29/01/2014 Newsnight Scotland

teach us. We have to leave it behind to po custody more intently on our

own anxieties and hopes in the brief time we're all allotted.

Tonight, on Newsnight Scotland. Amidst frenzied speculation and

ballyhoo, the governor of the Bank of England comes to Edinburgh to

talk about the future of the pound in an independent Scotland. Is a

currency union a good idea? His answer? Well, we still don't know

what his answer is. Instead, Mark Carney delivered a lecture on the

economics of monetary union which had even the most fervent admirers

of the dismal science struggling to pay attention. Needless to say, the

speech was hailed as a groundbreaking triumph by both sides

in the referendum debate. Which, if either, is right? Good Evening.

Well, the issue at stake is straightforward enough. The SNP say

if there's a Yes vote in the referendum they want a formal

currency union with the UK. The Treasury says it's "highly

unlikely"" such an arrangement would be negotiated. So, over to the man

who would run such a currency union -Mark Carney, the governor of the

Bank of England. Does he think a currency union is a good idea? He

spent much of the day in Edinburgh trying to answer any question but

that one. Huw Williams reports. Arguably the most important thing

about today was not the detail of exactly what Mark Carney said, but

the fact that he came to Edinburgh to say anything at all. The

pioneering work of Scottish economists from Adam Smith to my

former supervisor have had a great influence on my profession. Among

them is David Hume who was born a short walk from here...

This is David Hume, immortalised by the sculptor sandy Stoddart. He is

best-known as a philosopher, but he did write an essay on trade between

nations that share a common currency. At the time, that meant

gold. Things have moved on since then. Mark Carney described his

speech as a technical assessment of how you make a currency union work

between independent countries. Sharing a currency can also promote

investment by reducing uncertainty about currency movements and giving

businesses access to deeper more liquid financial markets. It can

reduce costs for countries with a history of high inflation and

currency devaluations. That was one of the Mott vaguses for many of the

countries to join the ERM and ultimately Europe. He pointed out

that joining a union means ceding sovereignty. In other words, giving

up your freedom to tailor policies according to what you most need. It

can be risky. In the extreme, adverse fiscal dynamics could call

into question question the country's very membership of the currency

union, creating the possibility of self-fulfilling runs on banks and

sovereigns absent central bank support. Such feedback loops turned

recessions into depressions in several European countries in recent

years. Not entirely by coincidence, just

across the road from Mark Carney's speech, the Royal Society of

Edinburgh has been hosting a seminar today looking at currency, banking

and tax in the referendum debate. The event focussed on banking and

financial services, and the implications of independence on

Scotland's fiscal regulation, tax and public spending, but governor

Carney's speech was on everybody's mind. There was nothing new. The

importance of governor Cairney's speech was that the governor said

it. The governor is talking about how to make independence work. The

Bank of England has to do that as the governor said, they're public

servants. It's their job to implement whatever constitutional

settlement politicians negotiate. Honest with you, if you have one

part of the currency union 90% value and the other side 10% it make it is

look like the rest of the UK would have the upper hand. The Scottish

Government say though that independence would give it control

over tax, employment and social security policy. Immigration, oil

and gas and a range of other levers. The reality of it is they would have

those powers. They would have all those taxes. They have to put

together a plan which will show how they would spend the taxes they

would raise. Indicate how that would have an impact on its borrowing

requirements. The plans would need to be approved. If they didn't meet

the UK's requirements there would be a negotiation around, how do you use

the levers in the way you want to if they don't immediate meet the

expectations of the UK Government. Monetary unions work if there is a

considerable amount of fiscal integration. But you get into

trouble if there isn't. What is the point of independence if you hand

over important controls to someone else? Everybody in Scotland knows

that there has to be some degree of shared sovereignty, just as there is

between the European Union and the various member states. The question

is, how much are you prepared to accept? What does independence mean

if you have to cede a whole lot of sovereignty? That's it. It's over.

