Currency Economics of Independence

Carney visit adds to good week for Yes Scotland

Carney SalmondMark Carney, the Governor of the UK’s Central Bank, visited Edinburgh to discuss technical issues surrounding the establishment of a currency area after independence.

It follows an independent Scotland on Sunday opinion poll which shows momentum with independence campaigners with a 5% increase in Yes support putting Yes Scotland in striking distance of victory.

Mark Carney’s position is politically independent, so his focus is not the politicking but rather on ensuring the strength of the economy across all areas that use the pound sterling.

These latest in a series of preparatory technical discussions signal an important step in ensuring sensible monetary structures in the common interests of business north and south of the border after independence. They also demonstrate that the continuation of the sterling union is being taken seriously by those who understand the technical details. So much for a “policy dead in the water” as suggested recently by No campaigners.

In his speech Mr Carney stated that the Central Bank would implement a currency union, following negotiations between Scotland and the rest of the UK.

He also set out the benefits of a currency union including eliminating transaction costs, promoting investment & encouraging integration. And he highlighted some of the reasons why a currency union would suit the social and economic landscape of Britain, not least the lack of a language barrier to the movement of labour supply. Technical challenges highlighted in Mr Carney’s speech – such as fiscal and banking structures – were recognised by both the Scottish Government’s independence White Paper and the independent Fiscal Commission Working Group. In this respect, it was interesting that Mr Carney specifically mentioned the importance in his education of Sir James A Mirrlees, one of the members of Scotland’s Fiscal Commission Working Group, an architect of the currency union proposal and a nobel prize winner.

There was nothing in what Mr Carney had to say about the sharing of fiscal structures which suggested any of the policies like investing capital investment, reducing corporation tax, scrapping air passenger duty and an extension of free childcare to grow Scotland’s economy would not be possible within a currency union. In fact, much of the points he highlighted involve the kinds of sensible fiscal parameters and structures a financially prudent independent country would want, especially one that recognises the benefits of sharing services in a globalising world. Moreover, all western countries including the UK must learn the lessons of the credit crisis and over borrowing. Prudent fiscal parameters will surely apply to both Scotland and the rest of the UK in future and a Scottish negotiating team should insist on them.

Mr Carney went on to note the strength of Scotland’s economy relative to the UK, the fact that the UK’s recent albeit modest economic recovery began in Scotland. No doubt as a result of the Scottish Government’s decision to invest more capital in infrastructure and the associated jobs and growth. If only Scotland had the powers to do even more when the recession hit, perhaps the impact could have been even shorter and shallower than it was in comparison to the UK as a whole.

Future technical discussions will take place to develop the currency union as Scotland moves towards becoming an independent country. As Business for Scotland has pointed out, market pressure will grow on the UK Government to support this plan – just as pressure forced it to clarify arrangements on UK debt.

10 reasons why the currency union is to Scotland’s and the rest of the UK’s mutual economic benefit.

1) The rest of the UK relies on open trade with Scotland

Scotland is the rest of the UK’s most important and second largest trading market. Billions of pounds of goods arrive from England alone every month creating / safeguarding hundreds of thousands of jobs in the rest of the UK that rely upon having access to the Scottish market. For Westminster to enforce a currency barrier would go against rUK’s economic interests.

2) Scotland’s balance of payments ensures the stability of the pound sterling

Scotland is a key market for exports within the UK. The trading surplus of oil and gas, whisky and manufacturing provide stability for the UK balance of payments. This maintains the worth of the currency in international markets. rUK requires Scotland’s membership of sterling to protect the currency.

3) Economic experts support a currency union

The independent Fiscal Commission Working Group of globally renowned economists produced a considerable report into the macroeconomics of an independent Scotland conclusively supporting a currency union.

4) The financial markets and institutions support a currency union

Oliver Harvey, strategist for Deutsche Bank, described a Scotland-rUK Sterling arrangement as an “optimal currency area”

Valentin Marinov, the head of European Group-of-10 currency strategy at Citigroup added: “the potential introduction of a currency union need not affect significantly trade and other flows.”

5) The Treasury followed market pressure on debt and they will do the same on currency

The UK Treasury recently confirmed that they will secure the repayment of all the UK’s current debts. This was as a result of queries from the financial markets. Similarly, there will be calls for the UK Government to make quickly clarify the currency position if Scotland becomes independent. All the common sense economic evidence favours a currency union.

6) Mervyn King: UK Treasury approach would be “entirely different” following Yes vote.

Former Bank of England Governor Mervyn King has said that the UK Treasury approach to agreeing a currency union will be entirely different following independence. As it stands, Westminster politicians are engaging in political posturing during the referendum debate. After the referendum is finished economic common sense will prevail. The former Governor of the UK’s Central Bank is well placed to understand this.

7) Professor Hughes-Hallet dismissed Westminster politicians for “political posturing”

In a recent interview with BBC Scotland, Professor Andrew Hughes-Hallett, an expert in economics and public policy at George Mason University in the US and a Professor at the University of St. Andrew’s, supported the currency union proposal.

He also said that: “The question is the running of it [the currency union], not the existence of it.” Westminster politicians, in his view, are engaging in “political posturing” while ignoring the economic evidence.

8) Westminster politicians will not rule out a currency union because it makes economic sense

Although Westminster politicians are negative and dismissive when it comes to cooperation after independence, all key representatives will not rule out a currency union. Shadow Chancellor Ed Balls recently said he would hold discussions on the issue. Chancellor George Osborne knows that after a Yes vote the situation would change rapidly and he would have to act in the best interests of business and trade in the rest of the UK which means supporting a currency union. And now we know all the technical work will be complete.

