Would the Reality of Independence be Scotland’s Worst Nightmare?

The so-called ‘Edinburgh Agreement’ has now confirmed what we all knew already; that Scotland as a nation will vote on whether to break a 305 year old union. Both sides have started to get their shots in early. Many on the No campaign would suggest that Scotland is heavily subsidised by the rest of the UK, and that independence could lead to a return for Edinburgh’s 18th century nickname – the ‘Athens of the North’ . The Yes campaign, on the other hand, would happily argue that Scotland is a net contributor to the Union, and by escaping from the ‘shackles’ of Westminster it would be free to drift towards a Swedish style utopia. Of course, both of these arguments seem a little facile, and I certainly would not suggest that this is the extent of the debate; but it does reflect the focus that this relatively small part of a wider debate is receiving. This is problematic for a number of reasons. Firstly, due to uncertainty over how oil revenues are split it is difficult to say what Scotland’s fiscal situation would be, but the reality would probably be different to how both sides see it. More importantly, this obscures the real and more clear-cut problems that an independent Scotland would face.

One of the main problems would be over what currency an independent Scotland would have, which would almost certainly be the pound. The original SNP policy was to join the Euro, but clearly this is now a non-starter and a ‘Scottish pound’ would be impractical and costly both in raising borrowing rates and in terms of setting up. However, staying with the pound would lead to a monetary union without fiscal union; ironically the very setup which helped cause the crisis in the eurozone. Though nothing like a eurozone crisis would ever be likely to occur, a currency union with the rest of the UK would severely restrict Scotland’s borrowing powers, and Scotland would have the interest rate set by the Bank of England imposed upon it. An independent Scotland is likely to diverge economically from the rest of the UK, and because the Bank of England would be more likely to tailor the interest rate towards the rest of the UK it would constrain the path that independence would be able to forge. Equally problematically, it was revealed that the SNP has not sought advice on whether the Scotland could automatically join the E.U, and the Spanish foreign minister concluded an independent Scotland would simply have to “join the queue” for membership. Joining the queue would mean that Scotland will have to try to meet the entry requirements; one of these is opting-in to the Euro. Whichever path Scotland would take, it seems to lead to problems.

Independence would also pit Scotland in direct competition with its former allies. A while ago the SNP had suggested that they would generally follow the Icelandic and Irish models for achieving growth in a small country by setting low corporation rates which then ‘sucks in’ investment. Obviously this model is now redundant, given where it took Ireland and Iceland, but if Scotland did cut rates it would probably have to compete with the UK, which is looking to do the same. Obviously this will be beneficial in raising investment, but over the long term it may end up ultimately reducing Scotland”s tax take as companies move elsewhere when the relatively favourable rates disappear. There is precedent for this. When tax subsidies were removed for high-tech business several companies made up the so-called ‘Silicon Glen’ simply left, leaving more problems than they caused. Furthermore, adding potential barriers and complications to doing business with Scotland’s biggest trading partner also seems unwise in the long term.

The Scottish government believes Scotland is entitled to a 90% geographical share of the North Sea’s oil and gas fields, giving it 81% of all the oil and gas produced in 2010. This is one of the main arguments for independence, but there are problems here as well. Scotland would depend on oil for 18% of its GDP, and given the ability of the oil to fluctuate it would be a volatile source of income. The Barnett Formula is often criticised, but at least it offers a stable form of income. The reserves of oil in the North Sea are also currently diminishing by 6% a year, which would suggest that they are not a long term source of income.

Then there is the ‘RBS question’, where critics would suggest that an independent Scotland would have been incapable of rescuing RBS and HBOS after the onset of the financial crisis. It is difficult to determine whether this would have been the case or not but does highlight the question of Scotland’s capability of dealing with asymmetric financial shocks. Something of the magnitude of the financial crisis may not occur for a long time (we would hope) but independence is very much a long term decision where every eventuality must be examined, and a country of Scotland’s size would probably struggle to support its financial system if such an eventually were to occur. This is especially problematic as Edinburgh and Glasgow are the second and third biggest financial centres on mainland Britain, and the 15th and 16th in Europe respectively.

The last time Scotland made a decision of this magnitude was in 1707. It might well be a long time before this opportunity comes round again, so even though Keynes might contend that we would ‘all be dead’ thinking in the long term independence does not seem like an attractive proposition. Indeed, support in Scotland for independence has remained consistently low, even through the Iraq war, the worst financial crisis in 70 years and the subsequent austerity. This suggests that we might be in for at least another three centuries of the most successful political, economic and social union the world has ever known. Which may not be enough for a Nobel Peace Prize, but is certainly enough for most of Scotland.

One response to “Would the Reality of Independence be Scotland’s Worst Nightmare?”

  1. Tom Polak says:

    Very well written article. Some interesting points about the longterm dangers of independence that the media doesn’t tend to pick up on – particularly the idea of a monetary union without a fiscal union.

    Food for thought for everyone in Scotland.