An independent Scotland that keeps the pound would have to give up some national sovereignty to avoid the kind of risks exposed by the euro zone crisis, Bank of England Governor Mark Carney said on Wednesday.
Carney, speaking in detail for the first time on issues related to September’s independence referendum, said he would not be drawn on whether Scots would be better off if they voted to break away from the rest of the United Kingdom.
In a speech to Scottish business leaders, he stressed that any talks between a breakaway Scotland and London would have to find a range of agreements to avoid “clear risks” that could threaten a currency union. These would include “tight fiscal rules” and a banking union.
“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.
He said the euro zone was starting to fix its institutional shortcomings but “further, very significant steps” still had to be taken to pool resources and share risks.
“In short, a durable, successful currency union requires some ceding of national sovereignty,” Carney said.
He listed the benefits and potential pitfalls for countries which share the same currency, including the “potentially large costs” of giving up an independent monetary policy and a flexible exchange rate.
The Canadian noted the deep economic integration between Scotland and the rest of the United Kingdom, which buys 70 per cent of Scottish exports.
“A word of caution applies here,” he said. “The high degree of integration between Scotland and the rest of the UK may in part depend on their being part of the same sovereign nation.”
Carney, making his first visit to Scotland since taking over as BoE governor last year, had earlier met Scotland’s First Minister Alex Salmond, a champion of Scottish independence.
Salmond’s Scottish National Party, which runs Scotland’s devolved government, and defenders of the three-centuries-old union with England are locked in an increasingly bitter debate over the rewards and risks of independence.
On Tuesday, Salmond said that Carney’s predecessor, Mervyn King, had advised him privately that Britain’s finance ministry would soften its negotiating stance if he won an independence vote. The BoE declined to comment on Salmond’s remarks.
Central to the SNP’s vision of an independent Scotland, if it wins the Sept. 18 referendum, is the creation of a currency union with the rest of the United Kingdom.
The SNP proposes that as part of that plan, the Bank of England should act as lender of last resort for Scottish banks and an independent Scotland should have a voice within the BoE.
British finance minister George Osborne has said the rest of Britain might be unwilling to let an independent Scotland keep the pound. The SNP has responded by suggesting that Scotland might in return refuse to take on its share of Britain’s 1.2 trillion pounds ($2.0-trillion) of government debt.
In his speech on Wednesday, Carney said Britain’s existing banking system had proved “durable and efficient” and allowed Scotland to have banks that were much bigger than its economy.
“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,” he said.
“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.”
With the independence campaign lagging in opinion polls, financial markets have so far shown little concern about the chance of Scotland leaving the UK, and taking a chunk of North Sea oil and gas with it.
But a poll published on Sunday showed the pro-independence campaign starting to gain ground, with 37 per cent in favour of independence, 44 per cent against and 19 per cent unsure, according to a survey by polling company ICM.
Last month the British Treasury said it would honour all existing government debt regardless of whether Scots vote for independence, a move aimed at preventing volatility in borrowing costs before the referendum.