The Implications of Scottish Independence on Business: Higher Education and Research: and Postal Services - Business, Innovation and Skills Committee Contents

2  The impact on business


4. In its White Paper, the Scottish Government set out the economic vision on an independent Scotland. It begins by asserting that independence for Scotland would:

    … allow us to use our own resources and shape our own fiscal and economic policies for Scottish needs and circumstances. This will ensure greater economic security and opportunity in the future.[1]

5. When we were in Scotland however, the view of business organisations was less confident. Uncertainty and lack of information were key areas of concern for them, alongside the position of an independent Scotland in the European Union, the future currency and the regulatory regime. When he gave evidence to the Economic Affairs Committee in the House of Lords, John Cridland, Director General of the CBI, said that uncertainty was "the biggest killer for investment"[2] and that this characterised the debate on the referendum. This was echoed by the business representatives who gave evidence to us. David Watt, Director at the Institute of Directors, Scotland, said that the uncertainty and lack of clarity was "something that business does not find welcome".[3]

6. The Scottish Government published its White Paper on Scottish Independence on Tuesday, November 26, 2013. In his first response, John Cridland stated clearly his belief that business would be better off in the existing United Kingdom:

    The CBI believes that the nations of the UK are stronger together and that Scotland's business and economic interests will be best served by remaining as part of the UK. Our members have been pressing for responses to many key questions on independence that we have put to the Scottish Government and we will study this White Paper closely to decide how far it answers businesses' questions.[4]

7. In its analysis, the UK Government set out the economic relationship between Scotland and the rest of the United Kingdom, and the dominance of the UK market for Scottish exports:

    The rest of the UK is, by far, Scotland's biggest economic partner. In 2011, Scotland sold goods and services worth £45.5 billion to the UK, double the levels exported to the rest of the world. It is also four times greater than Scottish sales to the rest of the European Union. Overall, exports to the UK represent 29 per cent of Scottish Gross Domestic Product but the importance of the UK market is even higher in some sectors. For example, financial and insurance services in Scotland sold nearly half their output in the rest of the UK in 2009.[5]

8. As we approach the day of the referendum it is clear that there is a deep concern about the impact of a yes vote on the future prosperity of Scotland. In particular, there is no certainty that breaking up the UK single market will have economic benefits.

Scotland and the European Union

9. The matter of a separate Scotland's membership of the European Union was a central issue raised by our witnesses from business. While it was clear that the business groups believed it was in the interests of both Scotland and the rest of the UK for Scotland to be in the EU, they all raised concerns as to how this would be brought about.

10. Iain McMillan from CBI Scotland noted that Scotland's continued membership of the European Union was a "controversial question" and that opinions differed on the both the timing and route to membership. He said that while the preference of the CBI was for Scotland to be in the European Union there were "issues around whether that would be so, on what terms and when".[6] David Watt, Executive Director at the Institute of Directors, Scotland, was also concerned that Scotland's re-admittance into the EU would not be automatic, not least because there was "a queue of countries waiting to get it in as it is".[7] He went on to argue that while he hoped that Scotland would receive "sympathetic transition arrangements", there was "no guarantee of that".[8]

11. The route to EU Membership is set out in detail in the Scottish Affairs Committee Report on Scotland's Membership of the EU.[9] That Committee highlighted the difference of opinion between the Scottish Government and others over the route to EU Membership. The Scottish Government believes that Scotland would not have to apply, as it is currently a Member through being a part of the United Kingdom. Therefore, it is seeking a "seamless transition" to membership. This it believes will be done by amending Article 48 of the Treaty of the European Union to include reference to an independent Scotland. Gordon MacIntyre-Kemp, founder of Business for Scotland, supported this view. In evidence to us he argued that the Scottish Government would be able to "renegotiate terms from an existing membership from within the European Union".[10]

12. In evidence to the Scottish Government, Jean-Claude Piris, former Legal Counsel of the European Council and Director General of the Legal Service of the EU Council, questioned the validity of that approach:

    It would not be legally correct to try and use Article 48 of the Treaty on European Union for the admission of Scotland as a member of the European Union. Only Article 49 of the same Treaty would provide for a suitable legal route.[11]

13. In February 2014, Jose Manuel Barroso, President of the European Commission, stated that "in the case there is a new country, a new state, coming out of a current Member State it will have to apply".[12] In evidence to us, Iain McMillan, director of CBI Scotland, also highlighted the opinion of Mr Barroso and believed that it was clear that Scotland "could not negotiate its entry to the European Union concurrently with secession negotiations with the UK Government and so it would have to be consecutive rather than in parallel".[13]

14. Professor Bell, a professor of economics, also highlighted the lack of clarity over these matters:

    There are a number of areas that are being discussed quite closely at the moment, but for which I suspect there will be no clear answers prior to the referendum, one of the key ones being what would happen around the currency should Scotland become independent. There is an issue around EU membership, which applies both north and south of the border, I think, of where that might be going and what status Scotland might have potentially post-independence.[14]

15. The UK Government is of the view while the rest of the UK would retain the UK's existing membership and opt-outs, Scotland would have to reapply for EU membership:

    Since an independent Scotland would be a new state there is a strong case that it would have to go through some form of accession process to become a member of the EU. It would also have to enter into negotiations on the terms of its membership. It cannot be assumed that Scotland would be able to negotiate the favourable terms of EU membership which the UK enjoys. All new EU Member States have been required to commit to joining both the euro and the Schengen area. The Scottish Government's stated intention to retain the pound and join the Common Travel Area is at odds with the EU's rules for new members, and is not in the Scottish Government's gift.[15]

