to the speech, the Scottish finance secretary John Swinney said: "Mr Carney provides a serious and sensible analysis of how a currency union can work in practice, and every one of the points he cites in terms of the technical requirements have been examined in detail by the Fiscal Commission, headed by two Nobel laureates. 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.
    "Ultimately, as Mr Carney makes clear, a sterling area is a matter for the two governments to agree. Such a shared currency area is the commonsense position as it is in the overwhelming economic interests of both Scotland and the rest of the UK."
     

    COPY   http://www.theguardian.com/