Independent Scotland Could Lose The Pound

The Treasury has warned it may not be in the UK's best interests for an independent Scotland to retain the pound in a currency pact.

The Scottish government has outlined plans to keep the pound if the country becomes independent after next year's referendum.

But in a new report, the Treasury said the economic case for creating a "sterling zone" was not clear and cast doubt on whether a deal could be reached.

Chancellor George Osborne added that he believed such a zone was unlikely to be backed by the rest of the UK.

"It is all very well for the SNP to assert that's what they would like. I think it is unlikely that it could be made to work and therefore if Scotland wants to keep the pound the best way to do that is to stay in the United Kingdom," he told the BBC.

"Scotland could go on using the pound, rather like Panama uses the American dollar, but it would have absolutely no control at all over its currency or its macroeconomic framework.

"There are some countries in the world that use other countries' currencies without their consent if you like, but it's a very, very difficult option for a country to undertake."

Scottish First Minister Alex Salmond is pushing for independence

The Treasury report outlines four options for currency if voters north of the border do decide to leave the UK.

One would see Scotland keep using the pound in a formal agreement with the rest of the UK, creating a sterling currency union.

Alternatively, it could continue to use the pound unilaterally with no such deal in place, or join the euro, or introduce a new Scottish currency.

The Scottish Government wants the "sterling zone" and economic experts there have concluded it is "sensible" and an attractive choice for the rest of the UK.

But the Treasury report said it "would only be possible if both an independent Scotland and the continuing UK could reach an agreement that satisfied both countries' economic interests".

It argues a formal sterling currency union would be "very different to the current arrangements and would be a profound economic change for both states".

An independent Scotland would "need to agree a negotiated set of constraints on its economic and fiscal policies", the report said.

Treasury warning: Chancellor George Osborne

It added: "In practice, this would be likely to require rigorous oversight of Scotland's economic and fiscal plans by both the new Scottish and the continuing UK authorities.

"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.

"The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties."

The paper argues the "current currency and monetary policy arrangements within the UK serve Scotland well", describing the UK as "one of the most successful monetary, fiscal and political unions in history".

It concluded: "All of the alternative currency arrangements would be likely to be less economically suitable for both Scotland and the rest of the UK."

It also claims both the Scottish and UK governments would need to agree for the commercial banks in an independent Scotland to continue issuing sterling notes as part of a currency union.

The Treasury has said the role of the Bank of England, as the central bank of the UK responsible for issuing notes by all commercial banks, would have to be reviewed under independence.

Scottish Finance Secretary John Swinney condemned suggestions that Scottish banknotes could be lost under the SNP's plans as "insulting" and insisted they would be kept.

He also claimed that the pound was "every bit as much Scotland's currency as it is England, Wales and Northern Ireland's".

He said: "If this scare story is the best George Osborne can do in advance of his visit to Scotland then it betrays the utter weakness of his case."

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