George Osborne and Danny Alexander will front two important pieces of analysis next month into why being in the UK benefits Scotland both in terms of its currency and its financial services sector.
The first of these papers could prove particularly interesting. It will argue that the best kind of relationship between Scotland and the rest of the UK would be full fiscal and currency union – ie remaining part of the UK.
But it will also give an intriguing answer on the terms on which Scotland could leave the UK and yet still retain sterling as its currency.
This became an issue when Alex Salmond changed his party’s policy from backing euro membership to promising to retain the pound under independence. This could have an impact on the rest of the UK if a Scottish government chose to run large deficits and devalued the currency by doing so.
Therefore, the Treasury will argue, a currency union is possible, but only if there is some sort of fiscal union too in the form of a deficit cap at the very least – if not further integration.
This answer may well wind up the SNP, who are likely to say this is an example of Westminster trying to control its budget. But the coalition thinks their evidence will be so robust that it will force Salmond to choose between two positions: currency union with limits set from London or choosing their own currency altogether.
One government official told me:
This is different from a straight transition from sterling to sterling, there would be a negotiated settlement.
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.
We await the SNP’s response with interest.
Jim Pickard
Kiran Stacey