In a series of grave warnings about the consequence of a Yes vote, the Chancellor also claimed that Scotland could run out of hard cash in the event of independence, the financial-services sector would not survive, and average mortgage payments north of the Border would increase by £5,400 per year.
Mr Osborne repeated his assertion that there is “no wriggle room” for him or a future chancellor to share the pound with an independent Scotland and said: “No ifs, no buts, there will not be a sterling zone.”
However, last night Scottish finance secretary John Swinney described Mr Osborne’s words as “bluff and bluster”. He said a currency union would be agreed between the two countries in the event of a Yes vote. Giving evidence to the Scottish affairs select committee, Mr Osborne said a currency union would only work if Scotland handed over almost all its economic levers – such as banking, spending limits and financial-service regulation – to the remainder of the UK, a position which he said was “unsustainable”.
He also dismissed the option of “sterlingisation” – using the pound without agreement – which has been suggested as a plan B by leading SNP figures. He acknowledged that Scotland could unilaterally adopt the pound without a formal monetary union, but said it would be doomed to failure.
And he highlighted the likely demise of Scottish sterling notes which were first printed in 1696, 11 years before the Act of Union, if Scotland attempts to go down the road of sterlingisation.
Appearing before Scots MPs alongside Sir Nicholas MacPherson, Permanent Secretary to the Treasury, Mr Osborne was asked about notes printed by the Scottish banks such as the Royal Bank of Scotland and Bank of Scotland. He said: “They wouldn’t exist any more.”
Sir Nicholas said if RBS or Lloyds – which owns the Bank of Scotland and Clydesdale Bank – wanted to continue to print money in Scotland, they would need a like-for-like number of British notes in their reserves to guarantee the money.
Mr Osborne explained: “So, for every pound the Royal Bank of Scotland issues as a banknote, it would be like a kind of IOU against the pound they have kept in their bank vault.”
He added: “The Scottish banks print notes with the support and authority of the Bank of England, the Treasury and Parliament, which has passed legislation to support this and continues to support this.
“So it would be a situation where you would wait for coins and notes to come across the Border, either people bringing them or through transfers of money electronically because of a business deal or something like that, and then you want to try to hold that money in the country or at least make sure you haven’t run out of it.”
And he claimed that Scotland could run out of hard cash if it separated, citing the example of Panama’s use of the dollar and saying that the Central American country regularly runs out of coins and notes.
He said: “There’s nothing to stop people in France using the pound if they wanted to, if they managed to get hold of the notes and the coins. But it’s not a sustainable arrangement.”
He said similar arrangements had been tried in Panama, which has had “more IMF bailouts than virtually any other country in the world”, and with the old deutschmark and later the euro in Montenegro, which has had “bouts of hyperinflation”.
He continued: “The idea Scotland could adopt the Panama or Montenegro approach is just not credible. It wouldn’t last, it would be pretty disastrous for Scotland to even try that.”
Mr Osborne told MPs it would also mean the end of the financial services sector in Scotland.
The Chancellor said: “It’s inconceivable that you could have a financial sector anything like the size and sophistication of Scotland’s, employing tens of thousands of people, when you are literally having to grab pound notes and pound coins as they come across the Border and try and hold on to them.”
Sir Nicholas said it would be possible for an independent Scotland to establish its own currency but it would be “messy” and involve substantial set-up and transition costs.
Mr Osborne went on to claim that Scottish householders would face higher mortgage bills if an independent Scottish government walked away from its share of the national debt, as has been threatened if a currency union is blocked.
He said: “For the average mortgage in Scotland, there would be £5,400 more [in] mortgage payments a year. It would squeeze the incomes of Scottish families.”
Sir Nicholas added that mortgage interest rates in Scotland could hit 8 per cent. At present, rates are 3.5 per cent on average, with many below 2 per cent on short-term deals.
But Mr Swinney described the evidence as “a desperate attempt” by Mr Osborne to “recover some credibility” after his “Sermon on the Pound completely backfired and has led to a surge in support for Yes”.
The “Sermon” was delivered in Edinburgh and ruled out a currency union.
Mr Swinney added: “It doesn’t matter what George Osborne claims on currency now – the people of Scotland do not believe his bluff and bluster, and even senior UK ministers have admitted that ‘of course there will be a currency union’. A currency union is the choice of business in both Scotland and the rest of the UK, and it is clear that the markets will expect the UK to negotiate constructively and in good faith. Anything else would be damaging to the economy of the rest of the UK.”
He insisted that “thorough, comprehensive proposals” have been developed by a Fiscal Commission which includes two Nobel prize winners.
He added: “The reality is that on this issue, like so many others, George Osborne is on the wrong side of the politics, the wrong side of the economics and the wrong side of the people of Scotland.”