By David Milliken
LONDON (Reuters) - Britain's government raised the prospect of euro-style financial problems if Scotland votes for independence, saying the kind of currency union proposed by nationalists is unlikely to work.
The euro zone's experience of countries sharing a currency but not a government shows no there is clear case for an independent Scotland to use sterling, Britain's finance ministry said in a report released 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, as proposed by the Scottish National Party (SNP) that runs the country's devolved government.
Independence campaigners want Scotland to keep sterling initially and decide later whether to set up its own currency.
British finance minister George Osborne linked the push by nationalists to the problems besetting the euro zone and said an independent Scotland using the pound would have no control over its currency and economic policy.
"I think it's unlikely that the rest of United Kingdom would agree to or could make work a euro-style currency zone with Scotland," he told BBC radio. "If Scotland wants to keep the pound, the best way they could do that would be to stay in the United Kingdom."
Osborne, from Britain's Conservative party, and his Liberal Democrat deputy Danny Alexander presented the report - part of a series by the government - in Glasgow on Tuesday.
Opinion polls show around 30 percent of Scots are currently in favor of independence, while 50 percent are against.
"PLAYING WITH FIRE"
A leading member of the SNP accused the Treasury of trying to make the prospect of independence sound as difficult as possible and said Osborne was "playing with fire."
John Swinney, Scottish finance secretary, said an independent Scotland might refuse to take on its share of British debt if London did not let Scotland use the pound as part of a currency union.
"If that's the kind of game and negotiation (Osborne) wants to play, he's welcome to do that. But what we're interested in is a rational and considered discussion," Swinney told the BBC.
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 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."
(This story is refiled to add dropped word "of" in first paragraph)
(Additional reporting by William Schomberg; Editing by Hugh Lawson)
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