Ae Fond Diss
Mark Carney is unlikely to be welcomed back by Scottish secessionists. The Bank of England governor’s speech in Edinburgh on Jan. 29 studiously avoided any criticism of the idea of Scotland leaving the United Kingdom. But it did undermine the intellectual basis of separation.
On the surface, Carney’s speech was little more than a canter around the conditions that would need to be in place were Scotland and the rest of the UK to share a central bank as part of a currency union, as secessionists wish. He said there would need to be freedom of movement of labour, capital and goods; fiscal transfers to areas whose economies suffer from having an inappropriate interest rate; and banking union.
Scotland scores okay on some of these factors. The BoE reckons a UK currency union could have scope for higher labour mobility, while about three-quarters of Scottish exports and its imports go to, and come from, the rest of the UK. But this integration rests on fiscal transfers from Westminster, which work to even out regional disparities in economic performance.
Independence would complicate these transfers. English taxpayers would assume the same controversial role as Germans in the euro zone – with Scotland all too easily joining the cohort of weaker peripheral states. And the English might be much less willing to subsidise an independent Scotland.
Scottish banks present an even bigger headache. As a slide attached to Carney’s speech points out, Scotland’s banking assets were in 2012 more than 12 times its GDP. Acting as lender of last resort to Scottish banks is an obvious risk for UK taxpayers, and London would demand significant regulatory power and compensation to keep carrying the burden. It might also want a fat share of oil revenues, which constitute a big chunk of an independent Scotland’s GDP.
As the euro zone is currently discovering, sharing the same currency ultimately requires a common fiscal and financial approach. If the important decisions are made federally, the next logical step is full political union. Scots secessionists should ponder Carney’s requirements for a currency union. Even if they achieve political independence, operating in a BoE straitjacket could render their freedom meaningless.