Scare tactic was bang on the money

"If Scotland walks away from the UK," said Mr Osborne, "it walks away from the UK pound." As if by magic, a succession of large companies announced they were going to walk away too: Standard Life, Lloyds, even RBS, which it later emerged isn't a Scottish company at all, at least in the eyes of the EU. The head of BP, Bob Dudley, delivered a warning on the risks to the oil industry, even though BP isn't a British company any more. Pension fund managers, accountants, retailers like Sainsbury's all weighed in with their warnings that food prices would rise, mortgages would rise, pension funds would fall. Only Michael O'Leary of Ryanair said he didn't care whether Scotland was independent or not, so long as it was good for his business.

Now, those banks and businesses warning about independence insisted they were merely alerting shareholders, deposit holders, customers etc. that "uncertainty" over the monetary arrangements after independence represented a material risk. This was something of a self-fulfilling prophecy since it was the announcement by George Osborne itself that created the climate of currency uncertainty. The UK Government had always insisted, since the signing of the Edinburgh Agreement in 2012, it was not prepared to "pre-negotiate" about post-independence arrangements. Instead it elected to pre-empt negotiations altogether by making a unilateral declaration of monetary exclusion.

The Unionist parties and the Better Together campaign's leader Alistair Darling, berated Alex Salmond for not offering a "plan B" now that the pound had been taken off the table. The First Minister stuck doggedly to the line that, because the Scottish government's Fiscal Commission Working Group had said the ideal post-independence arrangement would be a currency union, that was the only option he would entertain. In fact, the Fiscal Commission had noted the alternatives to a formal monetary union but had dismissed them on the grounds a monetary union would be the best option.

The reasons for this appeared fairly obvious. People do not want to change money at the border whenever they visit their relatives in England; cross-border banks and businesses don't want to have to go through the cost and inconvenience of having two accounting systems; and exporters don't want to have to incur transaction costs in changing currency when they send goods over the border. The UK, as the Governor of the Bank of England, Mark Carney, said in his speech in Edinburgh in January, was in many ways an optimal currency zone, since the two countries had similar levels of GDP and labour productivity, had a common language and were major trading partners.

However, the Governor had insisted there would have to be a degree of "pooled sovereignty" to ensure there was financial stability after independence and a strategy to deal with financial crisis like a collapse of the banking system. Perhaps surprisingly, the Scottish Government endorsed Mr Carney's speech and tacitly accepted his conditions: interest rates would be set by the Bank of England, and banking regulation and overall Scottish public borrowing would effectively be decided at UK level rather than by an independent Scottish government.

A number of Unionist commentators claimed this meant Scotland would be less free than it is at present. "Why vote Yes to be even more dependent?" wrote The Herald's former political editor, Catherine McLeod. "However much taxation was raised in Scotland,the Bank of England could constrain how it was spent. That cannot be independence in anyone's book". The Yes campaign responded by saying that, in Europe, countries pooled sovereignty but remain independent countries. Which perhaps isn't the best example to invoke, given the recent turmoil over the sovereign debt crisis.

THE Scottish Government's plan B was hinted at by Nicola Sturgeon and Alex Salmond when they announced that, if Scotland wasn't to be allowed use of the pound, Scotland would no longer be liable for its share of UK National Debt. The SNP insist they are willing under the terms of the Edinburgh agreement, to accept Scotland's share of this debt - around £120bn - but that if the rUK refuses to share common assets, it cannot expect Scotland to share liabilities.

The implication here is that an independent Scotland would issue a Scottish pound, based on a one-to-one parity with sterling, and set up what is called in the jargon a "currency board" - a central monetary authority that would require the banks to deposit reserves in a Scottish exchequer. This is the arrangement that applied in Ireland for 50 years after independence, when the pound continued to circulate in the Republic even though the Irish government, in 1933, refused to continue making debt repayments to the UK. A number of Latin American governments peg their currencies to the dollar in this way, which led to unionists calling the Scottish Plan B "Panamisation". However, a number of European countries also peg their currencies to the Euro, including Denmark and the Czech Republic.

The UK press called this "default", and warned if Scotland "reneged on its debts" international investors would not wish to lend to an independent Scotland. The Scottish Government responded this would not be default and an independent Scotland, backed by oil assets - which a report from oil tycoon Sir Ian Wood last month confirmed was worth between £1tr and £2trn - would have a better credit rating than the rest of the UK. The credit rating agency, Standard and Poors suggested that Scotland would indeed qualify for a Triple A credit rating when it said in its report on February 27th that Scotland would have "its highest economic assessment".

The currency debate is so hedged about with conditionals and suppositions it is hard for anyone to know exactly what would happen after independence. But the objective of the UK Government was achieved nonetheless. It wanted to ramp up the climate of anxiety with a currency shock and it succeeded. In the poll of polls, according to psephologist Prof John Curtice, the Yes camp has been rising marginally across the month. But other polls indicated that there was heightened anxiety about the economics of independence.

But the impact may be more fundamental still. The 1707 Treaty of Union, and the Acts that followed it, were supposed to represent a partnership between two nations, Scotland and England. It was never regarded, certainly in Scotland, as an annexation of Scotland by England. The currency union was the principle economic expression of that union partnership, yet in February 2014, that changed, when one of the partners declared the pound was no longer common property, and could be taken away, without consultation or negotiation, by a Conservative chancellor in an off-hand speech.

The symbolism of this moment cannot be over-emphasised. Scots may well reject independence in the referendum of 2014, but the United Kingdom will never be quite the same again.