Carney’s Hedge

The media reaction to Bank of England governor Mark Carney’s speech in Edinburgh this week has been rather dramatic. Under the rather prosaic and dull title of The Economics of Currency Unions, Carney’s talk – given the time, timing, place and audience – was intended to be a ‘technocratic assessment’ of the pros and cons of the proposed currency union that is integral to the SNP’s plans for an independent Scotland. 

Rarely, I think, has a lunch lecture to business dignitaries on such a topic set pulses racing. Yet the London commentariat – despite their best efforts to hide their jubilation – figuratively jumped for joy when the governor made his speech. 

Of course, there has been a lot of hedging of late on the issue of Scottish independence – not least as most London-based national newspapers have relatively healthy circulations in Scotland and are chary of losing 6 million potential customers. Usually there is at least a pretence of impartial coverage. So it was interesting to see that their reaction to this speech – detailing a cornerstone of prospective SNP policy – nearly made them thrown caution to the wind and gloat over the central banker’s intervention. 

Of course, much of the coverage fell along the usual predictable lines; most outlets decided this was a disastrous intervention that boded incredibly badly for the Scottish nationalist road-map. More measured analysts paint Carney’s approach as a calculated effort to remain above the fray. But what precisely is Carney saying? Very few pundits have attempted to paint this as positive endorsement of post-independent Scotland’s monetary structures. Most have, instead, narrowed in on Carney’s concluding remarks that ‘‘a durable, successful currency union requires some ceding of national sovereignty’’. This is understandable, nor is it unusual to surmise that Carney would not endorse any pro-independent policy.

Carney is, after all, a political appointee and a deeply conventional economic thinker. When this fact translates into his position on any given policy, it is typical to conclude that his stance would be antipathetic to drastic alterations in the political or economic structures of the United Kingdom. It is therefore unsurprising that news outlets concluded that this was a ‘pounding’ of pro-independence aspirations.

If this is an operating assumption – and it is understandable to suppose so – then it might be worth applying this presumption of Carney’s conservatism to the structure and statements of his Edinburgh luncheon. That is, if our stating assumption is that Carney attempted to put a damper on the independence blueprint, we should look at how he went about it.

Firstly, the speech was structured in particular way. Roughly, it was a speech of two parts that got increasingly vague, incoherent and political toward the second half. After the usual flattery and platitudes addressed to his Scottish audience (Scotland’s great, thanks for the free lunch, Adam Smith etc.) Carney commenced with a brief – very brief – description of the benefits of currency union. These appear to be many, but were swiftly covered in the speech. Low transaction costs, mitigation of foreign exchange risk, access to liquidity, the maintenance of liquid markets, reduced borrowing costs (both personal and sovereign), increased trade and easier mobility for labour and capital all flew by in a few paragraphs. This was followed by the drawbacks of currency union in relation to independent monetary policy.

The second half is more interesting, but loaded with value-laden terms like ‘credibility’, ‘prudence’ and ‘stability’. There Carney indicated that a successful currency union would have to maintain a central bank (the Bank of England) as a lender of the last resort, a shared supervisory structure (the Prudential Regulatory Authority and the Financial Conduct Authority) and a common financial deposit guarantee and compensation structure (the Financial Services Compensation Scheme). It is worth noting that this does not depart from SNP plans for independence – these will all be maintained, with only the Financial Ombudsman Service becoming part of a ‘super’, all-inclusive consumer dispute resolution service in Scotland.

So, this ‘banking union’ is uncontroversial – it exists now and would continue to exist if the SNP had their way. But Carney’s next point best illustrates his conservative position. It is also indicative of the thinking that has sadly characterized economics in the last few years. The lessons Mr Carney seemed to learn from the Eurozone crisis seem firmly derived from the ‘peripheral irresponsibility’ school of thought. There is not room here to point out how silly and flawed this argument is – but applied to this debate, Carney indicated that fiscal policies in an independent Scotland would have to be limited and monitored from London in case a departure from ‘‘prudent behaviour’’ caused contagion in the wider currency zone. 

Furthermore, a bizarre argument based on moral hazard was put forward. Put bluntly, Carney stated that a currency union would incentivize reckless spending by weaker countries – because they were aware that they would be bailed out by the stronger country that had ‘‘run their finances prudently in the first place.’’ That is, that they would engage in reckless spending because the safety of the wider currency union would be jeopardized if they were not bailed out from the effects of their spending. The logical (in Carney’s argument) conclusion was an alleged need for ‘‘tight fiscal rules’’ – namely, control of national budgets that would render the intended results of Scottish independence negligible.

Obviously, this is both insulting and intended to pander to an ingrained idea of Scottish public-spending proclivity that is gaining increasing purchase in England. Let’s get it straight however – Carney’s argument is that currency union (without ‘tight fiscal rules’) would cause an independent Scottish government to spend too much due to their awareness that Rump UK would ‘bail them out’ eventually. This is nonsense. Does any government – or would any government – ever behave this way? Of course not. Most bailouts have occurred due to unforeseen systemic shocks or market shifts that reduce revenue, cause bank-runs or increase bond-yields. They don’t occur because a government consciously overspends due to the mercenary calculation that they will be ‘bailed-out’. 

Of course, this is meat for many opposed to Scottish independence. Yet there is something incredibly encouraging from Carney’s intervention. Firstly, it was terribly mistaken, but infinitely more measured than many other interventions (compared to, say, the Treasury’s shrill prognostications and jeremiads). It is also possible that Carney has no personal emotional investment in Scottish independence and was attempting to edge debate toward considering a separate currency altogether. Carney may also have been attempting a qualified endorsement of a currency union – with the tacit caveat that it would be difficult to operate. For all that, Carney did not hide his ideological stripes. He spoke as an austerian and betrayed the incredibly unimaginative nature of his economic thought – one that brought up the Euro-bogeyman frequently but doesn’t seem to have imbibed any real lessons from the Eurozone crisis.

Mark Carney probably went to Edinburgh intending to scupper the economic vision of the Scottish nationalists. That his contribution was so weak and vague is heartening – after disregarding much of the false assumptions and bad examples, a limited array of modified financial instruments and decent policies could, and should, be able to overcome the stifling limitations placed on Scottish economic policy before and after independence. Failing that, let us hope, at least, that some sort of imagination begins to be seen in tediously repetitive and acrimonious debate on Scottish independence.