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Scotland can keep the pound, if it agrees to budget constraints

An independent Scotland can share UK currency.

In its next analysis paper, the UK coalition government will announce its support to the idea of sharing the pund, as advocated by the Scottish National Party (SNP) leader Alex Salmond.

In the paper, to be published in March 2013, the chancellor of exchequer George Osborne will say such a currency union would require ministers in Holyrood to accept a deficit cap, to be policed from London.

“This is different from a straight transition from sterling to sterling, there would be a negotiated settlement, a senior coalition official told the Financial Times.

“It very much suits the Scottish government to have a simplistic set of messages saying we will have sterling and the queen and anything else not to frighten the horses. But as soon as you look at it in any detail, it doesn’t work.”

Osborne earlier argued that sharing a currency would require some form of fiscal integration between the two countries.

“It’s difficult to argue for establishing a monetary union while pursuing fiscal and political separation . . . I have seen no such credible mechanisms proposed by those advocating independence. I am not clear they exist,” Osborne told the Confederation of British Industry (CBI) in September 2012:

British officials have long argued that allowing an independent Scotland complete control over its own budget could undermine a joint currency if a Scottish government decided to run unsustainable deficits and allowed debt to rise.

John Kay, a former adviser to Salmond, said last year that a separate Scottish currency was necessary for full control over tax and spending.

In its paper, the British government will also argue that the country’s financial services sector is so big that a separate Scottish government would not be able to afford to bail it out.

Ministers will point out that when the UK government nationalised RBS in 2008, its balance sheet exceeded £2.2 trillion, 50 per bigger than the entire British economy.

The SNP will release its own analysis later this year into how Scotland would operate if voters choose independence in next year’s referendum. In a recent poll, 32 per cent of Scots preferred independence, while 47 per cent said to remain with the UK. However, a 20 per cent of the voters said they were undecided on the issue.

The British government’s new argument will put Alex Salmond in a difficult position.