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7 September 2012

Osborne asks the right questions about Scotland’s currency

How would Scotland combine monetary union with fiscal independence? Don't ask the SNP.

By George Eaton

Fortunately, and contrary to some reports, George Osborne did not claim in his speech last night that Scotland would lose the pound if it became independent. It is not within the Chancellor’s gift to determine what currency Alex Salmond’s country uses – that power resides with the Bank of England. Nor would an independent Scotland be forced to join the euro, as is sometimes said. The UK, Denmark and Sweden have all remained in the EU despite retaining their own currencies.

What Osborne did point out (and rightly so) is that if the SNP wants a monetary union with the rest of the UK (Salmond having abandoned his promise to take Scotland into the euro) it becomes much harder for it to argue for fiscal and political independence. The existence of monetary union without complementary fiscal union being the principal cause of the eurozone imbroglio. Osborne said:

In a world in which a separate, independent Scotland wished to pursue divergent economic policies, what mechanism could there be for the Bank of England to set monetary policy, as it does now, to suit conditions in both Scotland and the rest of the UK?

As Chancellor of the Exchequer, I have seen no such credible mechanisms proposed by those advocating independence.

I am not clear they exist.

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If the SNP Scottish Government cannot provide answers to these basic questions about Scotland’s currency then the Scottish people are entitled to ask this basic question in return: what path is the Scottish Government leading them down?

A spokesman for the Scottish Finance Secretary John Swinney replied that Scotland needed “no lessons from a Tory chancellor whose disastrous economic policies are threatening jobs and investment across this country. The cast-iron position is that an independent Scotland will keep the pound — a position that the Scottish Secretary, Michael Moore, has agreed with.”

None of the above is wrong (one questions the wisdom of Osborne, the Chancellor who has presided over a second UK recession, leading the charge against independence) but, as you will have noticed, the SNP answered a charge that Osborne did not make – that an independent Scotland would lose the pound -, whilst ignoring one he did make – that monetary union and fiscal autonomy are inherently incompatible. Until it does otherwise, it will have no credibility on this point.