Britain warns on currency of independent Scotland

British finance minister George Osborne warned Tuesday that an independent Scotland would sacrifice control over much of its economy if it stayed in a currency zone using the pound.

Launching a Treasury paper on currency options ahead of a September 2014 referendum, Osborne said there was also no guarantee the rest of the United Kingdom would accept such an arrangement.

Osborne told an audience in Glasgow that Scotland could otherwise end up like Panama and Montenegro, which use the US dollar and the euro respectively but with no control over policy.

The pro-independence Scottish government has said a currency union is its preferred option.

"If it ain't broke, don't break it," Osborne said to muted applause as he insisted that the more than 300-year-old union with England was best for the economy of both nations.

The Chancellor of the Exchequer said an independent Scotland would have four options: currency union, unilaterally keeping the pound and pegging it to sterling, creating a Scottish currency or joining the euro.

But all were a "very deep dive into uncharted waters," he said.

A currency zone between two separate countries would be "extremely hard to sustain" without close political and economic union, Osborne said, pointing to the example of the euro.

"An independent Scotland would have to agree its tax and spending plans with what would be a foreign government," he said.

The British minister also said the rest of the United Kingdom -- England, Wales and Northern Ireland -- was unlikely to want to give an independent Scotland a say in the way that London runs the economy.

"Why would 58 million citizens give away some of their sovereignty to five million people in another state?" he said.

Unilaterally keeping the pound, the other main option, would leave Scotland with "no control over its own monetary policy" as all decisions on sterling would be taken by the Treasury in London, Osborne said.

He cited other small nations such as Montenegro, which uses the euro single currency despite not being part of the European Union, and Panama, which uses the US dollar, but said "this option would not be appropriate for a country of Scotland's economic size and complexity."

"All of these alternative currency arrangements are less suitable economically than we have now for both Scotland and the rest of the UK," Osborne concluded.

A referendum is set for September 18, 2014, when Scottish voters will be asked the yes/no question: "Should Scotland be an independent country?"

Scotland's First Minister Alex Salmond and his Scottish National Party (SNP) want to keep sterling in the event of a "yes" vote.