Mark Carney, of course, resolutely refused to say if he thinks Scotland

should become independent or stay in the union. So far, at least, David

Hume isn't saying either. With me this evening we have a trio

of currency specialists. Firstly, Dr Angus Armstrong, who is a Director

of Macroeconomics at the National Institute for Economic and Social

Research. He is also a visiting professor at Imperial College and a

House of Lords special adviser on Scottish independence. Joining us

from London, is John Nugee, an economic commentator and Better

Together supporter. The majority of his career has been at the Bank of

England, his final post spent as Chief Manager of the Reserves. He

has also worked for the Hong Kong Monetary Authority. Last, but not

least, also in our Edinburgh studio, we have George Kerevan, who is also

an economist, commentator and former SNP candidate. Dr Angus Armstrong,

let us start with this issue about sovereignty, in his speech Mark

Carney, while not wanting to directly answer the question of

whether he thought currency union was a good or bad idea, said it

would involve ceding nation sovereignty it depends on how you

interpret what that means? Yes. And ultimately, of course, this is for

the Scottish people to decide in nine months' time. Issue of

sovereignty is one that goes back to Mark Carney's speech that he gave in

Canada about a year ago when he pointed out that to have a

successful monetary union, there has to be a mechanism that, where about,

when things go bad in one part of the union, the other part of the

union can actually make some sort of financial transfer to it to sort of

bide it over the difficult times and vice versa. So, there is a

philosophical question here of, what does that really resemble what

people think is going to be independence? There is a practical

question, how would you actually do that? Particularly since one part of

the union is 10 times the size the other? I want to pick up on what you

said. It's not really been concentrated on since Mark Carney

spoke. He did make a big thing about fiscal stabilisers. In other words,

the fact that, at the moment in the United Kingdom, if one part of the

UK is doing badly, then money automatically flows to it through

the social welfare system. That obviously wouldn't exist for

Scotland if Scotland became independent. Now, what was unclear,

is he suggesting, do you think, you can't have a currency union unless

you have the automatic (inaudible) a united social welfare system. Or

there would have to be a mechanism in place where there could be

special transfers from one region of the UK to the other in the event of

problems? What he was suggesting is successful monetary unions, the

lessons from history, are areas such as, he brought up the example of

Canada, the United States, when accidents happen, things go wrong,

which of course one year they occasionally do, it's best if there

is a mechanism where by you have these a cross-border transfers to

smooth things out. Just saying that doesn't mean to say it can't happen,

the next question really becomes, how would one approach doing that

between two sovereign states? He is not saying that it can't be done. He

is saying, this is something which is new and would have to be thought

through about how you would do this between sovereign states. George

Kerevan, what do you make of that? I make this point, this hasn't really

been focussed on. It was a big part of Mark Carney's argument. If we...

Obviously, the SNP it argues, one of the reasons voting "yes" is to have

a different social welfare system from the UK. If you do that, these

fiscal stabilisers, as he called them, simply don't work any more.

How do you get round that? The first thing to say is that this, the

problems occurs if you've got what economists call if somethings

happens to one part of the economies that are linked in a common currency

not to the others. Which is what happened in the eurozone. I think

after 300 years of reasonably strong integration between the UK and

different parts of the UK I think it's unlikely in the present

circumstances. Let me give you one scenario. Scotland has lots of oil

money. The rest of the UK doesn't. There is a fall on oil prices. It

has an affect on Scotland that it wouldn't have on the rest of the UK.

That's a feesable proposition. Remember, we're talking over over

the long term. It's entirely possible that could happen? Gordon.

That happens at the moment. When we've had different parts of the UK

having different economic problems, right, they have lacked, at a

regional level, the fiscal powers to actually create the kind of

incentives for their individual businesses in order to grow. Now,

countries like America or Canada have actually given quite

sophisticated devolved fiscal powers which Scotland does not have in

order to get over some of that problem. So, the argument, the

argument for dealing with it is that if you have fiscal levers you can

apply directly to business incentives, that helps. Can I also

say that the other thing that Carney was underlining, which is an

important issue, is what happens if, in any of that trigger, any of those

problems triggers a banking crisis in one part of the common currency

than the other It's better, you have a banking crisis that are

cross-border whether you have a monetary union or not. The banks are

highly integrated if there was a crisis it would be across the the

border whether or not there was a currency union. A currency union

would create the institutions that allow a banking crisis to be built

by both countries. It's not - Let's move on - Is trying - Let's move to

banking in a moment. Let's create the institution where we can deal

with these problems. John Nugee what do you make of this. Fiscal

stabilisers, once you have two different welfare systems those

stabilisers, as I understand it, wouldn't work any more. Is it

satisfactory to argue, as George Kerevan does, that somehow fiscal

powers that Scotland would have, if it was independent, would trump the

effect of not having the fiscal stabilisers? I think they would any

small crisis. Clearly, the provinces of Canada, to use Mark Carney's home

country as am an example have considerable atomy. More than

Scotland does at the moment. The question we need to look at it, is

whether they would have another fire power in a big crisis. Whatever we

build, as one nation or two, has to survive, not just small crises, but

big crises, banking crises happen once in a generation, once in auto

50 years. No regulator will tell you it will never happen again. Whatever

we build is not for a short-term. Whatever we as one or two nations

put together has got to survive the storm. And, I think I agree that

Scotland could have more powers to handle short-term fluctuations and

small fluctuation that is is behind some of the push for one of the

options originally of devo max. To have another power to withstand a

major storm, as an independent country, without fiscal transfers

from London, asks a great deal of the other parts of the stabiliser

that Mark Carney talked about in the banking union. The movement of

capital and the movement of people. I think that is the challenge to

build a system which survives a really big storm is much more

challenging. A less grandiose issue arise from

ceding sovereignty. But have to agree the stocking of debt, the

public sector deficit that Scotland would be allowed to have. What does

that mean for the levers that the SNP want to have? For example, could

you still have a corporation tax lower than the rest of the UK?

Let me just point out that when this pack is negotiated and agreed, there

are eight couple of issues that the negotiator will want to bear in

mind. The first is that either party could actually leave the currency

union. The white paper quite rightly makes clear that it is up to the

Scottish people in future elections to determine whether an alternative

monetary arrangement might be suitable. The Scottish Government

has stated that. That would also holds true for the rest of the UK.

