Scottish independence: Key extracts from Mark Carney speech
The governor of the Bank of England, Mark Carney, has entered the debate on Scottish independence with a speech in Edinburgh, ahead of the referendum on 18 September.
During the speech, Mr Carney said plans to share the pound between an independent Scotland and the rest of the UK in the event of a "Yes" vote needed careful consideration, while stressing talks for any such agreement would be a matter for the Scottish and UK parliaments.
Here are key passages from his speech.....
"Scotland is a land rich in history and ideas, and one to which I owe a great debt.
"Scots built the very foundations of my native land, Canada, whose first Prime Minister Sir John A. Macdonald was born in Glasgow.
"Scots have shaped the modern world through their contributions to culture and science.
"The pioneering work of Scottish economists from Adam Smith to Sir James Mirrlees has had great influence on my profession."
On the Bank of England's role
"Any arrangement to retain sterling in an independent Scotland would need to be negotiated between the Westminster and Scottish Parliaments.
"The Bank of England would implement whatever monetary arrangements were put in place."
On sharing currency
"Sharing a currency can promote investment by reducing uncertainty about currency movements and giving businesses access to deeper, more liquid financial markets.
"It can also reduce borrowing costs for countries with a history of high inflation and currency devaluation. By tying themselves to the mast of the monetary policy of others they can import credibility.
"Sharing a currency also helps promote integration. It does so by eliminating one of the barriers between markets, improving transparency of pricing and increasing competition.
"Sharing a currency can also help to increase the mobility of labour and capital, raise trade in goods and services, and improve the flow of technology and ideas. In these ways, members of a currency union can exploit more fully comparative advantage and ensure greater dynamic efficiency."
"The similarity of the industrial structure of Scotland and the rest of the UK depends on how offshore oil is allocated.
"With oil split on a per capita basis Scotland and the rest of the UK look about as similar as the core and periphery of the euro area; but with oil split on a geographic basis they look about as diverse as the United States
"Despite any differences, the close integration of the Scottish and rest of UK economies has helped ensure that their economic performance has been very similar over a long period - output growth is highly correlated
"So, theory notwithstanding, being similar doesn't necessarily help and being different doesn't necessarily hinder.
"This suggests we should look elsewhere for the ingredients of a successful union: to the mobility of labour, capital and goods; to institutional structures promoting financial stability; and to institutions that mutualise risks and pool fiscal resources."
On the banking union
"Without a banking union, cross-border capital flows can be restricted, the effectiveness of monetary policy impaired and, in the extreme, the viability of the union itself undermined.
"It is in the interests of all countries to sever the link between banks and sovereigns by ending too big to fail.
"Governments must put in place regimes that impose losses on bank management, shareholders and creditors rather than taxpayers.
"The existing banking union between Scotland and the rest of the United Kingdom has proved durable and efficient.
"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.
"An independent Scotland would need to consider carefully how to develop arrangements with the continuing United Kingdom that are both consistent with its sovereignty and sufficient to maintain financial stability."
On fiscal arrangements
"It is no coincidence that effective currency unions tend to have centralised fiscal authorities whose spending is a sizeable share of GDP - averaging over a quarter of GDP for advanced countries outside the euro area
"That offers scope for a significant degree of stabilisation, much of it happening automatically as slowing growth in one part of the union causes tax revenues there to fall and welfare spending to increase.
"Those automatic fiscal stabilisers are important within the UK - it is estimated that for every £1 that output falls the reduction in taxes and increases in transfers are together worth about 50 pence.
"Fiscal stabilisation is particularly important in a currency union because it helps mitigate the loss of exchange rate flexibility.
"But being in a currency union can amplify fiscal stress for individual nations, limiting their ability to perform this valuable role just when it is most needed.
"So, it makes sense to share fiscal risks across the whole currency area.
"A localised shock is less likely to stretch the fiscal position in a larger more diversified currency area, especially if it shifts demand between different parts of the area.
"That makes a given shock to Nova Scotia less severe than the equivalent to Portugal."
On making it work
"As the Presidents of the European Council, European Commission, Eurogroup and European Central Bank argued in their report, European monetary union, which has so far relied on fiscal rules, will not be complete until it builds mechanisms to share fiscal sovereignty.
"Possible options range from a transfer union to a pooled employment insurance mechanism. Whatever is ultimately chosen, the degree of fiscal risk sharing will likely have to be significant.
"Similarly, 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.
"The Scottish government has stated that in the event of independence it would seek to retain sterling as part of a formal currency union.
"All aspects of any such arrangement would be a matter for the Scottish and UK parliaments.
"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.
"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."