UK Treasury and Scottish Government address "fundamental question" of currency for independent Scotland

Public policy expert Alastair Ross of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Chancellor of the Exchequer and Chief Secretary launched the Treasury's analysis of the currency options for Scotland post-independence in Glasgow. At the same time, the Scottish Government published its own paper on currency proposals.

"In summary, the Scottish Government wants to talk about what could be agreed, while the UK Government at this stage is focussing on what cannot or should be done," Ross said. "With 512 days until the referendum we can expect this particular debate to run and run."

"The paper from HM Treasury sets out very clearly some of the challenges and risks involved in establishing a sterling currency union between Scotland and the rest of the UK. However, much of the detail can only be answered after negotiation between the UK and Scottish Governments which the former has made clear it has no appetite for. Indeed, the Chancellor told his Glasgow audience that there could be no guarantee agreement on a currency union could be reached - a clear warning to Scottish voters," he said.

The Treasury's paper (113-page / 748KB PDF) considers the advantages and disadvantages of the potential currency options open to an independent Scotland. It concludes that none of the possible options would work as well for Scotland as the current fiscal, political and structural arrangements of the UK; which it describes as "one of the most successful monetary, fiscal and political unions in history". Among the options considered in the paper are a formal sterling currency union with the rest of the UK, the use of sterling without a formal agreement, joining the euro and introducing a new Scottish currency.

The paper is the second produced by the UK Government to examine how Scotland contributes to and benefits from being part of the UK, and how the rest of the UK benefits from its partnership with Scotland. It intends to produce a series of papers over the course of 2013 and 2014, leading up to the Scottish independence referendum on 18 September 2014.

In a previous report, the UK Government concluded that, should Scotland become independent, it would be classed as a 'successor state' and required to create a new set of domestic and international arrangements. From a fiscal policy perspective, this would mean that the newly independent country would not automatically be entitled to use the Bank of England as its central bank.

In his speech, Chancellor of the Exchequer George Osborne said that a formal currency union between "two completely separate countries" would not be "the same thing as keeping the pound we have now". Instead, it would be more like the arrangements under which Panama uses the US Dollar as its currency, he said.

"First, financial markets would need to be convinced such a union was built to last," he said. "A durable currency union between two separate countries requires very strong and credible political commitment - the very opposite of what the SNP is proposing with its determination to break the political ties with the rest of the UK ... monetary union without close fiscal and political integration is extremely hard to sustain."

In addition, as conditions of the currency union Scotland would have to accept "significant limits to its economic sovereignty", he said. These would include submitting budgetary plans to the UK Government in Westminster before the Scottish Government in Holyrood, accepting some continuing oversight of its public finances by UK authorities and limiting the degree of tax competition between Scotland and the rest of the UK.

Sterling monetary union is the Scottish Government's preferred option for an independent Scotland. In a new report (11-page / 212KB PDF), the Scottish Government fully endorsed the findings of an earlier report from the Fiscal Commission Working Group, an independent committee of economic experts. Both reports conclude that Scotland would be able to exploit areas of comparative advantage and tackle its economic disadvantages as an independent country in a shared "sterling zone".

"The sharing of the pound between an independent Scotland and the rest of the UK is the common sense position supported by the Fiscal Commission," said Finance Secretary John Swinney. "A sterling zone is also in the overwhelming economic interests of the rest of the UK every bit as much as it is in the interests of Scotland. An independent Scotland using the pound will mean Sterling's balance of payments will be massively supported by Scotland's huge assets, including North Sea oil and gas - which alone swelled the UK's balance of payments by £40 billion in 2011-12."

"Scotland's finances are consistently stronger than the UK's - generating more revenue per head than the rest of the UK in each one of the past 30 years - and Scotland has had a lower fiscal deficit than the UK over the past five years. With the additional economic levers that independence will provide, and the up to £1.5 trillion asset base provided by Scotland's oil and gas reserves, an independent Scotland will stand on a strong financial footing."

Public policy expert Alastair Ross said that the Scottish Government's paper "predictably believes that the challenges of establishing a currency union could be overcome", with the agreement of the UK Government and the Bank of England.

"Risks are recognised, but Scottish Ministers argue they would be reduced because Scottish and UK economies are more closely aligned than those of Germany and Greece within the eurozone," he said.