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Governor's notes on currency union

In substance, it was a dry technical analysis of the mechanics of currency unions but, in effect, Mark Carney's speech in Edinburgh yesterday was an exposé.

It showed up the weakness of Alex Salmond's claim that an independent Scotland would be able to maintain a currency union with the rest of the UK while also having full and free control over taxation, spending and borrowing.

"A durable, successful currency union requires some ceding of national sovereignty," declared the Governor of the Bank of England. It was the last thing the First Minister wanted to hear. Invoking the spectre of eurozone-style crises, Mr Carney talked of the need in the eurozone for "further, very significant steps" allowing countries to share risks and pool fiscal resources in order to support the currency union, even highlighting proposals under discussion in the EU for pooled employment benefits. He concluded that shared institutions and strict fiscal rules would be necessary to support a Scottish-UK monetary union too.

Though Mr Carney did not say so, the notion that Scotland could be an equal partner in such a union, when it would account for 10% of GDP and the rest of the UK for 90%, appears to belong in the box marked "wishful thinking". The speech did not raise any new arguments but, coming from such an influential, impartial and trusted figure, it was freighted with significance. It exposes the gulf between what the Scottish Government says it would like to do in an independent Scotland and what would be possible. For instance, the SNP has pledged that corporation tax would be cut by 3% below the UK rate. Under a currency union in which fiscal policies had to be aligned between Scotland and the remaining UK, it is hard to see the Westminster Government agreeing to that.

Others have warned before now that the Mr Salmond's vision of a currency union that allowed the Scottish Government free rein over its economy was unrealistic. Professor John Kay, a former member of the First Minister's Council of Economic Advisers, has said that it would be "difficult to negotiate terms that were consistent with the aspirations of independence". He would expect such talks to fail.

He believes, as do dissenters within Yes Scotland, that there ought to be a Plan B, and that Plan B should be a separate Scottish currency. Jim Sillars, Dennis Canavan and the Green Party's Patrick Harvie have all considered the pitfalls of a currency union and concluded that it does not sound much like independence.

They favour a separate currency. The First Minister will not wish to countenance that proposition, not least because a separate currency would bring its own problems, but ignoring the need for a Plan B when Plan A appears unsatisfactory is not going to reassure anyone.

How much will all this matter to Scots? Polling suggests that currency as an issue in itself is a bit of a turn off but also that winning the economic argument is the key to winning the referendum. Mr Carney's remarks make that harder for the SNP.

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