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Osborne's case against currency union ripped apart by top economist

THE Treasury case against a post-independence currency union between Scotland and the rest of the UK has been dismantled as "misleading", "unsubstantiated" and "the reverse of the truth" by one of the world's leading economists.

Professor Leslie Young, of the Cheung Kong Graduate School of Business in Beijing, accused the UK Government of relying on a "lurid collage of fact, conjecture and fantasy" in making its argument.

Young, whose work has been commended by two Nobel Prize winners and by the chairman of the Nobel Committee, has served an unprecedented four terms on the editorial board of the American Economic Review, the leading scholarly journal in economics.

The Scottish Government welcomed Young's rebuttal of Osborne's position - but the Treasury still maintained a currency union is "not going to happen".

A key plank of the SNP's economic case for independence is monetary union with the rest of the UK (rUK). The policy was dealt a blow after Chancellor George Osborne ruled out a currency union with independent Scotland. He was backed by his Labour and Liberal Democrat counterparts, Ed Balls and Danny Alexander.

Osborne's case was based on advice from Sir Nicholas Macpherson, the permanent secretary to the Treasury. But in the first paper produced for scotlandseptember18.com - an apolitical initiative set up by Scottish tycoon Sir Tom Hunter - Young rebutts Macpherson's claims, saying the arguments "cannot withstand" scrutiny.

Macpherson said the SNP currency policy was set against a background of a weakening union with the rUK, "counter" to the direction of travel in the Eurozone region - where countries have come closer together.

Young knocked down the ­Eurozone comparison on the grounds that Scotland and England would be closer in "business, financial and fiscal systems" than Eurozone members.

"They would start from very similar political and business cultures, hence very similar macroeconomic and business structures and financial parameters," he wrote. "So currency unification would not bring on the tensions that drove the Eurozone crisis."

He added: "The two governments and the central bank could quickly agree to head off any downward economic spiral with decisive action, given their shared values and culture, virtually identical business, financial and fiscal systems, and the familiarity, goodwill and respect that obtain between their electorates."

Macpherson argued "intolerable pressure" would be placed on a currency union if Scottish problems were "perpetually blamed on continuing UK intransigence".

Young dismissed this argument saying: "Scotland, unlike Greece, is a mature polity whose citizens have long enjoyed - and today demand - responsible government, transparent institutions and intelligent public discourse.

"Therefore ignorant, inflammatory rhetoric blaming English intransigence for the consequences of Scottish fiscal over-reach would be quickly dissected and dismissed by the many respected journalists, academics, and think-tank analysts on both sides of the border."

He added: "There is no substantive point here."

Osborne later published a letter from Macpherson summarising Treasury advice on the currency union issue. Young said: "There may be good reasons for the UK to reject a currency union with an independent Scotland, but none can be found in the Treasury letter. Yet that letter is the key justification for the stance of the UK Government."

Young challenged each paragraph of the Treasury letter in his report, describing it as focusing on "non-issues", and being "loose analysis" with "inconsistent assumptions".

A spokesman for the First Minister said the report "totally demolishes" the Treasury's argument against a shared currency.

He said: "As the Fiscal Commission Working Group has pointed out, the UK Government analysis to date has overstated the risks but failed to fully capture the benefits of formal monetary union. With the Osborne-Balls alliance, Project Fear has been losing the political argument. Now they're losing the fiscal argument too."

Blair Jenkins, Yes Scotland's chief executive, said: "The report states that no good reason can be found to reject a currency union in the Treasury's letter, proving that George Osborne also knows that a currency union makes sense. The reality is that the economics will trump political posturing after a Yes vote in September."

A Treasury spokesman said: "A currency union is not going to happen. The UK Government has set out detailed analysis supported by numerous independent voices as to why a currency union is not in the interests of an independent Scotland or the rUK. This decision is not going to change. This means less than six months from the referendum the Scottish Government still has no plan for what currency they would use."

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