You have to find some constraints that are going to be binding but

somehow allow for the fact that it is possible that one day one side

might choose to leave, which is the nature of sovereignty. The second

thing they will have to do is bear in mind that one of the two parties

essentially his native percent of the vote. The smaller parties have

to stick to the rules and the bigger parties...

Putting it bluntly would it mean something like a different

corporation tax rates, the SNP making it a big policy to have a

lower rate, with London have to give permission for that?

The first thing to say is that I am not involved in negotiations but

these are the sort of things that because Asians would presumably want

to look at as well as settling the overall envelope for the budget.

Clearly, joining some sort of union where you allow competitive

advantage to change tax, that would come at a question, I would

imagine? John Nugee, isn't there a democratic

issue here? Scotland could decide to be independent but nobody has asked

people of England, Wales and Northern Ireland whether they want

to be in a monetary union with Scotland. Shouldn't there be a

referendum for them whether or not to have a monetary union? Imagine

the UK Government said we are going to join the euro but we won't have a

referendum. I think you make a good point.

Whatever government is formed out of the 20 15th general election will be

the ongoing government of a continuing UK after independence and

will have the responsibility of negotiating terms with Scotland on

currency and indeed everything else. So I would expect it to play a big

part in that election and it makes for an interesting dynamic, that the

two parts of our country speak at different times. The referendum in

Scotland comes first and then the rest of the country can opine on how

to deal with that. Everybody knows that Scotland has the boat on how to

decide whether they want to be -- if they want to be independent. Those

of us who want to see it reductive union will hope that the government

negotiates responsibly but it is in the hands of the government to

conclude those for multiple stations.

Whatever the result of the referendum and even if all the

parties had something about this in their manifestos in the next general

election, it would be a fairly minor argument that the reason for

referendums is an constitutional change. So shouldn't the parties

saying we will have a referendum on it rather than saying they will or

will not negotiate? Agent be up to them?

It is certainly peculiar that the three London parties are trying to

ignore this major constitutional issue that affects the whole of the

UK. I've Cameron is saying it only affects Scotland. -- David Cameron.

You can't have a referendum for the rest of the UK about whether

Scotland wants to leave. I meant if Scotland forts yes, there

could be a referendum for the people of the rest of the UK if he wants to

share currency. Shouldn't they have the right to their say in a

referendum? I have no problem with that, in

fact, I think one of the things that will flow from Scottish independence

is that England will get their own parliament back.

We are running out of time. John Nugee, because of your background, I

want to elevate you to the Treasury for a short answer. If you were in

the Treasury and looking at an independent Scotland from the point

of the view of the rest of the UK and you were asked whether the UK

should form a monetary union, what would you say?

I would have to look very carefully at why I was putting my taxpayers at

risk for a foreign currency. I would be looking at a country which

doesn't share monetary policy very easily. For example the Eurozone.

Scotland is different because it is closer. But does the English urged

to maintain control trump that? Scotland may gain some sovereignty

out of this referendum but England, if it means entering into a currency

union with a foreign state, would lose some sovereignty and beaches

not to do so. We are joined by our political

editor at Holyrood. What do you make of the politics of this.

Today's event in some entrenches the politics. The SNP's perspective is

saying it is doable if difficult. The Wellcome the prospect of

discussions with the Bank of England. On the other hand, you have

the Conservatives saying that the proposals from the SNP are in

tatters, Labour saying they are falling down. In some sense all

sides were saying these things in advance. What the governor does in a

neutral fashion is draw together the challenges which would confront an

independent Scotland and of course the remainder of the UK. When it

comes to formulating the mechanics of that union.

It does produce some surreal situations. Watching the press

conference, he was trying so hard to say absolutely nothing whatsoever.

There was an answer, I can't remember what the subject was, where

he clearly drifted into saying something he shouldn't say and you

could see him looking down at the desk with panic in his eyes.

And you could see him saying how do it was a shame that every journalist

only had one question. Bear in mind this is the Governor of the Bank of

England and what he did say is market sensitive and he is used to

being cautious. You could see his relief on the way

out. Absolutely. He faced some searching

questions as he would always do from the media. But he was being very

cautious in his replies. Where does this go from here. Does

everybody just keep reducing and lists lists of numbers -- endless

lists? The Conservatives will see the

currency union was always unlikely. Alex Salmond has said on a number of

occasions that Scotland could choose the internationally tradable

currency called the pounds but just not in the sterling zone. His

opponents could pile on that and say wicked Alex Salmond is suggesting

something bad. He could say he is not suggesting this is a good idea,

just that you could do this if he wanted.

Just a quick look at the front page of the Scotsman. And the Daily

Telegraph. That is all for tonight. I will be

back tomorrow. Good night. It will be another cold day

tomorrow. There will be further showery outbreaks of rain. In terms

of sunshine, that will be best in Scotland, especially the West of

Scotland. We have got more wintry showers in the East. It may brighten

up a touch in the south-east but some rather sharp showers in the

afternoon. Temperature is not quite as low as they were today. Somewhat

drier for the south-west of England and a bit brighter in Wales. Its

Friday that