29/01/2014 12:46 GMT | Updated 31/03/2014 06:59 BST

Would a Currency Union Work for an Independent Scotland? History, and Mark Carney, Suggest Not

Mark Carney's important speech set out in some detail the logical steps that are required for a currency union such as the sterling zone to work. It works pretty well at the moment because we have a political union and fiscal and monetary policy work in tandem and banking regulation underpins the system.

But would such a system work as well if Scotland were to be an independent country?

As Mr Carney makes clear, the lessons of the euro zone crisis suggest not. These lessons would underpin any negotiations that The UK government were to have with the Scottish Government.

According to the Bank of England Governor, an independent Scotland would, in fact, have to cede any control over monetary policy - that is control over the setting of exchange and interest rates.

Also the latitude over fiscal policy would be extremely tightly constrained, limiting the borrowing of an independent Scotland.

This would mean that Scotland would be unable to finance its fiscal deficit even if North Sea Oil were included.

So the ability of an independent Scotland to have control over its tax policy would be illusory since tax policy would be perpetually trying to achieve fiscal targets unless swingeing cuts to public spending were made.

In what sense is this is independence when a foreign Chancellor is controlling fiscal policy and a foreign Governor is controlling monetary policy?

Especially since an independent Scotland would no longer be able to rely on the rest of the UK to smooth its volatile oil resources and ensure a fair distribution of public spending across the UK.

Of course North Sea Oil revenues, because they are so volatile, would add a huge extra burden in the achievement of imposed fiscal targets.

It would appear then that the detailed economic case for an independent Scotland has yet to be made when, which the SNP seem to readily accept, fiscal and monetary policy would be controlled externally along the lines of Mr Carney's speech.

One thing that can be said, though, is that the economic costs of independence would clearly massively outweigh any economic benefits.

Ronald Macdonald is Adam Smith Professor of Political Economy at Glasgow University