Governor: Currency Union Yes

I am writing this on Wednesday morning ahead of Mark Carney’s speech in Edinburgh. I will listen to it and judge it against his words made before he left his last post as Canada’s banker which, as I explain below, sound at times remarkably similar to what the Scottish government is proposing in monetary union.

Whatever you read into his words today, as Britain’s Bank Governor, Mark Carney is historically and by repute, a great believer in monetary union, citing it as one of the pillars of Canada’s economic success.

In his last speech as Canada’s central banker he said: “Canada’s monetary union has the essential elements of an effective currency union: an integrated economy, fiscal federalism and labour market flexibility.”

Scotland and the rUK have developed a closely aligned economy built up throughout the modern era and while, like Canadian provinces, output varies, the economy is highly integrated. Carney also points out that during the recession and its aftermath, the importance of interprovincial (think Scotland-England) trade was clear. For example, the increased demand from other provinces for Quebec’s goods and services significantly offset international exports lost as overseas business dried up.

Although there is one exchange rate for Canada as a whole (as there would be in a UK sterling zone), price differentials across the country yield different real provincial exchange rates. When higher energy prices stimulate production and investment in mineral-rich Alberta, extraction, construction and labour costs there rise. This increases the real Alberta exchange rate, making goods and services from the other provinces, including Quebec, more competitive. As a result they are better value and interprovincial trade (again Scotland-England) is boosted, spreading benefits throughout the economy. If you read Scotland for Alberta, he signals that a second oil boom for example would bring benefits consequential for England.

He was even then focused on the differences between a successful union with integrated economies (Scotland and the UK) and the fragmented Eurozone experience, cited by Unionist critics as a downside of the SNP plan. He pointed out how different productivity and national debt in Mediterranean countries contrasted with the more fiscally prudent north and created imbalance.

“Since the euro was introduced, Spanish competitiveness (as measured by GDP) has fallen by about 30 per cent relative to Germany. During the same period, the Alberta exchange rate moved even more dramatically, rising 40 per cent relative to Quebec. Spain is experiencing a balance of payments crisis with large current account deficits, funded in part by foreign purchases of real estate and inflows to the Spanish banking system. When these dried up, domestic activity collapsed. There are few institutional mechanisms within the Economic and Monetary Union (EMU) at present to offset the shock.”  But in Alberta’s case, a rising tide had lifted all boats. “That is because the Canadian monetary union has what Europe does not: a single financial market; a flexible, national labour market; and significant fiscal transfers. These smooth the adjustments brought about by the large shifts in relative prices.”

And, echoing his words, here’s what the SNP White Paper has to say. The UK is Scotland’s principal trading partner accounting for 2/3 of exports in 2011, whilst figures cited by HM Treasury suggest that Scotland is the UK’s second largest trading partner with exports to Scotland greater than to Brazil, South Africa, Russia, India, China and Japan put together

There is clear evidence of companies operating in Scotland and the UK with complex cross-border supply chains

A high degree of labour mobility – helped by transport links, culture and language

On key measurements of an optimal currency area, the Scottish and UK economies score well – for example, similar levels of productivity

Evidence of economic cycles shows that while there have been periods of temporary divergence, there is a relatively high degree of synchronicity in short-term economic trends. Sounds to me like Carney’s prescription for Canada can be applied to Scotland.

The White Paper goes on: Where financial resource was required to secure financial stability, there will be shared contributions from both the Scottish and Westminster Governments based on the principle that financial stability is of mutual benefit to consumers in both countries.

This will reflect the fact that financial institutions both in Scotland and the UK operate – and will continue to operate – with customers in Scotland, England, Wales and Northern Ireland and their stability will benefit all concerned.

Scotland will play our full part in protecting the financial system on these isles, taking responsibility for activity within Scotland as part of joint action across the Sterling Area.

The Scottish Government recognises that a sustainable fiscal framework is important no matter the currency arrangement. However, it is particularly important in a well-functioning monetary union to avoid significant divergences in fiscal balances.

