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No currency union with independent Scotland, George Osborne confirms
Alex Salmond responds angrily to Osborne's rejection of currency union
(about 4 hours later)
George Osborne has officially vetoed proposals for a currency union with an independent Scotland, in an attempt to deal a hammer blow to Alex Salmond's independence campaign.
Alex Salmond has renewed his threat that Scotland could refuse to pay its share of the UK's debt as he bitterly attacked George Osborne's decision to veto any currency union after independence.
The chancellor told an audience in Edinburgh that a currency union between Scotland and the rest of the UK would be unworkable and cause great damage to both the UK and Scottish economies.
Speaking in Edinburgh on Thursday, the chancellor said he had been officially advised by senior Treasury civil servants that a sterling zone between the UK and an independent Scotland would be unworkable, unstable and damaging to both countries.
"People need to know it's not going to happen," Osborne said. "Because sharing the pound is not in the interests of either the people of Scotland or the rest of the UK. The people of the rest of the UK wouldn't accept it and [the Westminster] parliament wouldn't pass it."
Bolstered by the shadow chancellor, Ed Balls, and Danny Alexander, the Liberal Democrat chief secretary to the Treasury, Osborne said: "People need to know it's not going to happen."
The chancellor said senior Treasury civil servants, including the permanent secretary, Sir Nicholas Macpherson, had officially advised the UK government not to agree to such a pact with an independent Scotland because of the economic challenges.
After studying civil service analysis on the risks and complications involved in such a deal, Osborne said, "it is clear to me: I could not as chancellor recommend that we could share the pound with an independent Scotland".
"The official advice I have received from civil servants in the Treasury is that they would not recommend a currency union to the government of the continuing UK.
Salmond, Scotland's first minister, retaliated by accusing the chancellor of "bluff, bluster and posturing" and insisting that a currency pact was "overwhelmingly" in the interests of both countries.
"Listening to that advice, looking at the analysis myself, it is clear to me: I could not as chancellor recommend that we could share the pound with an independent Scotland.
Facing the most focused and significant challenge so far to his plans for independence, Salmond described the joint attack from the UK parties as "a concerted bid by a Tory-led Westminster establishment to bully and intimidate."
"The evidence shows it wouldn't work. It would cost jobs and cost money. It wouldn't provide economic security for Scotland or for the rest of the UK.
Ignoring Osborne's jibe that to threaten a debt default was like threatening "to burn my own house down in protest", Salmond warned that if there was no deal on sterling, there would be no deal on Scotland paying its share of the £1.6tn of national debt expected by 2016. Turning down bids for television interviews, he instead issued a statement saying that if a UK did refuse to set up a new sterling zone, it would harm UK businesses and would leave the UK government having to pick up the entirety of UK debt.
"I don't think any other chancellor of the exchequer would come to a different view."
"All the debt accrued up to the point of independence belongs legally to the Treasury, as they confirmed last month – and Scotland can't default on debt that's not legally ours," the statement said. "However, we've always taken the fair and reasonable position that Scotland should meet a fair share of the costs of that debt. But assets and liabilities go hand in hand, and – contrary to the assertions today – sterling and the Bank of England are clearly shared UK assets."
It would require UK taxpayers to promise to bail out Scottish banks; it would require the Scottish government to accept substantial controls over its spending and economic policy and would lead to significant doubts on whether Scotland would continue with a sterling pact into the future, Osborne said.
The first minister resisted mounting pressure from his opponents to declare whether he has a "plan B" policy for currency, but the Scottish deputy first minister, Nicola Sturgeon, confirmed that the Scottish government could opt to use sterling without a formal deal. Pressed on what her government's alternative plans might be on the BBC2 programme Daily Politics, Sturgeon insisted that a currency union was workable, but added: "Scotland can't be prevented from using the pound; it's a fully tradeable currency."
International currency markets would attack the pound because a currency pact would be clearly weak. It would be unsustainable, the chancellor added.
Echoing warnings last month from Mark Carney, the Bank of England governor, the Treasury analysis said a currency union would be unstable without a close political union, a banking union and a shared fiscal policy that would allow the UK to dominate Scotland.
"Just look at what happened to the last two nations who tried to form a currency union following separation – Slovakia and the Czech Republic. Their union fell apart after only 33 days as capital flowed from one to the other in pursuit of the safe haven.
Earlier Alexander, the most senior Scottish MP in the UK cabinet, rejected claims that ministers in London were bullying Scotland into rejecting independence. "A currency union would leave the rest of the UK highly exposed to fiscal and financial risks from a separate Scotland," he said.
We would face the same risk if Scotland tried to keep the pound.
"As a Scot and as chief secretary to the UK Treasury, on the basis of this analysis, I couldn't recommend a currency union to the people of Scotland, and my party couldn't agree to such a proposition for the rest of the UK."
