As a Canadian, Mark Carney is no stranger to debates on independence. As Bank of England governor, he’s now entering another one.
Carney met Scottish First Minister Alex Salmond today before addressing business leaders in Edinburgh ahead of a Sept. 18 referendum on the country breaking away from the rest of the U.K. Salmond and his Scottish National Party plan to keep the pound and the central bank should they prevail, policies the British government in London has said are unlikely to work.
In his final speech before leaving the Bank of Canada last year to cross the Atlantic, Carney told an audience in Quebec that Canada’s monetary union had helped foster prosperity. The French-speaking province voted twice, in 1980 and 1995, on independence and both times opted to stay part of Canada.
“Some of the biggest questions are around currency union,” Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said yesterday. “If there are indications of what sort of conditionality might be required under any currency union, that would be of interest.”
Carney indicated last week in an interview with the BBC’s Newsnight television program that he would speak about independence on his trip this week to Scotland.
The pound is at the center of the debate over plans by Salmond and his semi-autonomous government in Edinburgh to unravel the U.K. after 307 years.
He says the rest of Britain would benefit because Scotland’s economy would be supported by North Sea oil and gas revenue. What’s more, Scotland has a proportional claim to the currency and central bank along with the rest of the U.K., Salmond said on Nov. 26 when unveiling his government’s blueprint for Europe’s newest sovereign state.
Salmond said after their meeting today that Carney was open to furthering technical talks.
“The discussion was private but I welcome that the governor has confirmed his willingness to continue technical discussions between the Scottish Government and the Bank of England in advance of the referendum,” Salmond said.
Analysts point to the potential risk and cost to the rest of the U.K. should an independent Scotland using the pound retain access to the Bank of England’s emergency liquidity framework. Also there’s the question of whether U.K. taxpayers might be liable for supporting Scotland’s financial industry.
“There’s so much up in the air in terms of negotiation, we don’t really know what the impact will be if Scotland continued using the pound,” said Martin Beck, an economist at Capital Economics Ltd. “But the policy of a Scottish government using sterling could impact on the interest rates in the U.K., and therefore the U.K. authorities would probably want to exercise some control over what goes on in Scotland.”
The Scottish government currently has control over policy areas including health, transportation, justice and education with money transferred from London. The U.K. dictates the broader economy and spending, defense and foreign affairs.
While opinion polls this week showed the first significant movement toward favoring independence, more voters in Scotland say they’d prefer to stick with the status quo.
A survey by ICM for the Scotland on Sunday newspaper found 37 percent of respondents would vote for independence in the referendum, up five percentage points from a comparable poll in September. Those who would opt to stay part of the U.K. dropped to 44 percent from 49 percent.
The pound advanced more than 10 percent in the past year, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Sterling was little changed at $1.6600 as of 8:47 a.m. London time and at 82.39 pence per euro.
Topics Carney and Salmond may discuss include access of Scottish banks to the Bank of England’s lender-of-last-resort facilities, and whether an independent Scotland had any representation on the bank’s policy committees, said Beck.
From a financial stability perspective, it may be beneficial for an independent Scotland and the rest of the U.K. to share the central bank due to large “cross-border exposures,” he said. If so, the Bank of England, and therefore taxpayers across the U.K., might be liable if Scottish lenders needed emergency funding.
At the height of the global financial crisis, Edinburgh-based lenders Royal Bank of Scotland and the then HBOS Plc required emergency liquidity assistance that at its peak totaled 65.1 billion pounds ($108 billion).
Carney may want Scottish banks to satisfy U.K. regulations and be subject to financial stability powers, Beck said.
“If we had a banking crisis in the future and an independent Scotland using sterling, then the Bank of England would have to stand behind Scottish banks, and behind the Bank of England stands the U.K. taxpayer,” he said.
Any discussion around currency union would have to reference financial stability, Walker at RBS said.
“You’re talking about 300 years of political integration - - disentangling that would present logistical challenges,” he said. “In practice there would be some cross border co-ordination in terms of monetary and financial stability.”
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