Edit: George Osborne’s attempt to claim Scotland couldn’t use the pound, quickly backfired when another UK minister briefed the Guardian by saying “Of course there will be a currency union”.

9) The Governor of the UK’s Central Bank is already discussing the technicalities

Mark Carney’s presentation in Edinburgh was a key step towards a currency union after independence. It laid out the benefits of maintaining a currency union and opened up further dialogue between the Scottish Government, the Fiscal Commission Working Group and the Central Bank. The challenges that were set out by the Governor will be taken seriously – and there is a substantial length of time until March 2016 (when Scotland would become independent) to establish working arrangements and institutions to address them.

10) Even Alistair Darling says that a currency union is “logical” & “desirable”

Alistair Darling, leading the No Campaign, understands that the politics before the referendum will be overtaken by the economic common sense that follows it.

On Newsnight Scotland he said “Of course it would be desirable to have a currency union…If you have independence or separation, of course the currency union is logical.”


Governor Mark Carney’s intervention should be welcomed. It sets out the direction of travel towards agreeing the technical aspects of a currency union after independence.

That the Governor of the UK’s Central Bank has taken a steady and pragmatic approach to this issue demonstrates that the economic case for both independence and a currency union remains serious. It’s the economic interests – both north and south – that will ensure the success of a currency union after independence.

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About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland Gordon ran a business strategy and social media, sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and Believe in Scotland.


  • True to his name, Mr Carney put on a good show of find-the-lady for the mainstream mediocrity.

  • The danger is that with too much posture painting, the rUK might find themselves trapped in a corner.

  • Mr Carney talks of loss of an element of ‘sovereignty’. It seems to me use of this word is misleading – ‘autonomy’ is more appropriate. Sovereignty remains with an independent Scotland in that its Parliament remains able to decide whether to remain in a formal currency union, whether Scotland adopts its own currency, simply uses Sterling, joins the Euro or whatever. The same options also rest with the rUK Parliament.

    A formal agreement in respect of a currency union will of necessity address things like extent and proportion of deficit and, by extension, the total revenue raised and public expenditure committed. However, the fiscal framework by which this is achieved need not be the same either side of the border. Scotland will, through independence, be able structure things in ways its Government considers more suitable.

    • What all of the papers/TV have not picked up s that Mr Carney was very careful not to say which state would cede sovereignty/autonomous decision making. There is a strong case that rUK would have to go along with Scottish Government decisions on fiscal policy as well..

      If the two governments came to blows (like Czech Republic and Slovakia), Scotland pulling out of the currency would easily force a significant currency devaluation for £ Sterling.

      i.e. The Scottish government holds the ultimate card.

  • Why is it that we never have anyone except you on telly who can articulate the simple economic facts of the debate?
    We are told “Scotland contributed £57bn of the UK’s taxes, but received about £65bn in spending”
    The trouble with such a statement given by the No camp is that it comes with the tacit implication that the difference, £8bn, somehow represents a subsidy by rest of the UK to Scotland.
    It doesn’t – it’s just our fiscal deficit. Darling and the rest know this perfectly well, and omit to mention that the rUK runs a deficit too, as does virtually every developed country (Norway being the significant exception), and that rUK’s deficit is larger than ours, per capita.
    This is a typical “Better Together” technique – just give half a fact, and invite the general public to draw an erroneous conclusion.
    The reality is that we subsidise them, because we pay the whole of the interest on our own deficit and part of the interest on theirs too.
    The equivalent figures are:
    Total UK Tax £573bn; Spending £694bn; Deficit £121bn
    For the remaining part of the UK without Scotland, the figures are:
    Total rUK Tax £516bn; Spending £629bn; Deficit £113bn

    The figures quoted above are from GERS, for 2012. The problem with these figures is that they ascribe to Scotland a proportionate share of UK “national” spending, on defence, foreign affairs etc, but also interest on the UK debt, resulting from the accumulation of these deficits.
    Looking at these figures, going back to 1980, we can broadly match up many of these and other published figures, such as the UK’s £1.1 trillion debt (in 2012). We can also identify the £64bn which Scotland has paid as its population share of interest on UK debt.

    The point is that if we look at Scotland’s figures going back to 1980, and the significant surpluses we were running, then we would have quickly extinguished our debt, had we run our own finances, using the GERS data. Therefore we wouldn’t have paid anything like £64bn interest. It is likely we would have paid about £2.5bn in the early 1980s, and nothing since, because we would have been in surplus throughout, even now.

    But that ignores the fact that we would have been earning on our surplus (call it our “oil fund”). We could have lent our cumulative surplus to the UK, rather than just giving it to them free, which is what we actually did. The UK government borrows by issuing Government Stock and paying interest on it, so that is what Scotland could have done with our surplus. The articles in the Times and Scotsman mention that we could have had a £50bn surplus. But it would most likely have been much more than that. Looking at the rates paid by the UK Government on borrowing over the years, which were typically 10-12% in the 1980s and early 1990s, we could have earned £224bn interest on our growing surplus, and we would now have a surplus of £230bn.

    A few seconds ago · Like

    • al, I have tried to explain this to people so much but due to the length of the conversation and statement, people lose interest.

      I totally agree with everything you have said but people will only care to listen if we can shorten our factual analysis.

      Such a pity that people are lazy and don’t put the time into research.

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