An independent Scotland must cede some sovereignty if it keeps the pound or face a similar fate to bailed-out eurozone nations Greece and Portugal if the country’s debt gets out of control, Mark Carney has warned.
The Governor of the Bank of England said failure to secure the credible “foundations” of a common fiscal backstop and policies risked putting a currency union between an independent Scotland and the rest of the United Kingdom at risk, reports The Telegraph.
In his first trip to Scotland since becoming Governor, Mr Carney compared a Scottish secession and its desire to keep the pound to the eurozone, which shares a single currency without common fiscal policies.
He said while currency unions “can import credibility”, “promote integration” and increase labour mobility, there were also “potentially large costs [associated with] giving up an independent monetary policy tailored to the needs of the region and a flexible exchange rate that can help absorb shocks.”
Mr Carney said that without a system of risk-sharing and pooling of fiscal resources, Scotland could suffer the same fate as countries such as Portugal and Greece, which have endured painful internal devaluation in the absence of being able to weaken their currency.
“Being in a currency union can amplify fiscal stress, and increase both the risks and consequences of financial instability,” said Mr Carney.
“In short, a durable, successful currency union requires some ceding of national sovereignty.”
He warned that the Scottish government could be forced to adopt “pro-cyclical” fiscal policies in order to combat economic shocks, which could aggravate the downturn.
“In the extreme, adverse fiscal dynamics could call into question a country’s membership of the union, creating the possibility of self-fulfilling ‘runs’ on bank and sovereign debt absent central bank support. Such adverse feedback loops turned recessions into depressions in several European countries in recent years,” Mr Carney said.
He also warned British taxpayers could end up being left on the hook for an independent Scotland’s debt if it kept the pound. Mr Carney noted that even tight fiscal rules would not eliminate “moral hazard” as “credible sanctions for breaking those rules” were “hard to develop”.
Alex Salmond, Scotland’s first minister, has said that Scotland would sign a “fiscal stability pact” if it were to become independent. He also acknowledged that this would “limit its room for manoeuvre”.
The White Paper also stated that the Bank of England would be “accountable to both countries” and “continue to provide lender of last resort facilities and retain its role in dealing with financial institutions which posed a systemic risk.”
Although Mr Carney stressed that he was not in Scotland to “pass judgment” on its desire to keep the pound if it were to secede, he highlighted that under current arrangements, use of the Bank of England as the lender of last resort is indemnified by Chancellor George Osborne, “because [providing finance to institutions] put[s] substantial public funds at risk”.
While the Treasury has pledged to honour all UK government debt issued up to the date of Scottish independence, it is unlikely to do the same if Scotland becomes independent.
“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 stability,” said Mr Carney.
Mr Carney also stressed that a banking union and free movement of labour were key pillars of an effective currency union.
