CURRENCY UNION NEEDS FOUNDATIONS FOR ‘A DURABLE UNION’

Technical discussions about a currency union

When making their minds up about how to vote in this year’s Independence Referendum, the question of what currency Scotland will use in the event of a “Yes” result is not necessarily at the forefront of everyone’s mind. Indeed, in a recent survey those asked indicated quite clearly that it was well down their list of priorities.

The Scottish Government wants to keep the pound
The Scottish Government wants to keep the pound
However, this is one of those seemingly technical issues which will be causing many civil servants and politicians to have sleepless nights. In its White Paper published last year, the Scottish government indicated a clear preference for keeping the Pound. Its argument was simple and focused on the fact that it would be in the best interests of both countries for the existing arrangements to continue.

By contrast, a number of those ‘experts’ based in London have insisted that such a currency union would be at best difficult and at worst impossible! They point out that a future government in an independent Scotland would in effect be handing power over its currency to a foreign state – in this case England. This would mean that Scottish ministers did not have, as they’ve long desired, full control over the “levers of economic power”. They’re also worried by what might happen if a left-leaning government in Scotland adopted economic policies at odds with a right-leaning government in Westminster.

Mark Carney Governor of the Bank of England
Mark Carney
Governor of the Bank of England
The arrival of the Governor of the Bank of England, Mark Carney, to speak at an event in Edinburgh has helped to focus minds. Mr Carney had travelled north at the invitation of the Scottish Council for Development and Industry. He was keen to stress that the final decision would not be his but would be taken by the Parliaments of the two countries – but he went on to emphasise that this would require careful consideration as part of what he described as “the necessary foundations for a durable union.”

He pointed out that failure to agree such foundations would be fraught with risk, adding that the problems faced by the Eurozone clearly illustrated what could happen. “The euro area,” he said, “is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty. It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.”

John Swinney MSP
John Swinney MSP
Scotland’s Finance Secretary, John Swinney, argued that the Bank of England would implement whatever monetary arrangements were agreed, adding that the benefits of a currency union were clear for both sides “…in terms of issues like promoting investment eliminating transaction costs, reducing borrowing costs and facilitating the movement of labour and capital, and we welcome the Governor’s recognition of these benefits.”

What Mr Carney has agreed to do is to continue a dialogue started by his predecessor, in which the Bank will provide “technical analysis” of the issues affecting the final decisions over the currency before the referendum. Before his speech, he had a private meeting with First Minister Alex Salmond who later described the outcome as having gone “extremely well”.

In a statement, the Prime Minister’s office said it was “no surprise” that the Governor had wanted to set out his views on such technical issues. It went on to acknowledge that the issue around currency was an important part of the debate currently going on in Scotland, adding that the people of Scotland would want to be as well informed as possible before taking the decision in September.