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By George Kerevan
WHO made the following positive statements about the potential of a currency union between an independent Scotland and rUK?
"…it eliminates the transactions costs associated with using, and switching between, different currencies…Sharing a currency can promote investment by reducing uncertainty about currency movements and giving businesses access to deeper, more liquid financial markets… Sharing a currency can also help to increase the mobility of labour and capital, raise trade in goods and services, and improve the flow of technology and ideas."
Answer: Mark Carney, Governor of the Bank of England. Speaking in Edinburgh on 29 January – not that you would have guessed this was his position if you read the next morning's London press headlines.
For the London media had ventured north of the M4 for 24 hours in the hope that Carney would somehow denounce the idea of a common sterling union being proposed by the Scottish Government. Unfortunately for them, Carney made very clear at the outset of his speech that it "does not pass judgement on the relative merits of the different currency options for an independent Scotland, but instead draws attention to the key issues". Note: "does not pass judgement".
Instead, Carney – as the person who would have to rub such a currency union - confined himself to laying out the pros and cons, before stating unequivocally that:
"Any arrangement to retain sterling in an independent Scotland would need to be negotiated between the Westminster and Scottish Parliaments. The Bank of England would implement whatever monetary arrangements were put in place".
However the media had come looking for a negative story and were determined to find one. No surprise then that Glenn Campbell of the BBC immediately asked:
"Could you as Governor make a currency union between an independent Scotland and the rest of the UK work?"
Of course the Governor had already said it was his job to implement whatever the Scottish and rUK governments decided. Patiently he repeated his position to Campbell: "The Bank of England, which is an impartial technocratic institution, would implement whatever monetary arrangements were decided to the best of our ability…"
Game, set and match you might say. But not for London's media finest. Enter next Richard Edgar of ITV News who suggested that Carney's speech indicated "that agreeing [a currency union] would be very difficult. Can you briefly explain why?"
But Carney was having none of this. He told Edgar: "I didn't mean to suggest that, I merely meant to underscore what the core issues were and then I would suggest it is the responsibility of the parliaments to outline how they would address those issues."
In fact Carney had gone to great lengths in his speech to explain the ground rules for a successful currency union. Top of the list, it requires a great deal of integration (in productivity, trade, capital and labour flows) of the economies of the member states because "similar economies won't suffer from a ‘one size fits all' monetary policy". But he immediately went on to say that "Scotland and the rest of the UK are highly integrated".
But what about an independent Scotland with North Sea oil? Would the difference in industrial structures undermine the proposed sterling area (as I was asked by Gordon Brewer on BBC Newsnight)? Carney had an answer for this too, specifically pointing to the fact that the internal Canadian monetary union (which he used to manage) "works well" despite having substantially larger industrial variations between provinces than even the US economy.
What Carney did point out was that a common currency zone would need common institutions to run it and that meant pooling a degree of national sovereignty. But this is true of many aspects of international cooperation. The point is you need to have sovereignty in order to pool it and the Scottish people lack sovereignty entirely.
The media pack tried another tack. Faisal Islam of Channel 4 News asked: "Is it the case that you feel that an independent Scotland would be too small to host giant universal banks like RBS?"
Faisal has obviously never heard of Switzerland or Luxembourg, where the banks are even bigger relative to the national economy, and seem to do very well. But Carney was patient as ever, replying: "That's clearly not what we said - or I said - in the speech."
Instead, Carney argued "whether Scotland, the United Kingdom, Europe, the US, Canada - we have to end too big to fail and we have to finish these various [banking] reforms that are being worked through…"
None of the hacks seemed to have noticed a reference at the start of Carney's speech that paid tribute to Scottish economists. He noted "the
pioneering work of Scottish economists from Adam Smith to Sir James Mirrlees".
The mention of Mirrlees is very significant, if not a coded message. Mirrlees (who hails from Kirkcudbright) won the Nobel Prize for economics in 1996. But he was also Carney's supervisor at Oxford while Carney was doing his PhD thesis. The two remain in touch. This is interesting as Mirrlees is a member of the Scottish Government's Fiscal Commission, which drew up the plan for a currency union.
It is obvious from the questions being asked by some of the London journalists at Carney's Edinburgh press conference that they had heard of neither James Mirrlees nor the Fiscal Commission (far less read the latter's reports). However, every single issue and point raised by Carney in his speech had already been discussed and dealt with by the Fiscal Commission.
Some of the journalists tried to focus the discussion on the exact details of how a fiscal pact would operate between Scotland and rUK in any sterling zone. The subtext is that the No campaign is trying to claim Scotland will have to give up a lot of its independence to the Bank of England in order to secure a common pound. In particular, it is alleged it would have to give up real control over fiscal policy (taxes and public spending) as well as over interest rates.
This line of argument is entirely bogus and has already been dealt with by the Fiscal Commission. The Commission's First Report (p94) sets out how things would work:
"Limitations on borrowing and deficits are typically at the composite level, and still allow for flexibilities in the design of the underlying tax system and a range of specific policies suitable for each Member State. Indeed, such flexibility is vital to the success of a monetary union as it provides the autonomy and policy levers to target country specific differences (advantages and weaknesses) which cannot be tackled with a common monetary policy. This should help ensure alignment in terms of economic performance."
Translated, that means member countries are banned from making unsustainable borrowing on the level Gordon Brown introduced when he was Chancellor (subsequently wrecking the finances of the entire UK). But inside this sensible spending envelope, countries are free to tailor spending patterns and individual tax rates as suits them. Indeed, this is a necessity in order to promote economic efficiency.
We should be clear that there is room for a degree of argument between independent Scotland and the rUK Treasury over how to interpret and police such fiscal rules. The rUK Treasury might start demanding a veto over the detailed breakdown of the Scottish budget. However, that is not necessary in order to run a sterling union or guarantee reasonable fiscal sustainability. And it must be reiterated, the whole point about pooling sovereignty to create a common currency zone is that rUK would have to abide by exactly the same rules as Scotland.
Overall, Carney's speech was very much in line with the thinking laid out in the Fiscal Commission reports. And judging from the way Carney dealt with the London media, he is someone an independent Scotland can do business with. I can't say the same thing for the London hacks.