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Scottish independence – playing by EU rules

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Written by David Blake

Professor David Blake argues that the SNP want to give back control to the EU (not a slogan they are likely to use)

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The Scottish National Party wants independence from the United Kingdom. In addition to the extensive powers it has under the devolution settlement, it wants Scottish control of foreign, defence, and macroeconomic policy – in particular, relating to currency, interest rates, borrowing, taxation and spending.

The reality is, of course, that the SNP does not want independence. Instead it wants to leave the UK in order to join the European Union as an ‘independent’ member state, along with the other 27 ‘independent’ members states. The problem with that, however, is that the EU has plans to take over control of foreign, defence and macroeconomic policy from the member states, leaving Scotland with even less effective independence than it has currently as part of the UK.  This, in part, because Scotland would have just 6 MEPs (out of 705) in Brussels compared with 59 MPs (out of 650) at Westminster.

Since the SNP is so keen on joining the EU and abiding by EU rules, let’s look at what Scottish ‘independence’ would look like when playing by EU rules.

We know what these are, since they would be the same as (or worse than) the ones that applied to the UK’s departure from the EU and contained in the Divorce Bill (or Financial Settlement),[1] the Withdrawal Agreement[2] (including the Northern Ireland Protocol, NIP[3]) and the UK-EU Trade and Cooperation Agreement (TCA).[4]

The key point is that Scotland would be leaving the UK club – just as the UK left the EU club.  Let’s use Scotland’s population of around 8% of the total UK population to determine the Scotland’s share of assets and liabilities.

Assets and liabilities

As the EU made clear, when you leave a club, all the tangible assets remain with the club.  This includes military assets and embassies, for example.

In addition, Scotland would have to agree to the following:

  • The rest of the UK (RUK) will retain its existing historic fishing rights in what would become Scotland’s fishing waters (which account for around 75% of all UK fish stocks).
  • As part of the Divorce Bill, Scotland will have to honour certain obligations, such as 8% of the spending that the UK planned in the current spending round while Scotland was a member and paying 8% of the pensions of retired UK civil servants.

Citizens’ rights and responsibilities

The rights of UK citizens living in Scotland would have to be guaranteed, including family reunification rights and the right to marry a foreign national.   Scottish citizens living in one of the member states of UK, e.g., England, would be permitted to continue to work in England, but would not be permitted to work in another RUK member state, e.g., Wales. Visas will be required for visits of more than 90 days in any 180-day period. The UK will monitor the implementation and application of the agreement for UK citizens living in Scotland, as it does now when UK law is applied in Scotland.

Scotland would, like Ireland, be required not to participate in the Schengen Agreement which allows the free movement of EU citizens between member states.  Joining Schengen will immediately result in a full land border between the UK and Scotland, with passports and customs checks for all people wanting to enter the UK from Scotland.

Goods trade

In terms of trade, in order to keep the land border open and to avoid tariffs, Scotland would have to agree to stay in the UK Single Market and Customs Union. The UK regulation of goods (including food products and medicines) would be incorporated into domestic Scottish law. Scotland would have to agree to maintain dynamic alignment with UK regulations of goods as they change over time. The UK Supreme Court would have jurisdiction over the regulation of Scotland’s goods market. UK State aid law would apply in Scotland in so far as it may affect trade between the UK and Scotland. Scotland would remain within the UK’s single VAT area.

This, of course, would be incompatible with Scotland joining the EU Single Market and Customs Union. If, in order to do this, Scotland left the UK Single Market and Customs Union, then the following would apply:

  • Full third country sanitary/phytosanitary (SPS) compliance and checks including export health certificates for foods of animal and plant origin. This includes banning of the importation of chilled meats from Scotland. Medicines are similarly banned. As are soil, seeds, plants and trees.
  • Customs declarations and rules of origin paperwork for goods entering the UK from Scotland and the payment of tariffs. In terms of rules of origin, Scotland must demonstrate that at least 55% of all components in goods manufactured in Scotland were made in Scotland.

The UK would not provide a land bridge for goods moving between Scotland the EU and vice versa, because of the risk that Scottish soil on the tyres of vehicles entering the UK could contaminate UK soil. All goods destined for the EU would have to go by ship from Scottish ports.

