U.K. Chancellor of the Exchequer George Osborne said Scotland must relinquish the pound if voters back independence in a referendum this year, raising the stakes for nationalists as they gain in the polls.
In a speech in Edinburgh today, Osborne made a substantive change to previous rhetoric of a currency union between Scotland and the rest of the U.K. being “unlikely” to an outright “no.” The Scottish National Party has said trade and productivity make it common sense to share the pound.
“There is no legal reason why the rest of the U.K. needs to share its currency with Scotland,” Osborne told an audience in the Scottish capital. “If Scotland walks away from the U.K., it walks away from the pound.”
The currency is the fiercest battleground in the debate before the Sept. 18 vote, with campaigners for maintaining the U.K. targeting it as a key weakness in Scottish First Minister Alex Salmond’s blueprint for independence.
The chancellor said a currency union would need joint control of banking and greater fiscal risk-sharing between the two countries, especially given the size of Royal Bank of Scotland Group Plc in relation to Scotland. U.K. monetary and fiscal policy could not be influenced by Scotland, he said, adding that Scots would also pay a premium to borrow.
“The Scottish government says that if Scotland becomes independent there will be a currency union and Scotland will share the pound,” Osborne said. “People need to know -- that is not going to happen.”
Scotland’s deputy leader, Nicola Sturgeon, said Osborne’s latest intervention was “campaign tactics.” She earlier accused the Conservative-led U.K. government of “bullying” after saying a currency union would be unworkable.
“The reason we propose a currency union is that it would be in Scotland’s interest and it would be in the interests of the rest of the U.K.,” she told Sky News today. “What the Treasury says now in the heat of the campaign will be very different to what they say after a democratic vote.”
While more people in Scotland want to stay within the U.K. than leave it, the margin has narrowed in recent polls.
A survey by ICM Research for the Scotland on Sunday newspaper showed the first shift last month. It found 37 percent of respondents would vote for independence, up five percentage points from a comparable poll in September. Those in favor of staying part of the U.K. dropped to 44 percent from 49 percent.
Osborne’s message was endorsed both by the opposition Labour Party and the Liberal Democrats and comes less than a week after Prime Minister David Cameron asked everyone in the U.K. to persuade Scots to stay within the 307-year-old union.
“This isn’t bluff, or bullying, it’s a statement of fact,” Chief Secretary to the Treasury Danny Alexander, a Liberal Democrat, said in an e-mail today. “The SNP’s claims that an independent Scotland could or should be able to share the pound are pure fiction.”
Labour finance spokesman Ed Balls said Scotland will not keep the pound if voters choose independence. It would be “catastrophic for interest rates, for taxes, for economic stability, for Scotland and the rest of the U.K.,” he said.
The Treasury today published an analysis paper highlighting the problems with establishing a currency union with an independent Scotland. Bank of England Governor Mark Carney said on a visit to Edinburgh last month that for such a union to work and not repeat the mistakes of the euro region, countries must cede some sovereignty over their budgets.
The U.K.’s main business lobby reiterated that point today in support of Osborne’s comments.
“The lesson of the Eurozone crisis is a single currency union requires deep fiscal and political integration, which the three main Westminster parties have made clear would be undermined fatally by an independent Scotland,” John Cridland, director-general of the Confederation of British Industry, said in an e-mailed statement.
Both Salmond and Osborne argued that Carney’s speech supported their positions on the pound.
“If currency unions are to succeed then the markets must believe they are built to last,” Osborne said, arguing the SNP is not committed to a long-term currency union.
Osborne said that when the Czech Republic and Slovakia tried to form a currency union after their 1993 separation, it only lasted 33 days, because capital fled from one country to another “in pursuit of the safe haven.”
The chancellor said another condition would be monetary union, and an agreed exchange rate policy. If the nations were independent and could not cut interest rates, it would have to respond by cutting spending or raising taxes.
He also said an independent Scotland would have to pay more to borrow, citing experts who believe it would to pay between 72 and 165 basis points above U.K. rates in interest, adding 1,700 pounds ($2,830) a year to the average Scottish mortgage.
“Currently, Scotland benefits from the whole U.K.’s credibility in the gilt markets,” he argued, adding that Salmond has said an independent Scotland could refuse to pay its share of U.K. debt if not allowed to use the pound.
International investors would not want to lend to a country that does not honor its debts, he said. The pound advanced for a third consecutive day against the dollar, appreciating by 0.3 percent to $1.6638 as of 11:21 a.m. London time.
“The Scottish government says it’s as much Scotland’s pound as the rest of the U.K.’s,” Osborne said. “The value of the pound doesn’t lie in the paper and ink that’s used to print it. The value of the pound lies in the entire monetary system underpinning it.”
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