The Sterling Twilight Zone

Something is afoot with Alex Salmond's plans for keeping the pound.
In January, the First Minister couldn't have been clearer:
Talking to the Economist about how an independent Scotland could form a "sterling zone" with the rest of the UK, he said: "I'm in favour of a stability pact".
In other words, an agreed set of rules for Scotland's spending, taxing and borrowing which would ensure fiscal discipline and ease fears of a rogue Scottish national debt undermining the currency. (See Euro for details)
In March, Mr Salmond expanded on his theme in a BBC interview with Andrew Neil.
"There would have to be a stability pact which would have criteria on what you could borrow," he said.
What a difference six months makes.
Last week, the First Minister performed an off-the-cuff U-turn, and told an audience in Chicago there was no need for a "fiscal stabilisation pact" after all.
Fiscal self-discpline and trust would suffice.
In the wake of the Eurozone crisis, it was a jaw-dropping remark.
In one sentence, he dismantled the scaffolding around the SNP's plans for keeping the pound.
Naturally, no government ever sets out to be profligate, incompetent, or irresponsible, yet many are (see Euro again).
So the idea that the rest of the UK would let an independent Scotland - perhaps for generations - use the pound without some kind of underlying pact is quite a claim.
"Not a cat's chance in hell," as Salmond's own former economic adviser, Professor John Kay, put it.

In today's Herald I report on the Treasury's response to the development.
Here's a longer version of the story

EXCLUSIVE
Tom Gordon

THE Treasury last night cast fresh doubt on Alex Salmond’s plans for an independent Scotland keeping the pound, after the First Minister abandoned his idea of an underlying “fiscal stability pact” with the rest of the UK.

Chief Secretary to the Treasury Danny Alexander said the Eurozone crisis showed strict controls on tax and spending had to be a pre-condition of monetary union, contradicting Mr Salmond.

Earlier this year, the First Minister backed a stability pact with the Bank of England and Treasury which would have set limits on how much an independent Scotland could tax, spend and borrow from the international money markets.
Although the arrangement would limit Scotland’s ability to set its own fiscal policy, he said it was necessary for creating a sterling zone, and “no more than the fiscal discipline a sensible country would have in any case”.
Critically, the pact would cap borrowing so a Scots national debt did not undermine the pound.
But in an off-the-cuff remark in Chicago last week, Mr Salmond unexpectedly abandoned the idea, and said a stability pact was no longer needed.
The U-turn prompted former Labour chancellor Alistair Darling, in his role as chair of the pro-Union Better Together campaign, to accuse Mr Salmond of flip-flopping and confusion.
Alexander, Liberal Democrat MP for Inverness, Nairn, Badenoch & Strathspey, last night joined the attack, saying: “Perhaps all these foreign trips have led Alex Salmond to forget about the Eurozone crisis on his own doorstep, though he clearly remembered to pack his flip-flops.
“The very simple lesson that taught us is that you can’t have a shared currency without controls on fiscal policy. I firmly believe that Scotland is stronger within the UK and the UK is stronger with Scotland in it.”
His comments echoed those of Professor John Kay, a former member of the First Minister’s Council of Economic Advisers, who at the weekend said a lesson of the Eurozone was that tight rules were needed for monetary unions, and there was “not a cat’s chance in hell” of an independent Scotland using the pound without a stability pact.
The First Minister’s reversal was revealed by the Herald’s sister paper, the Sunday Herald.
In January, Mr Salmond told the Economist magazine: “I’m in favour of a stability pact.”
In a BBC interview in March he added: “There would have to be a stability pact which would have criteria on what you could borrow.”

But answering a question about the restrictions of monetary union, such as the Bank of England setting Scotland’s interest rates, Mr Salmond told the Chicago Council on Global Affairs on Friday: “I don’t believe that a monetary policy restriction would have to have a fiscal stabilisation pact. I think we can have plenty of room for manoeuvre within a currency union.”
A Scottish Government spokeswoman said: “Scotland is in a stronger financial position than the UK as a whole, and therefore will have no difficulty adhering to fiscal discipline within a sterling zone as an independent country.”