The sterling price of Scottish independence

Mark Carney and Alex Salmond

The governor of the Bank of England says he is not giving a view on whether Scottish independence would be good or bad for Scotland and its people

But Mark Carney will have an influence on the fractious debate over Scotland's future, because of the implications of his assessment of Alex Salmond's ambition that a separate Scotland would be in a sterling currency union with the rest of the UK.

The nub of his analysis is that successful currency unions pool considerable amounts of sovereignty over fiscal - or tax and spending - decisions.

And that currency unions that endure existential traumas (a big hello to our friends in the eurozone) tend to be those lacking the ability to share their public-sector financial resources, and which have limited controls over the propensity of union members to behave in an economically reckless way.

Or to put it another way, opting to be independent within a successful currency union would represent a very constrained form of independence. A Scottish government would have far less ability to tax and spend as it chose, than if it had its own currency - or so Mr Carney makes clear.

Which carries two implications.

First, independence within a currency union might not properly satisfy the yearning for self-determination of diehard activists, since their ability to manage their economy would be limited.

Second, the business of negotiating the terms of a currency union with the rest of the UK would be both make-or-break for Scottish prosperity and hugely complex.

Economic shock?

It won't therefore surprise you that the Treasury has seized on Mr Carney's speech to reinforce its view that negotiations on a currency union would be "highly unlikely to be agreed".

But, you may ask, why the need for Scotland's budgetary independence to be curtailed in the event of currency union?

Well, on Carney's view - which merely translates conventional economic theory - one reason would be to prevent a Scottish economic downturn becoming excessively painful for Scottish people.

Imagine there was an economic shock that were to hurt Scotland more than the rest of the UK. This could, for example, be a collapse in the oil price, if Scotland were to end up as owner of all that North Sea oil.

In fact in those circumstances, the energy price fall would probably benefit the economy of the rest of the UK (RUK) because costs for businesses and households would fall.

Which means that the economies of Scotland and that of RUK would diverge.

Tax revenues

Now the value of the pound would tend to reflect economic conditions in the larger economic area of England, Wales and Northern Ireland, not the more recessionary conditions in Scotland.

So the pound would not fall to offset the downturn in Scotland and give a boost to the export prospects of Scottish companies. And nor could the Bank of England, setting interest rates, reduce those interest rates to help the hurting Scots people, because they would be in the minority as a part of the whole sterling union.

Which means that economic activity in Scotland would probably decline more than would happen if it had its own currency.

And that in turn would lead tax revenues for the Scottish government to fall disproportionately more - at a time when Scottish unemployment would be on the rise and the Scottish government's expenditure would be rising on social security and benefit payments.

So the financial position of the Scottish government would be disproportionately impaired (its deficit would rise) - bringing the dangerous risk, perhaps, of the government defaulting on its debts.

In other words, within a currency union, there would be a strong need for governments to call on a common pool of resources to cushion the effect of such shocks.

This would involve, in our hypothetical case, taxpayers from the rest of the UK helping to finance Scottish unemployment benefits for a period.

'Moral Hazard'

But RUK taxpayers would only be prepared to do this, if confident that the Scottish government could not spend willy nilly in either good times or bad.

Or to put this in the tedious terms beloved by economists, any safety net agreed between the governments to bail out Scotland or RUK in a crisis would carry as a corollary strict rules on how much each government could tax and spend, to prevent "moral hazard" - or the danger that the Scots (in this case, but the same would apply to RUK) would not go spending bonkers, knowing that RUK taxpayers would bail them out.

And the same sort of fetters would have to be imposed for a second related reason, namely that a currency union implies banking union - and RUK taxpayers would only be prepared to stand behind the liabilities of Scottish banks, if those banks were subject to tight controls on their freedom to lend and invest.

The imperative of shackling banks is doubly important when Scottish banks would inevitably hold the debt of the Scottish government, so would be weakened in our hypothetical example by any impairment of the credit worthiness of the Scottish government.

And, if you doubt any of this, think for a second about how miserable life has been for the Spanish, Irish, Greeks, Portuguese and Cypriots in recent years, in a currency union where there is no common unemployment safety net and no shared pool of money to prop up ailing banks.

So whether he intended to do so or not, Governor Carney has just lobbed a very large stink bomb into the centre of Edinburgh.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

Living standards not quite back to peak

Living standards for a typical family are back to where they were before the recession, says the IFS, although not for those 30 and under.

Read full article

More on This Story

More from Robert


This entry is now closed for comments

Jump to comments pagination
  • rate this

    Comment number 656.

    Pity you couldn't have been as neutral as Mr Carney, Robert.

    Keep the pound - unworkable apparently (alternatively some issues to resolve).
    Adopt the Euro - basket case apparently (alternatively some issues to resolve).
    New Scottish currency - worthless apparently (alternatively some issues to resolve).

    There's a lot of mince being spoken.

  • rate this

    Comment number 655.

    It is a bargining chip as you say, but I really cant see ruk government playing that card, unless disenfranchised tory peers are planning to retire to their country estates in an non eu highlands.
    Any-hoo, scotland would join likely join the EFTA or EEA if refused entry to the eu.

  • rate this

    Comment number 654.

    650 Dal_Riata

    It's a major bargaining chip-
    For instance - If Scotland were to walk away from debt then it would likely be used and you would be hard pressed to get any support from Germany.
    So in that sense it will keep the negotiations honest.

  • Comment number 653.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 652.

    There is a Gibraltar Pound there is a Falkland Island Pound, I think the Isle of Man has its own currency based on the pound. There has always been a Scottish Pound that some idiots in England wouldn't take even although it is legal tender. If its a case of interest rates then why cant Scotland have its own Scottish pound with the interest rates being set in Scotland.

