Sharing sterling between an independent Scotland and the rest of the UK could lead to eurozone-style crises unless firm foundations are put in place, Bank of England governor Mark Carney has said.
An effective union would also force a newly-independent Scotland to hand over some national sovereignty, he said in a speech at a business lunch in Edinburgh.
He intervened on the technicalities for negotiations less than eight months before people in Scotland decide whether to leave the UK.
“If such deliberations ever were to happen, they would need to consider carefully what the economics of currency unions suggest are the necessary foundations for a durable union, particularly given the clear risks if these foundations are not in place,” Mr Carney said.
“Those risks have been demonstrated clearly in the euro area over recent years, with sovereign debt crises, financial fragmentation and large divergences in economic performance. The euro area is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources.
“In short, a durable, successful currency union requires some ceding of national sovereignty.
“It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.”
He added: “Decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics. For those considerations, others are better placed to comment.”
Mr Carney, who became governor last July, focused on the implications of Scottish independence in his speech just hours after his first face-to-face meeting with Scotland’s First Minister, Alex Salmond.
The pair met for private talks at Bute House, Mr Salmond’s official residence in Edinburgh.
The Scottish Government wants to retain the pound if the country votes for independence, establishing a “sterling zone” with the rest of the UK. Other pro-independence groups argue for a separate Scottish currency.
Technical discussions on sharing sterling, which started under Mr Carney’s predecessor Sir Mervyn King, are expected to continue. UK Ministers including Chancellor George Osborne have cast doubt on whether the arrangement is possible. Mr Carney said any negotiations are for Westminster and Holyrood.
In his speech, the governor said a currency union’s success also rests on a good banking union, a term covering the range of institutions needed to support an efficient financial sector.
These include common supervisory standards, access to central bank liquidity and lender of last resort facilities.
There are difficulties separating those institutions from national fiscal arrangements, he said.
“The existing banking union between Scotland and the rest of the United Kingdom has proved durable and efficient,” he said.
“Its foundations include a single prudential supervisor maintaining consistent standards of resilience, a single deposit guarantee scheme backed by the central government, and a common central bank, able to act as lender of last resort across the union, and also backed by the central government.
“These arrangements help ensure that Scotland can sustain a banking system whose collective balance sheet is substantially larger than its GDP.
“The euro area has shown the dangers of not having such arrangements, as well as the difficulties of the necessary pooling of sovereignty to build them.”