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Currency union rejection questioned

Key reasons put forward by the UK Government for rejecting a currency union with an independent Scotland are "unsubstantiated", an economics expert has said.

Chancellor George Osborne cited Treasury advice when he ruled out sharing the pound in the event of a Yes vote in this year's independence referendum, but the arguments "cannot withstand" scrutiny, according to Leslie Young, economics professor at the Cheung Kong Graduate School of Business in Beijing.

The Scottish Government has put forward plans for the country to retain the pound if there is a Yes vote in September, arguing this would be to the benefit of both Scotland and the rest of the UK.

But the Chancellor, and his Labour and Liberal Democrat counterparts Ed Balls and Danny Alexander, have all ruled out doing such a deal with an independent Scotland.

In the wake of a speech in Edinburgh earlier this year, Mr Osborne published a letter from his Permanent Secretary summarising Treasury advice on the currency union issue.

The letter from Sir Nicholas Macpherson told Mr Osborne that unions are ''fraught with difficulty'' and raised serious concerns about the Scottish Government's commitment to making it work.

Prof Young said: "There may be good reasons for the UK to reject a currency union with an independent Scotland, but none can be found in the Treasury letter. Yet, that letter is the key justification for the stance of the UK Government."

The Scottish Government welcomed the report while the Treasury maintained that a currency union is "not going to happen".

In his letter, Sir Nicholas set out reasons against a currency union including concerns that the Scottish Government has suggested that another currency option could be chosen in future, the risk of a bailout for either country, and the impact of differing tax and spending policies.

Oxford-educated Prof Young challenged each paragraph of the Treasury letter in his report, describing it as "loose analysis" with "inconsistent assumptions".

Part of the Treasury letter said there would be "intolerable pressure" on the currency union if the UK and Scottish Governments did not have aligned fiscal policies.

Prof Young said: "I ts literal meaning is 'pressure so intense that it is bound to rupture the currency union'. Why hide behind the ambiguous construction? Why not state outright that the hypothesised behaviour by the Scottish government would rupture the currency union?

"Because that statement could not be substantiated. In other words, the claim that 'there is a substantive point here' masks the reality that there is no substantive point here."

He added: "(The letter) does not even address the question that it purports to answer: whether the currency union is in the interests of the UK, if Scotland voted for independence.

"The Treasury claims are invalidated, not by errors of fact, but by errors of logic. These errors are subtle and difficult to disentangle.

"But only subtle logical error could have led Treasury to claim, in effect, that past risky behaviour by investment bankers in London, inadequately supervised by the Bank of England, somehow disqualifies an independent Scotland to be a currency union partner of England."

A spokesman for the First Minister said the report "totally demolishes" the Treasury's argument against a shared currency.

He said: "As the Fiscal Commission Working Group has pointed out, the UK Government analysis to date has overstated the risks but failed to fully capture the benefits of formal monetary union.

"With the Osborne-Balls alliance, Project Fear has been losing the political argument. Now they're losing the fiscal argument too."

A Treasury spokesman said: "A currency union is not going to happen.

"The UK Government has set out detailed analysis supported by numerous independent voices as to why a currency union is not in the interests of an independent Scotland or the remaining UK.

"This decision is not going to change. This means less than six months from the referendum the Scottish Government still has no plan for what currency they would use."

Yes Scotland chief executive Blair Jenkins said: " As most Scots know, the pound belongs to Scotland every bit as much as the rest of the UK and this forensic analysis from a respected economist exposes the fact that the anti-independence parties' opposition to a currency union is purely political and designed to scare people into voting No - the rise in support for Yes shows it's backfiring.

"As it is now abundantly clear, a formal currency union makes sense not only for Scotland, but for the rest of the UK as well.

'The report states that no good reason can be found to reject a currency union in the Treasury's letter, proving that George Osborne also knows that a currency union makes sense. The reality is that the economics will trump political posturing after a Yes vote in September."

A spokesman for the pro-union Better Together group said: "This is a flawed piece of work which completely fails to take into account the extensive analysis produced by the Treasury's expert economists.

"A currency union isn't going to happen. As Professor Young points out, Alex Salmond has a duty to tell us his Plan B for what would replace the pound.

"Would we rush to adopt the euro or would we set up a separate unproven currency? The idea that Scots can go to the polls in September blind on this most fundamental issue simply isn't credible."


From Belfast Telegraph