2 The impact on business
Background
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.
Currency
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.
1 http://www.scotland.gov.uk/Publications/2013/11/9348/7
Back
2
http://www.publications.parliament.uk/pa/ld201213/ldselect/ldeconaf/152/15207.htm
Back
3
Q 100 Back
4
http://www.cbi.org.uk/media-centre/tags/?tag=independence+referendum
Back
5
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209891/13-635-scotland-analysis-business-and-microeconomic-framework.pdf
Back
6
Q2 Back
7
Q103 Back
8
Q103 Back
9
http://www.publications.parliament.uk/pa/cm201314/cmselect/cmscotaf/1241/124102.htm
Back
10
Q9 Back
11
Written evidence to the European and External Relations Committee
of the Scottish Parliament Back
12
http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26215963
Back
13
Q2 Back
14
Q99 Back
15
HM Government Scotland Analysis: EU and International Issues Back
16
Q166 Back
17
Q165 Back
18
Q167 Back
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
23
Q2 Back
24
Q2 Back
25
Q135 Back
26
Q14 Back
27
Q171 Back
28
Q156 Back
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