16. In evidence, the Secretary of State also pointed out while Scotland's re-admittance to the European Union "may well prove to be trouble-free" there was "a big uncertainty around that whole process":

    It could take a long time, it could take a short time, but it is the uncertainty around it that is the problem. It would be damaging for the whole of the UK if that situation arose, and it would be especially damaging for Scotland.[16]

17. A further complication raised by the Secretary of State was that the decision did not rest with the UK but required "the assent of all the other European countries"[17] and that "the Scottish Government should not take that for granted".[18]

18. The Scottish Government's view that an independent Scotland would automatically be a member of the European Union has not been supported by substantive evidence. While we believe that Scotland would become a member of the European Union at some point in the future, it is a leap of faith to believe that this would either happen automatically or that re-admission would be a swift affair. There would be a period of intense and complex negotiation and the terms of those could be damaging to business and citizens. Furthermore, a protracted period of negotiation beyond the proposed 18 months would have a negative impact on business in Scotland as well as the other parts of the United Kingdom. There is a substantial risk that Scotland could be cut adrift in the short to medium term from its largest economic market. The impact of this on Scottish business would be significant.

19. We recommend that both the UK Government and the Scottish Government publish all of their legal advice on the status of Scotland and the EU in the event of a yes vote so that Business can have a clear understanding of the consequences of a yes vote. Without this information it is not possible to make an informed decision on the economic merits of independence.


20. A key aspect of uncertainty at the time we took evidence was that of the currency in an Independent Scotland. The Scottish Government asked the Fiscal Commission to consider what form of currency would be in the best interests of Scotland. The Commission examined four options:

    The continued use of sterling (pegged and flexible);

    The creation of a Scottish currency; and

    Membership of the Euro.[19]

21. According to the White Paper, the Commission concluded that "retaining sterling as part of a formal monetary union with rest of the UK will be the best option".[20] This option would include a formal arrangement whereby:

    Monetary policy will be set according to economic conditions across the sterling Area with ownership and governance of the Bank of England undertaken on a shareholder basis.[21]

22. While this is now the stated position of the Scottish Government, the White Paper stated that "it would, of course, be open to people in Scotland to choose a different arrangement in the future".[22]

23. Iain McMillan said that the view of CBI Scotland was for an independent Scotland to retain sterling. However, he noted at the time that the Chancellor had "placed a question mark" over that option. He went on to argue that the remaining choices open to an independent Scotland would be to unilaterally decide to use the pound sterling outside of a sterling area, join the euro (once it had completed EU Membership) or to adopt its own currency.[23] However, he said that none of those options were "particularly attractive" and that each would introduce exchange rate costs and exchange rate risks into doing business either with the rest of the UK or other parts of Europe.[24] James Barbour, Director at the Institute of Chartered Accountants of Scotland, also highlighted the transaction costs of dealing with a different currency in Scotland as a business concern:

    The rest of the UK would still be using sterling and we would then be using the euro, so straight away you have transactions costs. The public, never mind business, do not like transactions costs. You know when you go on holiday and you have to transfer your currency. Even if you were not to spend anything, when you come back you still have less than you went with. It is that feeling. Any barriers to trade would not be welcome by business. If we were in the euro, that is one of the potential issues.[25]

24. Mr MacIntyre-Kemp also supported the retention of sterling and did not see any obstacle to doing so because Scotland already owned a proportion of it:

    We in Scotland have a percentage population share of that. We are not adopting it. We already have it. We will be keeping it and I believe that after a yes vote there will be no political posturing on that because, as I have said before about the size of the deficits, it would actually be extremely silly for the rest of the UK not to want to keep Scotland's exports within sterling in order to strengthen the sterling zone. Political posturing aside, coming at it from an economist point of view, I would have to say I would expect that deal to be done fairly quickly and sensibly because after the referendum is done most politicians will start to behave in a sensible way.[26]

25. The three main UK parties have ruled out a currency union with an independent Scotland. When he gave evidence to us, the Secretary of State argued that a currency union would require a single central bank and agreements on a fiscal compact and fiscal disciplines. In addition he argued that:

    Scotland would have to accept obligations in respect of its deficit financing and in respect of debt, both of which would be highly contentious, and would probably be very difficult for managing the Scottish budget.[27]

26. He went on to argue that these restrictions would make any currency union "extremely difficult to operate". As an example, he highlighted the "velvet separation" of Czechoslovakia, which lasted only 33 days, despite support from both of the new nations.[28]

27. All EU member states have their own central bank and this is a key fiscal structure which underpins the monetary relationship amongst members. We consider the European Union would require a separate Scotland and the Rest of the United Kingdom to have separate central banks. Therefore it is highly unlikely that the EU would permit a sterling zone. Furthermore, we do not believe that the use by a separate Scotland of a "shadow pound" would be acceptable to the EU.

28. The Scottish Government's economic argument for independence has been based on a belief that Scotland would remain within a sterling zone. Given the views of the three main parties at Westminster, this is no longer a tenable position. A protracted negotiation over Scotland's status within the EU also puts into doubt the possibility—in the short term—of adopting the Euro. As a matter of urgency, the Scottish Government must now spell out its plans for an alternative currency for an independent Scotland.

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11   Written evidence to the European and External Relations Committee of the Scottish Parliament Back

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15   HM Government Scotland Analysis: EU and International Issues  Back

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19   The Scottish Government: Scotland's Future: Finance and the Economy  Back

20   The Scottish Government: Scotland's Future: Finance and the Economy Back

21   The Scottish Government: Scotland's Future: Finance and the Economy  Back

22   The Scottish Government: Scotland's Future: Finance and the Economy  Back

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Prepared 8 August 2014