Bank of England governor Mark Carney says the central bank will look to implement whatever monetary agreement is reached by both governments if Scotland becomes independent.
The SNP has already put forward the argument in its White Paper on independence that Scotland should continue to share sterling with the rest of the UK if Scotland becomes independent following the referendum held this year.
However the SNP’s proposal to continue using sterling has come up against opposition from Westminster, with chancellor George Osborne arguing that it was unlikely the rest of the UK would agree to such a monetary union.
Speaking in Edinburgh this afternoon Carney made clear that he was not looking to make a case either for or against Scottish independence and the Bank of England would implement whichever monetary agreement is eventually decided by the two governments.
Carney did stress the benefits of a currency union for both an independent Scotland and the rest of the UK for investment for investment, labour and capital while also reducing borrowing costs.
However Carney also added that a “durable” and successful monetary union “requires some ceding of national sovereignty”.
He also highlighted the risks of losing the flexibility that comes with independent monetary policy which would occur in the event of a currency union between a separate independent Scotland and the rest of the UK.
“With an independent currency, exchange rate depreciation can dampen these effects by improving competitiveness and monetary policy can become more accommodative, supporting demand and employment,” he said.
“However, if the country were part of a currency area with its foreign market, its exchange rate would by definition not change, putting the full weight of adjustment on wages and unemployment – a significantly more protracted and painful process.”
Looking at the fiscal arrangements necessary for a shared sterling, Carney said it would be up to both governments to assess whether fiscal rules alone were enough to implement a monetary union.
“In a monetary union between an independent Scotland and the rest of the UK, the two parliaments would have to agree on whether fiscal rules were sufficient or whether similar risk-sharing mechanisms were necessary,” he said.