What are the costs of these measures to Scotland?  A study by the European Research Group in February 2021 outlined the costs incurred in Northern Ireland since 1 January 2021 due to the NIP and similar costs will apply in the case of Scotland:[5]

  • Additional time spent on paperwork. The average time taken to organise a load from Great Britain to NI has increased from twenty minutes to three or four hours. Once an application is submitted you cannot change anything except for arrival date and time. In January 2020 Blair International Transport described their difficulties with the system to the European Research Group as follows:

“if we have a blow out, fridge breaks down en route to the boat and have to change trailer then we have to go back to the start and do the declaration… all over again…. We have two extra people downstairs to help with admin and load wise we are probably 70% less busy than last week.”

  • Empty trailers GB to NI: As a result of the NI to GB route containing less friction than the GB to NI route, hauliers are reporting that NI exports to GB are holding up better than imports. This leads to hauliers having to return with empty trailers, leading to a new cost for all Northern Irish exports. GB customers are price sensitive and cannot pay NI manufacturers more than the cost at which they can source similar goods from existing suppliers in GB.
  • Less flexibility. Transit movements from NI to GB via Ireland do not have access to the Trader Support Service (TSS) or grace period exemptions. The Road Haulage Association estimates that these movements accounted for thirty to forty per cent of GB to NI movements before the end of the transition period. The intensity of these movements varies depending on the weather: storms in the Irish sea can cause diversion of lorry routes from Belfast-Liverpool to Dublin-Holyhead.
  • Groupage. A significant volume of GB to NI trade is undertaken via a ‘groupage’ model: multiple products are collected from multiple sites in GB and transported to NI. This includes parcels for the online shopping suppliers. Neither the TSS nor hauliers are equipped to meet expected timeframes for delivery, given the need for complex contractual changes, additional resource requirements and training.

Qualifications and services

Scottish professional qualifications would not be recognised in the UK and Scottish professionals working in the UK would need to requalify.

Scottish financial services would not be recognised as ‘equivalent’ and hence would not be permitted to be sold in the UK because of the threat to the financial stability of the UK.  Providers would have to set up separately capitalised companies in the UK.

UK financial service providers (such as mortgage providers) would not be permitted to offer these services to Scottish citizens.

Currency

Scotland would have to introduce its own currency on Independence Day.  If it were introduced at par with sterling, it is conceivable that it could fall in value by around 15% (the same fall as sterling the day after the UK Referendum in 2016).  Scottish citizens with existing liabilities denominated in sterling (such as the 800,000 with mortgages) could then see these liabilities increase by 15%.

Scotland could, of course, switch from sterling directly into the euro in preparation for joining the EU. However, only 18% of Scots want to join the euro.[6] The requirement of an EU member state to adopt the euro is enshrined in the Maastricht Treaty and all new member states must do so.

However, First Minister Nicola Sturgeon has previously rejected this. Tobias Locke, professor of law at the National University of Ireland Maynooth, has warned that if Scottish politicians were ‘too vocal about their non-commitment to taking such a step, there is a danger that the EU might in the end not agree to Scottish membership’. Further Philippe Lamberts MEP reconfirmed that Scotland would have to commit to its adoption and believes that Ms Sturgeon will change her mind on the issue.[7]

In any case, the idea that you are so desperate to join a club that you fly that club’s flag outside your front door, but then refuse to pay your membership fees using the club’s own currency is surely an unforgivable insult to the club.

The economic cost to Scotland

It is important to remember that, in terms of trade, 60% of Scotland’s exports and 67% of its imports are to and from RUK.[8] In 2018, Scotland exported £51.2bn to the UK (60%), £17.7bn to the rest of the world (21%) and only £16.1bn to the EU (19%).[9]

A study by the London School of Economics recently estimated the trade costs of Scottish independence.[10] It assumes that independence will increase trade costs between Scotland and the RUK by between 15% and 30%, depending on the size of the border costs.  It predicts that Scotland’s long-run real income per capita will fall by between 4.5% and 6.7%, or by between £1,385 and £2,155 per person.[11]  This means that the Scottish economy could shrink by £11bn a year if the country breaks away from the UK. This is the pure border-cost effect.

