Before Mark Carney went to Edinburgh last month to meet with leaders to discuss use of the pound sterling in an independent Scotland; debate surrounding the referendum this year was strangely subdued.
The Bank of England governor’s visit marked a pivotal point.
He delivered a scholarly lecture on currency unions and let the financial world know that a “yes” referendum vote to Scottish independence and a bid to keep the pound currency after separation would bring a range of economic complexities.
Carney argued that Scotland’s First Minister, Alex Salmond, must be prepared to cede some sovereignty to Whitehall and the Bank of England — if the “yes” campaign is successful.
The eurozone has taught us that any currency union will fail if it lacks a strong degree of banking fiscal integration and regulation.
For the countries on the periphery of Europe, the single currency has had terrible consequences.
In Greece the unemployment rate stands at 27.8 per cent of the workforce and unemployment among young people stands at more than 55 per cent. The high level of economic and social dislocation has provoked the rise of the far-right parties including Golden Dawn in Greece, Jobbik in Hungary and Marine le Pen’s French National Front. With the far-right comes the threat of antisemitism, a ban on shechita and brit milah.
While a breakaway Scotland is unlikely to bring in such far-right extremism; there is political uncertainty that comes with the potential currency change. People have underestimated the dramatic impact that could ensue.
At present, Scotland’s monetary policy and interest rates are set by the Bank of England’s Monetary Policy Committee — chaired by Carney. It set interest rates for the UK and protects the value of the pound sterling against foreign exchange markets.
But people mistakenly believe that there is already a degree of monetary independence because Scottish banks issue their own notes with their own independent symbols.
In fact, these notes are only issued on the Bank of England’s authority. The Bank has guaranteed them by issuing high-value banknotes, with a £100 million face value that Scottish banks must hold as a control and security against the notes they issue.
If Scotland were to vote for independence and negotiate a deal with the rest of the UK to keep the pound, it would also have to cede a degree of fiscal policy to the Bank of England. Scotland could also decide to have a larger public sector.
But to achieve that it would also have to put in place a high taxation structure so levels of public borrowing and debt in Scotland would be synchronised.
That might seem a simple, but the consequences for Scotland’s economy, as businesses and entrepreneurs headed south of the border in search of low taxation, could be devastating.
Another major complication is the size of Scotland’s banking sector; at 12.5 times the country’s gross domestic product is the largest in the western world.
If the pound were to be Scotland’s currency, it should have to accept the Bank of England as its regulator and lender of the last resort in times of trouble.
It is unlikely that the Scottish banks could remain so dominant.
Lloyds Banking Group, currently headquartered in Scotland, would almost certainly move to the City of London leaving behind the Bank of Scotland.
Similarly, the state-owned Royal Bank of Scotland could shed its English NatWest branch, as that too might move back to London.
Thousands of jobs would be lost and the remaining bank parts would require injections of new capital.
There are other potential monetary models for Scotland including joining the euro, a long drawn out process, or having an independent Scottish pound that shadowed sterling or the euro. Both would bring a risk of turmoil and cause loss of sovereignty.
One only has to look at Argentina to understand the instability that resulted from both shadowing the US dollar and then disengaging with it. It has led to years of economic and social chaos.
Scotland’s aspiration of political independence is understandable — but the economic consequences are high-risk and potentially