Scotland and England came to blows yesterday (23 April) over what currency an independent Scottish state would use, reigniting the debate over a Scottish independence referendum next year.
George Osborne, the British finance minister, said the UK Treasury could refuse to agree a formal currency union with an independent Scotland unless Scottish public spending was heavily restrained and the country cut its debts to reassure the markets.
In an accompanying critique of proposals from Scotland’s First Minister Alex Salmond to create a new sterling area, the Treasury said it had significant doubts about whether a currency pact would be in the UK's interests.
Osborne’s interjections came on St George’s Day, which celebrates the patron saint of England, adding salt to the comments.
Report: Currency union would expose UK to risk
If Salmond wins the independence referendum – scheduled to take place on 18 September 2014 – a currency union would expose Britain to greater risks from speculators and downgrading on financial markets, the Treasury report said.
"Even with constraints in place, the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear," it added.
Osborne also said he believed a newly independent Scottish government would be required to formally commit to joining the euro as a condition of its EU membership, raising further doubts about the durability of a sterling pact.
The issue of how Scotland would re-apply for EU membership following a successful independence referendum remains controversial.
The paper, called “Scotland Analysis: currency and monetary policy”, concluded: "If financial markets perceive that a currency union (or a fixed exchange rate regime) is not economically or politically durable, or only a transitional arrangement, speculative activity can put immediate pressure on the arrangement."
A new eurozone member?
The paper said Scotland's finances and economy would be weakened under independence and would left with the options of joining the euro immediately, creating its own currency or retaining sterling without any pan-UK deal.
Describing the UK as "one of the most successful monetary, fiscal and political unions in history", it argues: "All of the alternative currency arrangements would be likely to be less economically suitable for both Scotland and the rest of the UK."
But the Scottish Nationalists quickly rebutted the statement.
John Swinney, the Scottish finance secretary, said the report’s assessment of Scotland's balance of payments showed the economy was healthier and less indebted than the UK's, despite higher per head state spending.
"A sterling zone, with the pound as a shared currency, will provide the full flexibility to set tax and spending decisions to target key opportunities and challenges in Scotland," Swinney said.
Sturgeon: Cameron is two-faced
Meanwhile Nicola Sturgeon, Scotland’s deputy first minister, accused British Prime Minister David Cameron of “letting the mask slip” and “revealing the rank hypocrisy that is at the root of the anti-independence campaign’s arguments”.
Sturgeon said that Cameron frequently alludes to the lack of a compulsion for EU member states to join the euro. “The 'No' camp fully understands that euro currency membership cannot be forced on anyone, so why do they persist in trying to claim otherwise? They tell the truth to the rest of Europe, and scaremonger to the people of Scotland,” Sturgeon said.
“The fact of the matter is quite simply that an independent Scotland could not and would not be forced into using the euro – an independent Scotland will be part of a sterling zone, which is in the interests of both Scotland and the rest of the UK,” she added.
Sturgeon said that it would “not be possible for members of the anti-independence camp repeat their false euro claims without becoming an absolute laughing-stock.”