Mark Carney
Mark Carney, Bank of England governor, said a currency union between Scotland and the rest of the UK would need fiscal integration to be successful Reuters

An independent Scotland that kept the pound sterling would have to give up some of the sovereignty desired by nationalists pushing for a split from the UK, according to Bank of England Governor Mark Carney.

The Scottish National Party (SNP), led by Alex Salmond, is arguing for a yes vote in the September independence referendum, but also wants to retain sterling as the currency.

In an Edinburgh speech, Carney said successful currency unions require fiscal integration and risk-sharing between members.

He cited work across the eurozone build institutions and systems that encourage closer fiscal ties because the area's recent economic crisis was exacerbated by a lack of integration.

Struggling individual member states could not loosen the exchange rate and increase fiscal spending to balance out the economy in a downturn.

Their individual finance ministries were therefore unable to absorb the shock. Stronger economies in the currency area were also resistant to a looser exchange rate.

"Fiscal stabilisation is particularly important in a currency union because it helps mitigate the loss of exchange rate flexibility," Carney said.

"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."

He added: "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 UK Treasury has said it would be difficult for an independent Scotland to enter a sterling currency union because it is unlikely there would be agreement on fiscal rules or risk sharing.

"The benefits of a currency union are clear for both sides in terms of issues like promoting investment, eliminating transaction costs, reducing borrowing costs and facilitating the movement of labour and capital, and we welcome the governor's recognition of these benefits," said Scotland's Finance Secretary and SNP politician John Swinney.

Carney was keen to stress that his speech was purely on the technical aspects of a currency union and was not treading on political ground.

"Decisions that cede sovereignty and limit autonomy are rightly choices for elected governments and involve considerations beyond mere economics," he said.

"For those considerations, others are far better than the Bank of England to comment."