In view of all that’s happened in Europe, it is extraordinary that Scots could think monetary union with Westminster perfectly compatible with full scale independence. This is none the less the platform sold to them by the Yes campaign. All the evidence suggests that a shared currency without shared government doesn’t work. Monetary union requires a high degree of both fiscal and banking integration. Mr Salmond proposes the very reverse.

The reasons for this have been exhaustively explained elsewhere already, but bear brief repetition. Countries with their own currency shouldn’t logically ever run into fiscal difficulty. In a downturn, when spending rises and tax revenue falls, they can always print money to cover the shortfall. The printing press also gives them the wherewithal to bail out insolvent banks, and thereby prevent wider economic collapse. With a shared currency, these privileges are denied, if only because more solvent nations tend to refuse liability for insolvent ones.

Any monetary union with the rest of the UK is therefore certain to involve a high degree of continued fiscal and financial oversight by Westminster. Without such controls, monetary union would be unacceptable to the rest of the UK. But with such controls, it would be equally unacceptable to Mr Salmond. Independence would count for little if Westminster continued to dominate Scottish affairs. The Scots can have monetary union if they like, but they cannot also have Mr Salmond’s promise of welfare-max, otherwise known as socialism.

Three other alternatives exist – the hard peg of sterlingisation, the slightly softer peg of a currency board, or a completely free floating independent currency.

The last of these possibilities has been all but ruled out – and for fairly obvious reasons. Scotland has a lot of debt, both public and private. As home to the UK’s two largest banks, total debt is off the scale relative to GDP once financial liabilities are also taken into account. It would be impossible for the new currency to stand behind such mountainous foreign currency obligations. And if sterling debt was redenominated in the local currency, it would be tantamount to default, creating a massive financial and economic crisis.

Debt is what renders parallels with the “velvet separation” achieved by the Czech Republic and Slovakia back in the early Noughties largely invalid. The two new countries started out with a common currency – the Czech koruna – but concern about the potential liability to the Czech Republic caused the currency union to be dissolved a few years later. This was achieved with little mishap because the debts involved were still relatively insignificant.

With Scotland, it would be a different ball game, which is why we can expect both Royal Bank of Scotland and Lloyds Banking Group to announce they are re-domiciling south of the border within hours of a Yes vote. Even if they thought it worth the risk of staying, the Bank of England would not. To forestall a run on the two banks, they would have to remain safely under the Bank of England’s wing.

This leaves sterlingisation or currency board arrangements similar to those operated by Hong Kong. The latter option, which demands foreign exchange reserves of at least the same size of the monetary base to work convincingly, would appear a non starter, at least in the short term. Where is Scotland going to get reserves of this order of magnitude from?

So sterlingisation it is – a perfectly acceptable solution, and actually a very good one if you believe in low taxes, a small state, and much smaller, low risk banking system. This, unfortunately, is not how independence is being sold. Denied the flexibility to borrow and print at will, Scotland would have to fund its spending through higher taxes, which would in time render the country uncompetitive and therefore unable to sustain its welfare promise.

City analysts from Goldman Sachs and Berenberg, a German-based multinational bank, published reports concluding a Yes vote would force Scotland into deeper austerity, requiring a “significant reduction in the provision of public services” to gets its finances in order.

In a separate analysis, Iain McLean, professor of politics, predicted every Scot would be £480 worse off under independence now thanks to sharply declining oil revenues.
All three agreed that a separate Scotland would pay a higher interest rate on its borrowing, an additional cost that would be passed onto borrowers and mortgage holders.