Speaking in Glasgow recently, the Chancellor George Osborne said that a currency union between an independent Scotland and what remained of the UK would impose “significant constraints on [Scotland’s] economic sovereignty.”

Nationalists were quick to dismiss this warning in public, but privately they must have known that it was far from an empty threat: Osborne, armed with standard Tory prejudices about Scottish spending habits, will do what he can to limit public expenditure north of the border, whether Scotland stays part of the UK or not.

No doubt the SNP hope that Labour’s shadow chancellor, Ed Balls, would offer less restrictive terms during the negotiations for a prospective post-UK ‘sterlingzone.’ But they shouldn’t bank on it: Balls’ economic record suggests he would be at least as uncompromising as Osborne, if not more so.

As an influential Treasury adviser, Balls was one of the driving forces behind Gordon Brown’s decision to grant the Bank of England ‘operational independence’ in 1997. The move completed Labour’s shift away from post-war Keynesianism and towards a form of monetarism based on ‘sound money’ and rule-based spending constraints.

In the years that followed, the Treasury tailored its fiscal and labour market policies to suit the Bank of England’s strict two per cent (now 2.5 per cent) inflation target. It did this by adhering to Brown’s ‘golden rule’ (that borrowing should only be used to finance capital, not day-to-day, expenditure), by refusing to lift Thatcher-era anti- trade union laws (which helped suppress wage growth), and by relaxing employment regulations.

In this way, New Labour gave up on an active fiscal policy as a means of securing growth. Credibility with the financial markets – something Brown tried to secure by adhering to Tory spending limits for two years and reducing the national debt over five – replaced the party’s traditional support for full employment as the guiding principle of its economic strategy.

This remains the case today. Under Balls’ influence, Labour has again promised to work within Tory spending limits and cut the deficit if it wins the next UK general election in 2015.

The implications for Scottish independence are clear. In a recent piece for The Scotsman, Balls reiterated his conviction that monetary and fiscal policies are intimately tied to one another. His assertion that “successful monetary union requires a degree of convergence that limits a nation’s economic independence” isn’t just pre-referendum bluster – it is a sincerely held ideological commitment.

Should he become chancellor, Balls will carry this belief into any post-referendum currency talks. He will insist that an independent Scotland sticks closely to Westminster’s spending plans, avoids policies that promote inflation, and, above all, sets out a clear timetable for the reduction of Scotland’s deficit.

Balls could offer a Westminster version of the Maastricht convergence criteria, meaning that Scotland’s public debt would have to come down to below 60 per cent of GDP. Or he could present more stringent conditions, such as those the Troika have imposed on struggling eurozone economies. These might involve public sector redundancies and forced privatisations. Either way, it would be politically impossible for the SNP to agree to Balls’ demands.

Of course, the SNP rejects the ‘sterlingzone’ / eurozone parallel. And so it should. Scotland doesn’t have Spain’s 25 per cent unemployment rate, nor is it burdened with the same levels of debt as Greece. Indeed, as Salmond often points out, Scotland’s debt and deficit levels are lower than those of the UK as a whole.

The real problem with the SNP’s currency proposals doesn’t lie in the remote threat of a eurozone-style meltdown, however. It lies in the influence the Bank of England has over UK macro-economic policy – an influence that grew during the Brown and Balls era.

Take Alex Salmond’s recent conference pledge to ensure that the minimum wage rises in line with or faster than the rate of inflation in an independent Scotland. It was a smart piece of political manoeuvring, signalling the SNP’s desire to expand social protection for those in employment. But it doesn’t go anywhere near far enough. Even a minimum wage that rose slightly above the rate of inflation would be insufficient to provide a decent standard of living for workers.

Yet an independent Scottish government that took a more radical stance – by, for instance, committing to a public and private sector living wage – could easily find itself at odds with the UK Treasury over the potentially inflationary effects of Scottish workers’ growing spending power.

Recent history, stretching back beyond Brown and Balls, tells us that the Treasury and the Bank of England will jealously guard the value of the pound, with little regard for the broader social consequences. There is a reason the UK has, as Nicola Sturgeon noted recently, “one of the lowest pay economies in the OECD.”

If the SNP is serious about taking Scotland in a more Nordic direction, as it constantly tells us it is, it will have to break with what academics call the ‘Anglo-liberal growth model,’ which combines wage suppression with high levels of private debt and an over-sized financial sector.

Ultimately, Salmond’s ‘sterling-zone’ plan is political; an attempt to reassure voters and investors that a Yes vote won’t result in any significant disruption to the Scottish economy. Like the monarchy and NATO, it forms part of the SNP’s pre-referendum triangulation strategy.

Ironically, in the 1990s, as a leading advocate of the Third Way in the Labour Party, Ed Balls helped lay the groundwork for Britain’s current economic crisis – a crisis Scotland won’t be able to escape if it remains anchored to the UK pound and all the suffocating constraints that come with it.

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