  • rate this

    Comment number 651.

    Re the neg of my 644.

    I find it astonishing that anyone can find fault with the sentiment.

    Anything less does the people of Scotland an injustice

    Do you really want Scotland to be sucking at the teat of the EU forever, passively accepting whatever emerges

    I can think of little worse than being a minor part, and a vassal state, of the Franco German Empire

    The people of Scotland are worth more

  • rate this

    Comment number 650.

    648 btw
    Forign office and successive governments have always supported an enlarged eu. Uk even supports turkys entry. (Watch yes prime minister if you want a cynical view of why)
    In theory you are correct but in practical terms it wont happen. Not in ruk interest and would seem churlish.
    but the broader point remains, the big players will support it and they will prevail in the end, as always.

  • rate this

    Comment number 649.

    True what you say.
    And true, alec has gone and got himself a bit slice of blair/brown straight talking. Much the pity.
    But I do understand his reasoning. The whole deck is stacked agin him, and the stakes are large. At heart, and the bit the media overlook, is that hes a romantic national. On that front he is consistant and true. The rest is just politics of winning

  • rate this

    Comment number 648.

    Dal Riata: It's not something you SAID, it's what you ARE: Eg "France/Ger/Italy will support Scot EU entry as it will reduce Eng block vote in European commission to that of Spain. win/win/win"
    And the UK can veto Scotland's EU membership.

  • rate this

    Comment number 647.

    Dalriata 639

    I don't want a shrewd politician. I want an honest one and prior to this referendum campaign, Salmond and the SNP were the straightest of the lot by a mile

    That is why I respected them.

    They did an awful lot for the Scotland.

    But throughout this campaign they have obfuscated and dissembled on the less clear aspects along with the best

    Much of their honesty and my respect has gone

  • rate this

    Comment number 646.

    642 noblewilliamw - No, it's an invention of the media. A recent study found that the BBC personalised the independence issue as the wishes of Alex Salmond 35 times & ITV did it 34 times. Not once did either do similar with the "No" campaign.

    643 ommadawn2000 - What I'm saying is no matter what was proposed, it'd be deemed the "wrong" choice. But the currency union makes the most sense.

  • rate this

    Comment number 645.

    Personally my view is we are already in a currency union in which one party runs an unsustainable deficit of over 7% to GDP and spends profiligately on subsidising property price booms in London and the SE and hence inapproriate interest rate rises for other party. The sooner we can drag them into a Fiscal pact that rectifies this the better. The only way to do that is via Independence.

  • rate this

    Comment number 644.

    Drunken Hobo 640

    I did it a little while ago on this blog, but I will summarise it here.

    One nation

    One government

    A shared enterprise by the people of Scotland. BEHOLDEN TO NO-ONE BUT OURSELVES, and reliant upon no-one but ourselves.

    We have the resources and the skills to do it.

    Why does Salmond want to keep Scotland in chains

    Rogues come in a variety of guises and parcels.

  • rate this

    Comment number 643.

    640.Drunken Hobo
    Scaremongering - how so? The Eurozone is an ongoing example of how a shared currenrcy without a common approach to spending and borrowing leads to exessive risk. With that before them why would you expect BoE and Treasury to accept an independent Scotland into sterling without those controls.

    A seperate currency would not involve anything like the same amount of risk for RUK.

  • rate this

    Comment number 642.

    I'm sorry I've lost the post number but someone commented that 9 out of the top 10 posts relate to Salmond more than the independence issue.
    Who's fault is this? Surely it must be Mr Salmonds', he seems to rely on the cult of great leader.
    What seems to get little reporting is the departure of more and more members of the inner management group of the yes campaign.
    No room for dissent possibly?

  • rate this

    Comment number 641.

    Evening all. Bit of talk on here tonight about EU entry and possible blocking by Spain. I'll not presume to make any predictions on that but an observation. The Spanish PM represents a Province in Gallicia in NW Spain home to the largest fishing fleet in Europe supporting 100s of thousands of jobs and Billions of Euros to local economy. That fleet lands 40-50% of its catch from Scottish waters.

  • rate this

    Comment number 640.

    638 zipperty
    "If Scotland is as well placed for "independence" within the EU as you say why is it not similarly placed for true independence."

    Define "true independence".

    639 Dal_Riata - That's been my feelings all along too. Imagine the scaremongering they'd be peddling if we were to create a new currency! Best just to keep "uncertainty" to a minimum; same currency, same head of state.

  • rate this

    Comment number 639.

    Not really important what I think, im not in the media or politics so have no sway over public opinion.
    Alec is a shrewed politician though and he knows the media coverage he would get if he proposed a new and untried currency or the euro. So a lesser of two weevils as Jack Aubrey might say

  • rate this

    Comment number 638.

    Dalriata 637

    I am an Englishman living in Scotland and proud of both.

    The Scots that I know are self reliant and personally independent minded.

    Why does Salmond (or do you) think that an independent Scottish currency would be so little thought of by the "markets"

    If Scotland is as well placed for "independence" within the EU as you say why is it not similarly placed for true independence.

  • rate this

    Comment number 637.

    @625 Zipperty.
    I'm not sure Alec Salmond has any desire to call shots on the £. I think he's more scared of losing votes to peoples concern about a newly established currency being ripped up for loo rolls on the open market. He's an accountant afterall so fully conversant with money flows.
    @628 cowshot.
    the win/win/win refers to France Germany Italy - being three of each you see.


Page 1 of 33



Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.