In the nicest possible way, Mark Carney, the Governor of the Bank of England, jammed a large spanner into the wheels of the Scottish National Party's independence train. For an independent Scotland to retain a currency union with Britain would require that Scotland give up some of its national sovereignty, said Mr. Carney, making pointed reference to the continuing struggles in the euro zone.
With only seven months to go until the Scottish people vote on their political destiny, the really tough issues are finally being tackled, first among them being the pound in your pocket: Is it Sterling or some new Gaelic groat? Alex Salmond, leader of the Scottish Nationalists, has insisted that Scotland would enter into a monetary union with Britain, under which the Scottish people would get their freedom without the risk of their savings being ravaged in a sudden devaluation. The Chancellor of the Exchequer, George Osborne, has pooh-poohed talk of a currency union, saying that it is not on the table for discussion and in response, Mr. Salmond has threatened to refuse to accept Scotland's share of the U.K.'s £1-trillion ($1.85-trillion) national debt. Into this row walked a Canadian, Mr. Carney, who trod carefully, offering what he called a "technocratic assessment of what makes an effective currency union between independent nations." By the end of his speech in Edinburgh, however, it was clear that Mr. Carney was utterly baffled by the Scottish Nationalist idea of creating a sort of sterling mini-zone, offshore of Europe.
What would be needed to achieve a workable currency union, he explained, would be all the things that the euro zone currently lacks and which have caused the huge imbalances and the continuing crisis of debt, unemployment and lack of competitiveness in the periphery euro zone states. In other words, proper fiscal risk sharing between nations in the currency union. Without the safety valve of devaluation, members of a currency union need a compensating mechanism to ensure that if one state maxes out its national credit card, the ensuing weak economic performance is not made worse by a rigorous monetary policy. Such a transfer system already exists in Britain, explained Mr. Carney, because " a fifth of variation in regional personal income relative to the national average is stabilized by central government transfers."
Mr. Carney delicately concludes that "a durable currency union requires some ceding of national sovereignty." Put less diplomatically, he might have said that if Scottish savers want the pound in their pocket to maintain its value, Scotland's powers to tax and spend must be joined at the hip to Westminster.
There is another reason for Mr. Carney's skeptical intervention and it is the need for a proper banking union to support a currency union between Britain and Scotland. The hideous disaster that is RBS (formerly Royal Bank of Scotland), rescued from bankruptcy by the U.K. taxpayer after a brief career as the world's largest bank, was certainly on Mr. Carney's mind when he spoke in Edinburgh. It is not credible that a British government would consent to underwrite the debts of Scottish banks – and an independent Scotland would probably need to hand over to the Bank of England regulatory control of its lending institutions – if Scotland remained in a Sterling zone.
It begs the question what Scotland might gain from independence, other than tartan chutzpah. With the North Sea oil flow reduced to a trickle and the promise of big transfers from Brussels unlikely in a Europe of austerity, the economic gains are dubious. Add to that the choice between a devalued currency or fiscal shackles to HM Treasury and it becomes clear that economic self-interest does not point in the direction of sovereignty and independent government from Holyrood. What remains of the argument is best left to Scottish Nationalists. The gut appeal of regional nationalism, whether in Britain or Canada, tends to rise and fall with the fortunes of the domestic economy. The Scottish vote later this year might just be timed to catch a following wind. It's not clear yet, whether it will be a warm westerly or a chill blast from the East.