The loss of Barnett formula[12] fiscal transfers from the rest of the UK would be additional. Fiscal transfers to Scotland for 2021-22 will be £38bn. Scotland’s public spending is £81bn, while £66bn in taxes are collected in Scotland, including those on North Sea oil revenues.[13]  This implies that there will be a net reduction in Gross Domestic Product (GDP) of £15bn due to the loss of fiscal transfers.

Adding these losses together implies a £26bn total reduction in Scottish GDP which is equivalent to 15% of Scotland’s 2019 GDP of £168.14bn.[14]

The UK economy has just experienced a 10% reduction in GDP due to the covid pandemic. This is the largest fall in 300 years. The UK economy will eventually bounce back from this. Scottish independence means a permanent reduction in GDP of 15%, which is 50% more than the cost of covid. The Scottish economy will never recover from this.

The LSE study’s authors said: ‘What surprised us is just how exposed Scotland is to the increase in trade costs of independence because it has this very high dependence on trade with the rest of the UK [compared with the EU]. Since trade with the rest of the UK is more important, that at least for the foreseeable future, it wouldn’t really make sense for Scotland to rejoin the EU economically’.

An independent Scotland would also need to cut public spending or raise taxes to compensate for the loss of Barnett funding. It has been estimated that to continue the current level of government spending after independence, the basic rate of income tax in Scotland would have to increase from 20% to 46% or the standard VAT rate would have to increase from 20% to 49%.[15]

Conclusion

With only a little exaggeration, this is the reality of Scottish independence ‒ under EU rules.  The SNP are deluded if they think there will be a smooth transition from being part of the UK to being part of the EU.  And they are just as deluded if they believe there is some form of Free Trade Agreement that will allow frictionless trade between Scotland and the UK as well as frictionless trade between Scotland and the EU – as Northern Ireland has clearly demonstrated. Precisely the same will happen between Scotland and the RUK. There is no ‘best of both worlds’ solution as Nicola Sturgeon repeatedly suggests. Time for a very big reality check.

Professor David Blake, City University of London

A follow-up article ‘The Fantasy Economics behind the case for Scottish independence’ is here.

 

[1] https://www.instituteforgovernment.org.uk/explainers/brexit-deal-financial-settlement

[2] https://www.instituteforgovernment.org.uk/explainers/brexit-deal-withdrawal-agreement

[3] https://www.instituteforgovernment.org.uk/explainers/brexit-deal-northern-ireland-protocol

[4] https://www.instituteforgovernment.org.uk/publication/future-relationship-trade-deal

[5] European Research Group (2021) Re-uniting the Kingdom:  How and why to replace the Northern Ireland Protocol, February; https://www.telegraph.co.uk/politics/2021/02/24/northern-ireland-protocol-must-abolished-rather-tweaked-demands/

[6] https://blogs.lse.ac.uk/europpblog/2020/02/05/what-would-it-take-for-scotland-to-rejoin-the-eu-as-an-independent-state/; https://d25d2506sfb94s.cloudfront.net/cumulus_uploads/document/cqi01wjj1n/Internal_ScotIndependence_200129.pdf

[7] https://www.express.co.uk/news/uk/1407066/nicola-sturgeon-news-comments-scotland-eu-in-danger-independence-euro-spt

[8] https://cep.lse.ac.uk/pubs/download/brexit17.pdf

[9] https://www.gov.scot/publications/export-stats-scotland-2018/

[10] Hanwei Huang, Thomas Sampson and Patrick Schneider (2021) Disunited Kingdom? Brexit, trade and Scottish independence, Centre for Economic Performance, London School of Economics and Political Science, February; https://cep.lse.ac.uk/pubs/download/brexit17.pdf

[11] This is the pure Scexit effect, excluding the Brexit effect which is also modelled in the LSE study.

[12] The Barnett formula is used by the UK Treasury to calculate the annual block grants for the Scottish government, Welsh government and Northern Ireland executive; https://www.instituteforgovernment.org.uk/explainers/barnett-formula

[13] https://briefingsforbritain.co.uk/questions-the-snp-avoid-answering; https://www.deliveringforscotland.gov.uk/scotland-in-the-uk/public-spending/

[14] https://www.statista.com/statistics/1003902/uk-gdp-by-country-2018/

[15] https://www.taxpayersalliance.com/fiscal_challenges_facing_an_independent_scotland

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About the author

David Blake

Professor David Blake is at Cass Business School