That is why such a monetary framework will require a fiscal sustainability agreement between Scotland and the rest of the UK, which will apply to both governments and cover overall net borrowing and debt. Given Scotland’s healthier financial position we anticipate that Scotland will be in a strong position to deliver this.


I’m sure those with trained economic eyes will be able, as ever, to read different outcomes into all this. But I have to say, in reading the White Paper and the Carney speech, they chimed with me, even in the jargon of the market, as broadly similar, at times remarkable so. And it’s worth remembering as the SNP asks for representation on the Bank of England, that in Canada the provinces are all represented in the management of the Central Bank, although not in the interest-setting area. That is because they are recognized as having a share in the bank and its assets and with their own direct interest in the currency.

Two other thoughts. Carney points out that from the mid-1990s onwards, successive Ottawa governments ran more than a decade of surpluses, cutting the government debt-to-GDP ratio from almost 70 per cent in 1995 to 22 per cent in 2008. As a result, Canada’s net debt relative to GDP went from being the second-highest ratio among the G-7 countries in 1995 to the lowest. Britain has one of the highest. What were Gordon Brown and Alistair Darling doing at the Treasury?

Also I liked Carney’s view on where real investment should go – into human capital echoing I think the strong stand taken on education by the SNP, notably on free tuition. “In a rapidly shifting world, only sustained education, ingenuity and investment can maintain competitiveness. This means we must continuously invest in our workforce. With technology and trade transforming the workplace, the need to improve skills across the spectrum of work has never been greater.” I wonder if Mark’s a secret Yes man?

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0 thoughts on “Governor: Currency Union Yes

  1. Canada is a federation with more than a currency union tying it together. Yes campaigners are SUPPOSED to be seeking independence and the opportunity to create divergence in the two economies (Scotland/England) when a currency union would not be appropriate.

  2. Mark Carney will work toward stability. That’s what he was brought in to do and nothing will interfere with that aim.
    He comes from an Independent country…of course he would be a Yes!
    Nice article.

  3. Lets hope he is not even a wise man but a decent man. Decent enough to do what’s in the Bank of England’s interest, Scotland’s interest and not just be another political pawn .

    One can only hope

    Great Article

  4. Margaret Brogan

    I find this very interesting, as will my sister in Canada, who is doing a great job for the Yes campaign out there! They have no vote in the referendum, but there’s lots of interest, much of it negative, especially among expats. I said she should ask them why they left the UK in the first place, because many left when it was better place than it is today.
    The last post on London’s tax payer assisted spending has been circulated too.

  5. There is no question that it is everyone’s interest to have a currency union immediately following independence (except not in the interests of the No campaign to admit).Carney seemed to be saying that monetary and fiscal arrangements would be a matter for politicians to sort out and that the Bank of England’s job would be to ensure those arrangments were implemented and supervised.
    However,thereafter whether Scotland remains in this currency union would be a matter for us Scots to decide.If it isn’t working for us,we ditch it in favour of something that does.We don’t have that choice at present and that is what independence is about.
    We will also decide who we pool resources with and on what terms.
    As far as the Euro situation is concerned,it was very clear at the time that certain countries did not meet the economic convergence criterea for joining the EU but were admitted based on political enlargement decisions.
    If the argument is that Scotland’s economy is not currently similar to that of England’s
    and so would make a currency union impossible then surely this makes the case for independence even stronger.
    At the end of the day,Carney has made it crystal clear that it is down to political will.
    I await the announcement from Westminster that a currency union with an independent Scotland has been definitely ruled out (along with Cameron’s EU referendum) but will not hold my breath on that.

  6. I see Darling declared Carney’s speech as ‘devastating’ to the Yes campaign.

    Darling has become such a tool it is hard to stomach.

    I also note that Westminister continues to state a currency union is ‘highly unlikely’.

    Why don’t they just come out and say, ‘not possible, ever, not in these islands’?

    Because they know it is the sensible thing to do if the Scots vote for independence.

  7. THey won’t say No to a currency Union not just because such a thing is ‘sensible’ but because to say No would bite them on the arse ie the financial market would punish them. We should flush this out!

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