Scotland risks falling into a euro-style debt crisis if it cuts its budget ties with the United Kingdom as it could not withstand a severe financial shock alone, Treasury minister Danny Alexander will say Friday.

Alexander will argue in a speech, to be delivered as EU leaders meet to hammer out a deal to save the euro zone, that the crisis shows Britain needs strong central control of budget policy and borrowing.

Scotland within the monetary union, but fiscally independent, creates similar risks to those we see in the euro zone, he will say, according to extracts of his speech seen by Reuters.

If that crisis tells us anything, it is that strong control of fiscal policy and borrowing would have to be exercised centrally, he will say in the Scottish capital of Edinburgh.

Germany and France want to revive confidence in the euro zone by changing the EU treaty to allow much tighter central oversight of member countries' budgets and borrowing.

The Scottish National Party (SNP), which won a majority in Scotland's devolved parliament in May, has promised to hold a referendum on independence within five years.

But Alexander, a Scottish member of the coalition government, will argue that the euro zone's problems strengthen the case for Scotland to remain in its 300-year union with England.

Alexander will warn that should a fiscally independent Scotland suffer a financial crisis, it would not have recourse to help from the Bank of England - even if it still used sterling as its currency and its monetary policy remained set by the British central bank.

Scotland would also not have the funds to recapitalise its banks if needed.

British taxpayers stumped up hundreds of billions of pounds in cash and state guarantees to save Royal Bank of Scotland and HBOS, another Scottish lender, from collapse during the financial crisis.

If an independent Scotland had to undertake such huge recapitalisation itself, there is a high risk that the very solvency of the country, let alone its banks would come under market attack, Alexander will say.

Stating the obvious, independent from the rest of the UK, Scotland would have access to massively less fiscal firepower, according to Alexander, a Liberal Democrat.


The bulk of Scotland's funding comes from a 30 billion pound grant from the British central government, but the SNP has said an independent Scotland would be entitled to the lion's share of North Sea oil revenues.

Still, the British government opposes a break-up of the union with Scotland, instead offering Edinburgh greater powers to vary taxes and borrow money for infrastructure projects. Scotland already has its own legal system and devolved responsibility for health, education and emergency services.

Alex Salmond, the SNP leader and first minister of Scotland, is delaying a referendum on independence until late in his five-year term so as to turn the surge in his party's popularity into stronger support for breaking away from England. But that means he has also given little detail about what an independent Scotland would look like.

Alexander will accuse the SNP of creating uncertainty by not spelling how a fiscally independent Scotland would function, and what currency it would use.

This is a matter on which the SNP has been uncharacteristically silent. Yet it is one of the most central issues that need to be understood and debated, he will say.

The Scottish government has said it would consider joining the euro in the longer term.

What is happening in the European Union profoundly affects the debate about the future of our union. As the euro zone seeks rightly to tighten its economic and fiscal bonds in response to the crisis, Scots should ask very searching questions of those who seek to weaken those bonds on our island.

(editing by David Stamp)