The Osborne gambit: Independent Scotland could not keep the pound
George Osborne took an extraordinary risk in the battle to protect the union today, with a keynote speech warning that an independent Scotland would not be able to keep the pound.
In a coordinated attack on Alex Salmond's credibility, the speech was backed up immediately by statements from shadow chancellor Ed Balls and Liberal Democrat chief secretary to the Treasury Danny Alexander.
"I could not as chancellor recommend that we could share the pound with an independent Scotland," Osborne said.
"The evidence shows it wouldn’t work. It would cost jobs and cost money. It wouldn’t provide economic security for Scotland or for the rest of the UK."
He added: "At heart this banking union would involve putting UK taxpayers on the line for banks in a foreign country.
"It is very difficult to see how after a 'yes' vote, any UK politician could propose such an asymmetrical arrangement."
Westminster cannot stop Scotland using the pound but it can prevent it forming a currency union with the remains of the UK after Scottish independence. That would leave it having less control over financial policy than it does at present.
In a highly unusual intervention for a civil servant, Treasury permanent secretary Nicholas MacPherson signed and released a public letter to Osborne saying he would "advise strongly against a currency union as currently advocated".
The letter summarised arguments set out in a 76-page analysis in which the Treasury strongly objected to currency union.
Osborne called Alex Salmond's bluff about Scotland refusing to pay its part of the UK's debt if Westminster did not play ball on currency union in the event of a 'yes' vote.
"International lenders would look at Scotland and see a fledgling country whose only credit history was one gigantic default," he said.
"And they would demand a punitively high interest rate as a result.
"That would be crippling for every Scottish household with a mortgage or personal loan, for every Scottish business with credit, for the public finances and therefore for public services and for taxpayers, and for the whole economy."
In a written statement, Alexander said: "As a Scot and as Liberal Democrat chief secretary to the UK Treasury, on the basis of this analysis, I couldn't recommend a currency union to the people of Scotland and my party couldn't agree to such a proposition for the rest of the UK.
"The SNP now need to work out what their alternative currency proposal is and set it out openly.
"This isn't bluff, or bullying, it's a statement of fact."
The announcement, which has reportedly been prepared for months following relentless focus group testing, took the Scottish National party (SNP) by surprise.
Salmond had assumed currency union was sufficiently in Westminster's interest for it not to take the risk of ruling it out.
"People in Scotland will not be fooled by the bluff, bluster and posturing of Osborne, Ed Balls and Danny Alexander," the Scottish first minister said.
"This is a concerted bid by a Tory-led Westminster establishment to bully and intimidate – but their efforts to claim ownership of sterling will backfire spectacularly in terms of reaction from the people of Scotland, who know that the pound is as much theirs as it is George Osborne's.
"The reality is that a formal currency union with a shared sterling area is overwhelmingly in the rest of the UK’s economic interests following a 'yes' vote, and the stance of any UK government will be very different the day after a 'yes' vote to the campaign rhetoric we are hearing now."
Salmond accused Osborne, who is highly unpopular north of the border, of trying to bully Scotland and again threatened not to pay Scotland's share of UK debt if Westminster was uncooperative.
"All the debt accrued up to the point of independence belongs legally to the Treasury, as they confirmed last month – and Scotland can’t default on debt that’s not legally ours," he said.
"However, we’ve always taken the fair and reasonable position that Scotland should meet a fair share of the costs of that debt. But assets and liabilities go hand in hand, and – contrary to the assertions today, sterling and the Bank of England are clearly shared UK assets."
Westminster sources are certain the move pinpoints the weakest area for pro-independence advocates and will help swing undecided voters behind a 'no' vote.
The SNP's support for currency union is itself a new development, with an origin in the difficulties the euro faced.
During a visit to Brussels in 1999, Salmond described sterling as a "millstone around Scotland's neck".