Jeremy Peat OBE, Visiting Professor, First appeared on IPPI BLog.
The First Minister is making what sounds like a major ‘keynote’ speech on Monday 25 July at IPPR in Edinburgh on the topic ‘Scotland and Europe’. This should provide her with a great opportunity to look beyond the present state of chaos across the UK to the options Scotland faces, the difficult decisions to be made and the key priorities for action whatever option may in due course be selected.
Three options for Scotland
There are three options to be assessed. The ‘base case’ – i.e. what happens without major action – is for Scotland to remain within the UK as the UK exits the EU. Then there is the tough gig, clearly favoured by the FM, of Scotland exiting the UK before the latter exits EU and being permitted by the EU to remain within its boundaries and jurisdiction. Finally there is the more difficult in practical terms, but probably significantly more achievable politically, option of Scotland leaving the UK after the UK has left the EU and therefore being required to apply for EU membership from outside rather than within. [A sub-option ignored hereafter is for Scotland to leave the UK post BREXIT and remain in splendid isolation outwith both UK and EU.]
It would be excellent if the FM spelt out these options – or her version thereof – with a broad indication of priority and reasoning for same. But there are difficult decisions within each option and it would be preferable if she were to at least acknowledge these now, rather than turning a blind eye and planning to cite ‘project fear’ in the future.
Problems with the ‘base case’
The key downside for the base case is the loss of relations with the EU, and wider implications. My view is that this loss is highly dangerous and potentially damaging for both Scotland and the rest of the UK. But there are Scotland-specific issues. In addition to straightforward trading links, which (let us not fool ourselves) will be less favourable post-BREXIT, Scotland must have particular concerns about the impact on financial services and inward investment. Both matter relatively more here than for the UK as a whole and both are subject to risk. There is also the small matter of agriculture and fisheries.
Of course the FM will endeavour to be part of the UK’s negotiating team (alongside Messrs Davis, Fox and Johnson – so good luck there) and should work to focus on achieving the best outcome for her nation where it matters most. Even if the top of her wish list is UK exit pre-BREXIT, she should still tell us on Monday where she sees the priorities for Scotland in the BREXIT negotiations and how she can best work to make progress in Scotland’s interests. There has to be an acknowledged Plan B.
For financial services what will matter most will be retaining the ‘passport’ for companies based here to operate across the EU. Is that obtainable? Without access to a passport many companies will leave or at least shift HQs. For agriculture and fisheries it is clear that (a) the EU subsidies will go and (b) control will be devolved to Scotland inter alia. But will that devolution be accompanied by funds sufficient to maintain the subsidies? That will be a UK Government decision not an EU one. If, for example, the UK decided to share the funds returned from the CAP on the basis of Barnett, then Scotland would be much worse off, as we receive much more than our Barnett share of EU CAP and fisheries funding. So the FM should set out that tough negotiations will be needed with UK and EU. Even if she manages both to get engaged and to be influential, the end result is likely to involve downsides for the Scottish economy, at least in the medium-term.
Exiting the UK, staying in the EU
Hence the necessity, she could explain, of looking carefully at the options for exiting the UK and staying within the EU. She could re-inforce the point that early exit from the UK and retention of EU status might be less disruptive. Further, she might wish to stress, retention of EU membership should mean that there would not need to be any commitment to enter, or aim to enter, the Eurozone. She could tell us how other EU member states have responded to this desire from Scotland to stay within. Does she have good reason to believe that this is genuinely a feasible option?
But this option is by no means all upside. Even if other member states were to approve, a risk to be stressed is that it would be nigh on impossible even under this non-euro option for Scotland to continue to use the pound sterling. What is the FM’s proposition? Perhaps she will suggest a new Scottish currency tied to the pound sterling. This would be far preferable to a freely-floating Scottish currency, or indeed an early tie to the euro at, as the rest of the UK is far and away Scotland’s largest trading and economic partner. The relationship with the EU, our second largest partner, would be secure, but with Scotland in the EU single market and rUK out there will be complications for trading, investment, etc. where it matters most to Scotland. And these complications would be significantly exacerbated if currency stability could not be assured.
Tying that currency to sterling would not be cost-free. The FM needs to note that this would require a tight dose of monetary and fiscal policy, to secure and retain credibility with the markets and UK economic partners. So if the FM intends to re-emphasise her Government’s preference for Scotland remaining within the EU, she needs to explain not only how this can be achieved in political terms (how other EU states can be persuaded to agree) but also how the continuing relationship with rUK is to be secured. The question of currency will be at the core, but tying a new Scottish currency to sterling would bring problems of its own. We need to start thinking these through now.
Applying to the EU from the outside
Then there is the third option. What if the EU cannot or will not agree to Scotland retaining membership post BREXIT? The choice becomes remaining in the UK outwith EU – as discussed above – or leaving the UK post BREXIT and applying to the EU from the outside. This last option may need to be weighed on the scales against that unpleasant option of Scotland staying in the post-BREXIT UK, so some early consideration of the costs and benefits would make sense.
The question of currency becomes even more complex. Are the EU powers that require Scotland to aim to join the Eurozone mandatory to be granted EU entry? Has the FM been told that we could have an opt-out on this one? If so we should be told. That might mean we could retain our own currency pegged in some way to sterling. If not we would face the prospect of an extended period of tight macro policies in order to achieve, and remain on, the path to Eurozone entry; and we would know that this would imply continuing uncertainty over the currency relationship between Scotland’s currency and sterling. Even if there would be no need for borders so far as individuals are concerned, corporate Scotland and corporate UK would face major uncertainties and costs – leading to less trade, less investment across borders and less inter-relationship generally.
It was fascinating that Sir Nick Macpherson (the man who took over my job at HM Treasury in 1984 and until recently Permanent Secretary at HMT) should write recently in the FT that the case for Scottish independence ‘looks stronger post-BREXIT’. He notes that this would involve a new Scottish currency, perhaps shadowing sterling, which would in turn require a strong central bank and a Government prepared to put ‘great effort into establishing fiscal credibility … running fiscal surpluses in the good times …’ That would be much easier said than done. Scotland in the EU, with our own currency carefully managed, would be a tough option so far as both fiscal and monetary policies are concerned. Maybe Sir Nick is looking for a new position as our central bank Governor!
All-in-all the objective analysis shows why Scotland was right to vote against BREXIT. If only rUK had similarly seen the logical path! But the can of worms has been opened and the FM needs to acknowledge the complications on Monday. There is no straightforward best option now for Scotland. We will need to pick, and try to achieve, the least nasty of a pretty sorry lot – given what we believe would be negotiable under the different scenarios. Then we will need to work extraordinarily hard to achieve the least bad outcome of an achievable option.
Monday’s speech provides an opportunity for realism on such issues and facing up to the tough choices ahead. I very much hope that clear options can be enunciated and key issues identified with possible paths to solutions laid out. The earlier that the Scottish Government sets out this realistic path the better.
The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.