By David Milliken
LONDON (Reuters) - The euro zone's experience of countries sharing a currency but not a government shows there is no clear case for an independent Scotland to use sterling, Britain's finance ministry said on Tuesday.
The nation of 5 million will hold a referendum on September 18 next year to decide whether to split from the United Kingdom, at the instigation of the Scottish National Party that runs the country's devolved government.
Pro-independence campaigners want Scotland to keep sterling, at least in the early years of independence, and then to decide later whether to switch to its own currency.
But in a report on Tuesday, Britain's finance ministry said there was no clear case for the United Kingdom to agree to a formal currency union with an independent Scotland, which would have an economy of a similar size to New Zealand's.
"The economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear," said the report, which was prepared by non-partisan civil servants.
"The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties," it added.
Conservative finance minister George Osborne and his Liberal Democrat deputy Danny Alexander, who insist Scotland would be better off remaining part of the United Kingdom, are due to present the report in Glasgow later on Tuesday.
Financial markets are unperturbed by what they see as a remote prospect of Scottish independence, but there could be major implications for sterling and the British government bond market if this perception changed.
Markets could easily force a currency union to break up after independence if they did not think there was a solid commitment to it on both sides, imposing costs on both Scotland and the rest of Britain, the report said.
Moreover, there would be complex issues to be decided on whether the Bank of England could continue to be a lender of last resort to Scottish banks, and Britain would want "rigorous oversight" of an independent Scotland's fiscal policies.
The report reached a similar conclusion and highlighted further risks for Scotland if it decided to use sterling unilaterally, join the euro or create its own currency.
Scotland's economy was heavily exposed to the volatile oil and gas sector, and more similar to the economy in the rest of Britain than to that of the euro zone, the report said.
"The current currency and monetary policy arrangements within the UK serve Scotland well," the report said. But after independence, "the status quo would not be one of the options".
"All of the alternative currency arrangements would be likely to be less economically suitable for both Scotland and the rest of the UK."
The report is part of a series by the British government that it hopes will inform the referendum debate.
Opinion polls show around 30 percent of Scots are currently in favor of independence, while 50 percent are against.
(Editing by Alison Williams)
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