Join a currency union, and you end up part of a nation state

I don’t go to very many speeches by important-sounding people (it is rarely worth it). But I made an exception yesterday for Mark Carney, who was up in Edinburgh giving a speech about what makes a successful currency union.

He was keen to point out (over and over) that whether an independent Scotland would join with England in currency union and what the terms of any deal might be, are nothing to do with him. He runs a “technocratic organisation” that simply implements the instructions it is given by the government.

However, whatever he might think about the politics (and I know that he is a great fan of a book called What Money Can’t Buy by Michael J Sandel) his talk made it pretty clear that in his view, the SNP is going to find it very hard to get what it says it wants – fiscal independence alongside monetary union. A successful currency union always “requires some ceding of national sovereignty”.

There are excellent reasons for wanting to be inside a currency union with a like-minded country. It makes people more likely to invest across borders when they don’t have to bother with exchange rates; it means everyone has access to more liquid financial markets; and if you have a history of inflation or bad financial management, you can cut your borrowing costs by taking on another country’s financial credibility via their currency.

It can also help with pricing transparency, said Carney, encourage the free flow of labour, and “improve the flow of technology and ideas”. Sounds brilliant, doesn’t it? No wonder the SNP wants to stay in the currency union it is already part of.

But there is a problem. Well, a problem for anyone who wants to live in an independent country and be in currency union. Being in a union can bring huge stresses: if you are uncompetitive, but stuck with a shared currency, you can’t devalue your way out of trouble, and so on. That brings us (or Carney) to what makes a successful currency union.

The answer is to have that union inside a nation state. So it works in the US and in Canada. It doesn’t work in Europe. That’s partly down to having a common language and integrated labour market, but, says Carney, it’s also down to the major feature of successful currency unions – they are also banking unions.

They have a joint deposit guarantee scheme, common supervisory schemes and access to the same central bank as a lender of last resort. They share institutions, and in particular, a “national backstop” in the form of their supranational central bank. But “pooling risk” like this automatically implies a “loss of sovereignty”.

After all, a backstop puts sovereign (taxpayer) funds at risk, and with a deposit guarantee scheme, “all member states must be persuaded that they won’t simply be left with the bill for the mistakes of others”.

It doesn’t stop there. Successful unions don’t just have “common fiscal backing”. They have shared fiscal arrangements – they have a system that transfers cash between regions (the worse-performing get money from the better via a central government); something that helps “mitigate the loss of exchange rate flexibility”.

Europe is heading down the road (with some difficulty) to fiscal union, or at least a “set of robust fiscal rules” in order to survive. When it is done, it will look much like a huge nation state. The degree of fiscal risk sharing, said Carney, is “likely to be significant”. Join a currency union, and you end up part of a nation state.

Look at it all like that and you might find yourself wondering exactly what the point of demands for Scottish independence really are – it clearly isn’t possible to downgrade from being part of a nation state to being in a currency union with the bigger part of that state.

As I have said before, Scotland is effectively a member of five unions (the Crown, defence, currency, European, parliamentary). The SNP plans to keep four of those intact, and as things stand, shift the dial on the fifth (parliamentary union).

But if you believe Mark Carney (and as he says, the politics of the case are nothing to do with him), it is clear the dial can’t be shifted very far. It’s all a bit more ‘devo max’ than independence, isn’t it?

As Bill Jamieson puts in The Scotsman, Scotland has set out on what looks to be a very “steep learning curve about the meaning of sovereignty and its limits”.

* You can find the full speech here should you feel up to it.