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Chips are down in battle over Union

The impact yesterday's speech by George Osborne will have on undecided voters depends on whether they are swayed more by the politics of it or the economics.

The Chancellor had a legitimate economic case to make as to why the rest of the UK would not favour a currency union.

For some, however, that argument will have been obscured when the tartan mist came down at the sight of a Tory Chancellor telling Scots they will not be permitted to share the pound on his watch. Whatever the merits of the arguments, to rule out this option seven months out from the referendum risks looking petulant and contrary, especially with Labour and the Liberal Democrats weighing in behind Mr Osborne in such an orchestrated manner. A Government that has consistently refused to "pre-negotiate" now appears to be refusing to negotiate at all.

Alex Salmond was quick to accuse the Westminster parties of bullying and intimidation, and that could prove more significant in swaying voters than anything the Chancellor actually said. Last week, David Cameron was "love-bombing" Scots, urging them to stay in the UK. Now Mr Osborne is issuing stark warnings. This good toff, bad toff routine may have sounded like a good idea over brandy in the lounge of Number 10 but it could well backfire.

None of this is to say that the Chancellor did not have a right to speak.The First Ministers assertion that a vote for independence would be a vote for currency union, so often presented as fact, is clearly very much in doubt and voters should be aware of the implications before they vote.

It would, indeed, be difficult to convince UK taxpayers that they might have to be lender of last resort to a foreign country's banks, especially when Scotland, as the much smaller partner, would be in no position to offer quite the same service in return. There is also no denying that such an arrangement would be a punishingly hard sell for the Conservatives and scarcely less so for Labour within their own parties. Let us not forget how ceding sovereignty to the EU has played within Tory ranks for 30 years to see how it would go down.

Then there is the intervention of Treasury chief mandarin, Sir Nick Macpherson, who has advised ministers against joining a currency union. As well as the "asymmetrical risk" argument, he highlighted the Scottish Government's lack of a long-term commitment to the pound. This could increase the risk of capital flight from Scotland if it appeared St Andrew's House might abandon the pound. Also, forcing Scotland to align fiscally with the UK could increase clamour in Scotland for a separate currency, which could destabilise both economies.

There is of course an important counter argument: that the huge volume of trade between Scotland and England would outweigh these negatives. Many millions of pounds' worth of trade by companies in the rest of the UK depend on Scottish markets. This would certainly weigh on UK ministers' minds were they to be faced with accepting a currency union or not. The SNP has also warned that, if the UK Government still refused such a union, Scotland would renege on its share of UK debt, though it must be said that that could risk damaging Scotland's reputation with international investors, resulting in higher borrowing rates.

Sadly, if the negotiations decended into tit for tat in this way, Scotland's independence from the UK would be no velvet divorce but a bitter tussle. One senior Coalition Government source has even suggested negotiations might stall altogether and that, if so, Scotland would not become independent but revert to the status quo by default, a hugely unstable and unsatisfactory outcome.

The upshot of all this? That Mr Salmond is under pressure to name his Plan B. Even so, Mr Osborne's implacable stance may anger, rather than alarm, Scottish voters.

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