Scotland's Choice

By Umit Utku

On 15th October 2012, David Cameron (British PM) and Alex Salmond (Scottish First Minister) agreed to hold a referendum concerning Scottish independence from the United Kingdom. Any British citizen residing in Scotland and aged 16 or over will be eligible to take part to this consultation on 18th September 2014. The electoral campaign has been fought primarily by two organisations. Yes Scotland is campaigning for independence under the chairmanship of Blair Jenkins OBE, with the support from the Scottish National Party (SNP). Better Together – supported by the three major political parties – instead campaigns for continued Scottish participation within the Union and is led by Alistair Darling MP.

For the first time, citizens aged 16 and 17 will also be allowed to vote. On voting day, voters will be asked the following question: “Should Scotland be an independent country?” When the debate about the Scottish Independence referendum kicked off, the majority of voting intention polls estimated large support for the Union, with only 29% in favour of independence. According to a Survation/Daily Record poll – conducted at the beginning of June – the gap between the two sides has gradually been narrowing, with 44% in favour of the Union and 36% for independence. It must be noted however that approximately 20% of the population is still undecided on the issue. With such a small margin, the undecided factor could potentially prove decisive in each scenario.

Should Scottish citizens vote for independence, both governments will face complex economic and political challenges. We would like to provide our own take on the challenges that the Scottish and the UK governments are likely to face in the abovementioned scenario.

Currency

One of the most debated issues concerns which currency an independent Scotland would adopt. Is it going to keep the Pound Sterling? Will it be forced to adopt the Euro or a new national currency?

Alex Salmond stated that Scotland would continue using the Pound as part of a currency union with the UK. But George Osborne (Chancellor of the Exchequer) promptly replied “If Scotland walks away from the UK, it walks away from the UK Pound […]. The Pound isn’t an asset to be divided up between two countries after a break-up like a CD collection”. Salmond has called these remarks ‘a bluff’ and affirmed that Osborne will not risk imposing a new tax on British businesses to trade with Scotland ahead of next year’s general election.

Recent statistics show that approximately 65% of Scottish trade is conducted with other parts of the UK. In 2011, Scotland sold £45.5 billion worth of goods to the UK, double the level of its exports to the rest of the world. Scottish trade with the UK has further increased by 62%, compared to a mere 1% rise in trade with Europe. Moreover, Scottish imports from the UK represent 3.5% of the UK’s GDP (circa £90 billion). Yes Scotland believes that a currency union is the only choice that makes sense for both countries because any other solution – such as joining the Euro or creating a national currency – would mean extra costs for businesses in both Scotland and Britain. However, the British government recently reported that an independent Scottish government would find it difficult to cope with economic challenges such as a fall in global oil prices, thus exposing the UK to fiscal and financial risks. The Treasury also advised the government against entering into a currency union, although the three main political parties already ruled out this option should Scotland become independent.

EU Membership

As the debate about currency union rages on, the uncertainty of Scotland’s future with its EU membership poses additional questions to the currency issue. Scotland has hitherto been part of the EU since the UK joined the organisation in 1973. Should Scotland vote for independence in September, would they be forced to re-apply as an independent county thus putting in jeopardy their current status?

The Scottish government believes that an independent Scotland will remain a EU member state. The Scottish government stated that the transition period between the referendum and the prospective independence date on 24th March 2016 would provide enough time to deal with the EU membership terms. Yes Scotland cited East Germany as an example, stating that the former Soviet satellite state joined the EU in less than a year. It is nevertheless crucial to point out that the East Germany was being annexed into the Federal Republic of Germany, a founding member of the EU. Scotland’s example would consist of the exact opposite and could not possibly echo the same historical parallel of 1990, which coincided with the end of the Cold War.

