Independence with pound would come with strings, Bank of England tells Scotland

EDINBURGH Wed Jan 29, 2014 7:19pm GMT

The Governor of Britain's Bank of England, Mark Carney, speaks to business leaders at an event in Edinburgh, Scotland January 29, 2014. REUTERS/Chris Watt

The Governor of Britain's Bank of England, Mark Carney, speaks to business leaders at an event in Edinburgh, Scotland January 29, 2014.

Credit: Reuters/Chris Watt

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EDINBURGH (Reuters) - Bank of England Governor Mark Carney said on Wednesday that an independent Scotland that keeps the pound would have to give up some national sovereignty or risk the kind of problems exposed by the euro zone crisis.

Carney, speaking in detail for the first time on issues related to September's independence referendum, took care to avoid taking sides in the increasingly heated campaign.

But in a speech to Scottish business leaders, he delivered a sobering message, stressing that a breakaway Scotland and the rest of the United Kingdom would have to secure complex agreements on "tight fiscal rules" and a banking union, or face "clear risks" that could threaten a currency union.

"Those risks have been demonstrated clearly in the euro area over recent years," Carney said. "In short, a durable, successful currency union requires some ceding of national sovereignty."

Both campaigns seized on Carney's speech. The Scottish National Party, which runs Scotland's devolved government, welcomed his comments about the potential benefits of a currency union, which could help investment and lower borrowing costs.

"Mr Carney provides a serious and sensible analysis of how a currency union can work in practice," Scotland's finance secretary John Swinney said.

The British government had a very different take. "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 spokesman for the Treasury said.

British Chancellor George Osborne has said the rest of the United Kingdom - England, Wales and Northern Ireland - 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 the country's 1.2 trillion pounds ($2.0 trillion) of government debt.

In his speech, Carney 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.

CAUTION ON INTEGRATION

The Canadian noted the deep economic integration between Scotland and the rest of the United Kingdom, which buys 70 percent 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."

If it wins the September 18 referendum, the creation of a currency union with the rest of the United Kingdom is central to the SNP's vision of an independent Scotland. Alternative options such as joining the euro zone or creating a new currency are seen as more expensive and potentially riskier.

As part of its plan, the SNP proposes the Bank of England should act as lender of last resort for Scottish banks and that an independent Scotland should have a voice within the Bank.

In his speech, 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," Carney said.

Plans for a euro zone banking union aimed at preventing future crises in the bloc were watered down by Germany and others last year and have still to be passed into law by the European Parliament.

Edinburgh-based Royal Bank of Scotland was briefly the world's biggest bank prior to the 2008 financial crisis, with a balance sheet of 1 trillion pounds - bigger than the overall British economy.

The bank still makes losses after being part-nationalised in 2008 and 45 billion pounds ($69 billion) pumped in by the British government to keep it afloat.

With the independence campaign lagging in opinion polls, investors have shown little concern about the chance of Scotland seceding and taking a chunk of North Sea oil and gas with it.

But a poll published on Sunday showed the pro-independence campaign gaining ground, with 37 percent in favour of independence, 44 percent against and 19 percent 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.

(Writing by William Schomberg in London; Editing by Catherine Evans)

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Comments (3)
Raymond.Vermont wrote:
That guarantee of honouring existing debt by the London Treasury, has got to be a powerful plus for Scots to UDI.

The problem for the UK, being that passions throughout the UK arent altogether overwhelmingly positive for retaining the union anyway.(as it stands)

Jan 29, 2014 3:18pm GMT  --  Report as abuse
Raymond.Vermont wrote:
Are the Scots (all 5 million of them) really suggesting that they would have equal parity in decision making over what happens in a central bank that exists within another country that is ‘independent’ to them?

Perhaps to have any sway over decisions made in another country, the Scottish executive would have to give something back…

Say part shared sovereignty over waters, some common economic zones and a defence arrangement that sees HMNB Clyde as a leased base to the Kingdom of England, Wales & NI(KoE,W&NI) with special arrangement waivers. (as the only acceptable place for nuclear weapons in Scottish areas of the British Isles)

Jan 29, 2014 8:39pm GMT  --  Report as abuse
mgb500 wrote:
King Alex clearly hasn’t given much thought to the currency that an independent Scotland would use..come to think of it, not sure he’s thought much about ANY of the issues!

Will happen with major Scottish insurers? Stay put or skip over the border?

Jan 30, 2014 6:27pm GMT  --  Report as abuse
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