"Signing up for arrangements that are inherently unstable would risk over time breeding huge resentment on both sides of the border. We want to bring people closer together, not drive them further apart."
Balls said: "It would be bad for Scotland, it would place an unacceptable burden on the UK taxpayer, it would repeat the mistakes of the euro area. In fact – worse – you'd be trying to negotiate a monetary union as Scotland is pulling away from the UK.
Nicola Sturgeon, the Scottish deputy first minister, said the chancellor's currency speech was a "panicky reaction" the increase in support for independence shown in recent polls. It was a political gamble by the no camp to frighten Scots away from independence.
"It won't happen, I wouldn't recommend it. Scotland will not keep the pound if Scotland chooses independence."
"People in Scotland shouldn't be fooled by what's effectively campaign rhetoric by George Osborne," Sturgeon said on BBC News 24. "What they're saying needs to be seen in the context of a campaign to frighten and intimidate Scotland."
The joint attack from Osborne, Alexander and Balls – the first time all three pro-union parties have endorsed the same economic policy on independence – will be used by the pro-UK Better Together group to mount a new "vote no to save the pound" campaign in coming weeks.
She said two economic Nobel Laureates, Sir Jim Mirrlees and Joseph Steiglitz, had advised the Scottish government that a currency union was clearly in the best interests of both the UK and an independent Scotland, because their economies were so closely intertwined.
Several recent polls show a majority of Scottish and UK voters believe a currency union would be the best option for both countries. But Better Together sources said their private polling showed that economic security was a crucial factor for the "middle million" of Scotland's voters who have yet to make up their mind on independence.
"There are strong, practical, hard-headed reasons why continuing to use the same currency is in the interests of people across the rest of the UK," Sturgeon said.
"They feel the burden of proof rests with the Scottish National party and are looking for reassurance that things will be fine," the source said. "If there's a backlash, it will be short-lived and it will be from people who are already thinking that way anyway."
English businesses export £60bn worth of goods to Scotland, and a separate currency for Scotland would add hundreds of millions to their costs, she said. After a yes vote in September's referendum, it would be in the UK's overwhelming interests to set up a sterling zone.
Henry McLeish, a former Labour first minister of Scotland, said there would be an immediate backlash in Scotland against Osborne's attack on the currency proposal. It would increase support for independence, by angering many wavering Scottish voters and building up their sense of alienation.
She added: "It would be a very odd chancellor of any UK government who insisted on a course of action that costs its own businesses hundreds of millions of pounds."
Insisting he would vote no to independence, McLeish told the Guardian: "The great danger for them is that the no campaign now is losing votes because it's so relentlessly negative, with no empathy for Scotland at all. [A lot] of people will say 'we're sick of this, these threats won't work'."
"George Osborne's problem is that he's banking on the fact that people in Scotland are daft: people in Scotland aren't daft," she said.
"We're not being selfish in Scotland about this: yes, it would be in our interests, but it would in the interests of the UK too."
The formal advice from Sir Nicholas Macpherson, the Treasury's chief civil servant, told Osborne he would "advise strongly against a currency union as currently advocated, if Scotland were to vote for independence".
"Currency unions between sovereign states are fraught with difficulty. They require extraordinary commitment, and a genuine desire to see closer union between the peoples involved," said Macpherson's letter.
"As the Treasury paper points out, the great thing about the sterling union between Scotland, Wales, Northern Ireland and England is that it has all the necessary ingredients: political union, economic integration and consent.
"What worries me about the Scottish government's putative currency union is that it would take place against the background of a weakening union between the two countries, running counter to the direction of travel in the eurozone."
Osborne said his decision to publish this private, formal advice from a permanent secretary was extremely unusual – evidence of his determination to drive home the significance of the issue.
Danny Alexander, the Liberal Democrat chief secretary to the Treasury, was the first of the other two pro-UK parties to confirm that he and the Lib Dems would not endorse a formal currency union with an independent Scotland.
In a statement issued by the Treasury, Alexander rejected allegations from the Scottish government that the UK parties were "bullying" Scots by vetoing a sterling pact.
He said: "All of the currency options for an independent Scotland are riskier than the current arrangements, but a currency union carries particular risks, especially when the Scottish government says it might only be a temporary arrangement, leaving it at huge risks from market speculation.
"A currency union would leave the rest of the UK highly exposed to fiscal and financial risks from a separate Scotland.
"As a Scot and as chief secretary to the UK Treasury, on the basis of this analysis, I couldn't recommend a currency union to the people of Scotland and my party couldn't agree to such a proposition for the rest of the UK."
Osborne's stance is also expected to be formally backed on Thursday by Ed Balls, the shadow chancellor, as part of a united front by the UK parties to thwart Salmond's plans.