Jose Manuel Barroso, the outgoing EU Commission President, stated that it would be extremely untenable for Scotland to obtain support from all other member states to join the EU on a so-called fast track. Moreover, he pointed out how the Spanish governmental stance against local communities seeking total independence from the central administration led them to oppose the formal recognition of Kosovo in 2008. Therefore, it would be safe to assume that Spain might be willing to veto Scotland’s future EU membership. Prior to the Scottish Independence debate, Barroso stated – in a letter to the House of Lords – that “If part of the territory of a Member State would cease to be part of that state because it were to become a new independent state, the Treaties would no longer apply to that territory”. Barroso further added that, by becoming a third country, the EU Treaties would no longer apply to Scotland and the newly independent country would need to apply for membership from scratch. Following these comments, Jim Currie (Former EU Commission Director-General for Environment) said that it would be unwise to claim that an independent Scotland would not be able to join the EU automatically. “The bottom line for me is that it would be dealt with in a pragmatic way", Currie affirmed.

As the referendum approaches, the debate surrounding Scotland’s future relations vis-à-vis the European Union is likely to be subject to further scrutiny.

National Debt and Economy

The debate on national debt also occupies a crucial role for any future independence prospects. If Scotland becomes independent, national assets and public debt would have to be split fairly between the United Kingdom and the new state. The main question concerns the amount of national debt that Scotland would be left with upon leaving the Union. A wide range of ideas has been put forward over the last two years.

First, the White Paper released by the Scottish government states that in partitioning the national debt, contributions made by Scotland to UK’s public finances from the 1980s onwards should be taken into account. In the White Paper, the share of national debt is approximated to £100 billion, which amounts to 55% of Scottish GDP.

Second, additional calculations in the White Paper – based on partitioning debts according to the population – projected for 2016/17 estimated the national debt at £130 Billion (75% GDP). Notwithstanding the calculation method, an independent Scotland will hold a significant national debt. Nevertheless, Alex Salmond claimed that whatever the calculation used, the debt-to-GDP ratio of Scotland will be lower than the UK’s equivalent in every scenario.

Another related issue concerns how the transfer of debt would be conducted. Three methods have been hypothesized insofar: a legal transfer of shares, a ‘clean break’ option, and the so-called ‘I Owe You’ alternative.

A legal transfer of shares would take place after a set amount of Scottish debt was agreed with the creditors. The UK government would then have to agree with creditors to legally transfer some of the selected debt to the Scottish government. This method is likely to generate unnecessary complexities between the lenders and the two governments, hence making it highly unlikely to be employed.

A ‘Clean Break’ would see the Scottish government pay the full amount of debt to the UK government in 2016. This scenario also seems highly untenable because it is seems highly unimaginable for any newly created sovereign state to pay such a considerable amount upfront.

The ‘I Owe You’ method seems to be the most tenable option. After Scotland’s share of the UK debt is established, the two governments would make arrangements under which the Scottish government would meet the service costs of its share, leaving the UK liable for the current debt level. It might sound as a logical move for both sides, even though without complications. 

North Sea Oil

One of the most discussed campaign topics by Alex Salmond concerns the North Sea Oil Reserves, situated on the Scottish side of the border. When the first well was drilled under UK regulation in 1967, it has provided oil to the Union undoubtedly adding a great deal of value to the UK economy.

Although the production of crude oil has been decreasing in the North Sea from 1,000 million barrels/year in 2000 to 400 million barrels/year in 2011 – due to the global rise in oil prices from $25 per barrel to $110 – the profitability of the North Sea Oil is still significant. In a recent report published by Oil and Gas UK, it is estimated that at least 15-24 billion barrels of oil are still remaining which could be worth over £1 trillion according to the same report.

The debate on this matter has predominantly centred on how the total tax revenues from the North Sea oil generated will be split in the case of independence. Although some parties suggest that the population of UK should be taken into consideration when dividing the revenue, this seems rather unlikely as most of the oil production is in the borders of Scotland.

An alternative to this is the ‘middle line’ principle, which was set in the late 1960s, used by most of the countries in this area and is often applied in international law. It draws the middle line between the neighbouring country or a country opposite making sure the distance between the line to the countries are equal. The application of this principle in the case of Scottish independence will ensure about 90% of the total tax revenue is received by Scotland.