A plan to revitalise Aberdeen's heart, which had 70% of its funding lined up, has been kicked into touch by a bigger, brasher scheme

• Proposed plan for a new arts centre in Union Terrace Gardens for Peacock Visual Arts

The arts are a vital part of that sustainability. They are important both to a community's self-esteem and to its ability to attract new people. There has often been generous sponsorship of events in Aberdeen, but the permanent arts infrastructure has not evolved as you might have expected.

Only now is Aberdeen Art Gallery about to embark on a refit to make it once again a fit vehicle for the civic pride that established it and its superb collections more than a century ago. The only arts establishment in Aberdeen that has a reputation beyond Scotland now, or even beyond the city, is Peacock Printmakers, now incorporated into Peacock Visual Arts (PVA).

Begun on a humble scale nearly 40 years ago, Peacock works from its original cramped premises, attracting artists from all over the world, and the workshop has produced some of the finest prints to come out of Scotland in our generation. Think of Frances Walker's work, for instance, or of Will Maclean's Night of Islands.

Peacock produces great art, but that does not mean it is exclusive. On the contrary, it is a skill-based, open-access workshop that is there to serve the community. Peacock's statement reads: "At Peacock people don't just come in and passively see. They are welcome to come in, take part and DO." And that is not an empty invitation.

To consolidate its success, Peacock needs new premises. Two years ago it was poised for a development that would provide them, making its success more visible and its future more secure. It would also bring much-needed life and a touch of elegance back to Union Terrace Gardens. In a neglected green valley in the city centre, they run northwest from Union Street. The Victorians put the railway through the valley, but when a dual carriageway was added, the gardens began to go into decline.

The Peacock plan is to build against the retaining wall of Union Terrace that encloses the gardens to the west. Discreetly echoing the contours of the ground, the new building would intrude only minimally on the green space and its mature trees, while bringing back the life and animation it once had. The success of DCA in Dundee is the model and the scale is similar. (DCA also incorporates Dundee Printmakers.)

The new building would provide Peacock with workshops, a gallery, education rooms and all the other facilities it needs. As was planned from the start at DCA, it would also house the city's own Arts Development Team. In addition, it would provide space for the dance agency, City Moves. This project is costed at 13.5 million. Remarkably 9.5m of this sum is in place, almost half coming from the Scottish Arts Council (SAC), the rest from Scottish Enterprise and Aberdeen City Council. Planning permission has been granted.

The last piece of the jigsaw – the lease of the ground from the city council – was expected to fall into place when, in October 2008, with very little warning, Sir Ian Wood came up with a counter-proposal for the Gardens that stymied Peacock's plan. Sir Ian carries weight in Aberdeen. The council stood up to Donald Trump, only to be shamefully betrayed by the Scottish Government, but Sir Ian Wood is different. He is Aberdeen's success personified.

When, with Alec Salmond at his shoulder, he announced that he would put up 50m towards the cost of the creation of a new public square where Union Terrace Gardens now stands, the city had to take notice. The Peacock project was put on hold.

The total required for Sir Ian's square would be 140m – ten times the cost of the Peacock scheme, and that does not include some significant costs that would have to be met. The Scottish Government, Wood proposed, should put up 70m. Salmond evidently managed to be at once enthusiastic and non-committal. Where the balance of 20m would come from seems a bit vague.

The new square would obliterate Union Terrace Gardens. Decking over the whole valley at street level, flat concrete would replace a natural feature with its greenery and mature trees. It is not clear whether the buildings on the square would be retail or civic; nor is it clear how they would earn the money needed to maintain them. The project has been handed over to Acsef (Aberdeen City and Shire Economic Future) and public consultation on the Acsef project is ongoing.

Great men require great schemes. Clearly Sir Ian wants to do something for his city on a scale that matches his own achievement. But this is not a great scheme. It is a dreadful scheme. Aberdeen is a dignified and handsome city built on a modest scale. Bigger than Red Square in Moscow, this proposal is a city square for a nightmare Megalopolis. It would scar the city and its reputation.

In the 1960s, with civic self-esteem at its nadir, in a paroxysm of self-harm Glasgow, Dundee and Inverness tore themselves apart. Although badly scarred by crass development, more by luck than judgement, Aberdeen, like Edinburgh, escaped the worst of this wholesale civic devastation. Sir Ian's proposal is, however, the revival of a much earlier scheme which he also backed.

Old-fashioned even then, it was a throwback to those disastrous times when planners cheerfully proposed to finish what the Luftwaffe had begun: the comprehensive destruction of our city centres.

The idea that 70m of public money would ever go into such a white elephant in the present climate is absurd. Sir Ian's Megalopolis Square will surely never be built. The money pledged to Peacock's project was for its scheme as costed, it cannot simply be transferred to this grandiose and ill thought-out project. Nor is there anything on offer in the proposed square that could tempt Peacock even to try to join in.

If a decision is not made in favour of its original scheme, when the SAC ceases to exist later this year on the arrival of Creative Scotland the 4.3m it has pledged will go with it. According to Lindsay Gordon, Peacock's director, Sir Ian has refused to underwrite it. So both schemes will fall.

Faced with that prospect, Peacock has made an alternative proposal which keeps its building as planned and the gardens with it, but suggests that development would be possible on the other side of the garden if the railway and the dual carriageway were decked over. Such a proposal could never have been part of Peacock's own remit, but it offers a way for Sir Ian to fulfil his ambitions. On a more modest scale than his square, it could really improve the site and almost double the size of the gardens.

Sir Ian is good at making money. Peacock is good at making art. Success in the former is quantitative; in the latter it is qualitative. Without quality, quantity has little meaning. Aberdeen needs both.

Sir Ian might look back to the remarkable contribution that an earlier generation of its magnates made to the quality of their city. More than a century ago, men like John Forbes White and Sir James Murray played a key part in the conception and formation of the collections of what is still the city's greatest cultural ornament, Aberdeen Art Gallery.

Look to that precedent and Sir Ian and Peacock are natural partners. I hope that is how this matter is resolved. The sad alternative is that Union Terrace Gardens sinks back into neglect, a shabby monument to a missed opportunity.

What If?, an exhibition exploring ideas for Union Terrace Gardens, is at Peacock Visual Arts until 20 February. To view plans for the proposals put forward by Peacock and Sir Ian Wood, log on to www.peacockvisualarts.com