The governor of the Bank of England Mark Carney has warned that an independent Scotland would have to give up some of its newly-acquired sovereignty if it wants to hold on to using sterling.
Speaking in Edinburgh, Mr Carney said “a durable, successful currency union requires some ceding of national sovereignty”, warning that the euro zone’s failure to put in place proper rules has “been demonstrated clearly”.
The currency to be used by an independent Scotland has dominated the referendum debate for months, with Scottish National Party leader and first minister Alex Salmond saying there is no issue about Scotland's right to do so.
Negotiations between Scotland and the rest of the UK would have to take place after independence to ensure that “the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place”, Mr Carney said.
The euro zone was poorly set up, he warned, and has faced “sovereign debt crises, financial fragmentation and large divergences in economic performance”, though it is “now beginning to rectify its institutional shortcomings”.
Meanwhile, Mr Carney pointed out that the existing banking union between Scotland and the rest of the UK – which was forced to come into play to save RBS and the Bank of Scotland – "has proved durable and efficient".
A single prudential supervisor exists, as does single deposit guarantee scheme backed by the central government, along with a common central bank “able to act as lender of last resort across the union, and also backed by the central government. These arrangements help ensure that Scotland can sustain a banking system whose collective balance sheet is substantially larger than its GDP,” he told the Scottish Council for Development & Industry in Edinburgh.
Euro zone crisis
Highlighting possible difficulties ahead, Mr Carney said the euro zone crisis has shown how difficult it is to create such systems afresh.
His speech was interpreted differently by both sides. Former Labour chancellor Alistair Darling, who is heading the pro-union campaign, said Mr Carney's views were "devastating" for the SNP's arguments.
However, the SNP said Mr Carney had not scuppered the prospects for a currency union since he had made it “explicitly clear” that the Bank of England would implement agreements reached between London and Edinburgh.
