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Carney to Scotland: Be careful what you wish for

Helia Ebrahimi and Kiran Moodley
Wednesday, 29 Jan 2014 | 9:28 AM ET
BoE's Carney on Scotland-UK currency union
Wednesday, 29 Jan 2014 | 8:15 AM ET
If Scotland becomes independent and keeps the British pound, the Bank of England would "simply implement whatever monetary arrangements" were negotiated, says Mark Carney, governor at the Bank of England.

Bank of England Governor Mark Carney has warned that if Scotland wants to keep the British pound it will need to "cede" some of its national sovereignty.

In a blow to campaigners for Scottish independence, Mr Carney told a group of businessmen in Edinburgh that a currency union between an independent Scotland and the U.K. would have to involve an Edinburgh government giving up some of its tax and spending decisions.

"In short, a durable, successful currency union requires some ceding of national sovereignty," said the Governor.

Mark Carney, governor of the Bank of England
Chris Ratcliffe | Bloomberg via Getty Images
Mark Carney, governor of the Bank of England

On September 18, the people of Scotland will be asked in a long-awaited referendum: "Should Scotland be an independent country?" However,the issue of the economic implications of an independent Scotland have come to dominate the referendum debate.

(Read more: Scotland independence: Widnae it work?)

The Governor's speech followed an earlier meeting with Alex Salmond, first minister for Scotland, where Mr Carney is understood to have laid out some of the issues raised by Scottish independence.

In Scotland, the 'Yes' vote has galvanized popular support ahead of the 17 September vote and Mr Salmond has said he would like to keep sterling, given it is an asset that needs to be shared between both countries.

Carney outlined the benefits of shared a currency, namely the elimination of transaction costs, reduced uncertainty about currency movements and helping to promote integration by removing one of the barriers between markets and improving transparency.

While the BoE Governor said it was not his place to decide whether Scotland would be better or worse off under independence, the Governor's speech contained warnings about sharing a single currency without the right measure of fiscal alignment.

(Read more: Europe moves to banking union with blueprint for failing lenders)

The biggest area of concern for Mr Carney was the need for a stable banking system. The combined balance sheet of Royal Bank of Scotland and Lloyd Banking Group, which are headquartered in Edinburgh, is almost ten times the size of the Scottish economy.

The UK Government is unlikely to want a currency union that would allow an independent Scotland influence over domestic monetary policy whilst simultaneously leaving UK taxpayers on the hook for Scottish banks.

Carney said the current banking union between Scotland the U.K. had proved durable and efficient: "Its foundations include a single prudential supervisor maintaining consistent standards of resilience, a single deposit guarantee scheme backed by the central government, and a common central bank, able to act as Lender of Last Resort across the union, and also backed by the central government."

However, the euro zone crisis had shown that without such arrangements, disaster was around the corner, and Carney said that an independent Scotland would have to "consider carefully" how it would retain the current union in a way that was consistent with its own newly-acquired sovereignty.

(Read more: UK to make debt pledge ahead of Scotland referendum)

Scotland's First Minister Alex Salmond and Deputy First Minister Nicola Sturgeon
Andy Buchanan | AFP | Getty Images
Scotland's First Minister Alex Salmond and Deputy First Minister Nicola Sturgeon

"In short, a durable, successful currency union requires some ceding of national sovereignty," Carney said.

The majority of Scots are seen voting against the motion, but the "yes" vote seems to have gained ground recently. An ICM poll published in the Scotland on Sunday newspaper last weekend found that 37 percent of Scots were in favor of an independent Scotland, up from 32 percent back in September. Forty-four percent of those polled remained against independence.

The ICM said the seven-point gap between "yes" and "no" votes was "sufficiently small to be within striking distance."

"Of course this is but one poll, which could easily suffer from any number of the usual poll vagaries, but it does build on smaller increases in vote share for 'Yes' that were seen in December," it said in a statement.

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