Economic Implications for the United Kingdom of Scottish Independence - Economic Affairs Committee Contents

Chapter 5: International economic implications of Scottish independence

Scotland, the United Kingdom and the European Union

108.  Mr John Cridland, Director-General of the CBI, told us: "Uncertainty is the biggest killer for investment."[128] Any uncertainty over the future EU status of Scotland or the whole United Kingdom has obvious economic implications, not least for business confidence, especially if it risked fragmenting the long-standing UK single market—which Mr Cridland reminded us is a key asset[129]—as well as the more recent EU single market.

109.  Scottish-based business leaders were clear that Scotland should remain part of the EU single market. Sir Philip Hampton, Chairman of the Royal Bank of Scotland, said:

    "The overarching framework, assuming that Scotland and the UK stay within the European Union, is that we have a single market for the main products and services, including financial services. The overriding existence of the European single market and the presence of a potentially independent Scotland and the United Kingdom within that should trump relatively smaller, effectively regional differences that might arise."[130]

Mr Rupert Soames, CEO of Aggreko plc, said:

    "Being part of the European Union would be the sine qua non of our having our headquarters and manufacturing facilities there [in Scotland]. We need not only access to the free passage of goods within the EU but the protection of all the EU trade agreements."[131]

110.  The Scottish Government's policy is that an independent Scotland should be an EU member state. There is however no precedent to show how, after a "Yes" vote in the referendum, Scotland would move from its present status within the EU as part of the United Kingdom to membership of the EU in its own right. While we were taking evidence in Scotland in October 2012, there was controversy about the transition and especially about what legal advice the Scottish Government had or had not had from Brussels. Mr John Swinney MSP indicated to us that Scotland's position in the EU would be for discussion between a "Yes" vote in 2014 and independence in 2016:

    "In that period after a referendum and before the establishment of an independent state in the spring of 2016, Scotland would be involved in a process of settling the independence process and conducting negotiations with the United Kingdom Government and with the European Union about the terms of Scotland's membership of the European Union."[132]

111.  The Scottish Government's commitment to EU membership for an independent Scotland recognises the economic importance of the single market and the need of Scottish business to remain part of it. But it is not clear how Scotland would make the transition from its current inclusion in an EU member state to EU membership as a state in its own right, since there is no precedent in EU history.

112.  We asked the President of the European Commission, Mr Jose Manuel Barroso, for guidance on the processes which would apply in a first case of transition by a part of an EU member state to full membership of the EU as an independent state in its own right.[133] He replied:

    "A new independent state would, by the fact of its independence, become a third country with respect to the EU and the Treaties would no longer apply on its territory … any European state which respects the principles set out in Article 2 of the Treaty on European Union may apply to become a member of the EU. If the application is accepted by the Council acting unanimously, an agreement is then negotiated between the applicant state and the Member States on the conditions of admission and the adjustments to the Treaties which such admission entails. This agreement is subject to ratification by all Member States and the applicant state."[134]

113.  Mr Swinney disputed Mr Barroso's analysis. He said: "There is no provision within the Treaty on European Union that provides for the scenario that President Barroso has cited."[135] Asked if the Scottish Government would put clearly to the Scottish electorate that there is a strong possibility that an independent Scotland would have to reapply for membership of the European Union, Mr Swinney replied: "No, we will not do that."[136] He added that the European Commission had made clear that "it would only ever comment on a specific scenario if requested to do so by a member state. The United Kingdom Government have made it clear that they would not be prepared to do so".[137] But he clearly expects the United Kingdom actively to assist a transition after a "Yes" vote in 2014, citing clause 30 of the Edinburgh Agreement: "The two governments are committed to continue to work together constructively in the light of the outcome, whatever it is, in the best interests of the people of Scotland and of the rest of the United Kingdom."[138]

114.  Taking as authoritative the view on process of the President of the European Commission, the European Treaties would cease to apply to Scotland on independence. Scotland would need to apply for membership of the European Union in its own right and the outcome of negotiations on Scotland's admission would need to be ratified by each EU member state.

115.  An independent Scotland's transition to membership of the EU would raise complex issues of substance as well as of process. For example, the European Treaties require from new member states a commitment to join the Euro (although the case of Sweden shows that implementation can be deferred). Scotland would probably wish to negotiate an opt-out like the UK's from the EU's Schengen immigration arrangements. Scotland might also bid to retain a share of the UK's rebate, (although in the view of Professor Iain McLean and Professor Gavin McCrone would be unlikely to succeed).[139] Scotland might also seek revision of the EU fisheries regime. The EU may insist that a new member state should adopt its own regime of financial regulation. There would also be other contentious issues.

116.  The United Kingdom's plans for a new relationship with the EU may further complicate an independent Scotland's path to EU membership. Mr Swinney referred to "the degree of uncertainty that surrounds the United Kingdom's continued participation in the European Union … there is some prospect … of a referendum on the United Kingdom's continued participation".[140] The United Kingdom's intention to negotiate a new settlement with the EU, to be followed by an in-or-out referendum, was announced by the Prime Minister in January.[141]

117.  Negotiations after a "Yes" vote for independent Scottish membership of the EU would most likely be protracted and complex; Scotland, the rest of the UK and the EU itself would have to navigate through EU procedures as well as settle many intricate points of substance then win acceptance of the outcome by all other EU member states.

Other international issues

118.  Defence policy and relations with NATO (see Chapter 6 below) is the main non-EU external issue an independent Scotland would need to address. Applications for Membership of other international organisations such as the UN, the IMF, the OECD and the Council of Europe would follow naturally from independence, as would the establishment of a modest network of diplomatic representation. None of these appears to court controversy. Separate Scottish representation in international bodies might be seen as reducing the standing of the rest of the UK, with possible adverse consequences for its voting strength or shareholding in some international bodies.

International tax treaties

119.  An independent Scotland would have to take early international action on some economically significant issues including tax treaties, not least with the rest of the UK. Mr Frank Haskew of the Institute of Chartered Accountants in England & Wales said:

    "Scotland will clearly need to have a double tax agreement with the rest of the UK. That is the foundation of international trade and commerce, tax and resolving disputes, difficulties, and indeed allocating taxing rights. As part of any independent settlement, a comprehensive double-tax treaty will need to be negotiated … My guess is that that would be based fairly solidly on the OECD model treaty … also … we would need to have a double contributions agreement for things such as national insurance, and we would probably need an agreement for inheritance tax as well. So we would need a fairly comprehensive set of agreements covering a wide range of taxes."[142]

120.  Scotland would also "have to start negotiating new treaties with other jurisdictions … it will be a long process, I would have thought, for Scotland to put together a set of international tax treaties".[143] Extra costs for Scottish business would result, as Mr Soames fears:

    "One of the big impacts and complications for us as a global business will be around double taxation agreements. The people who will have a ball with independence are all the professional advisers—all the accountants and lawyers."[144]

121.  An independent Scotland would need to have a double taxation agreement with the rest of the UK and to negotiate tax treaties and similar agreements with a range of countries.

128   Q 306 Back

129   Q 279 Back

130   Q 773 Back

131   Q 805 Back

132   Q 871 Back

133   Lord Tugendhat's letter of 29 October 2012 to the President of the European Commission Back

134   Mr Jose Manuel Barroso's reply of 10 December Back

135   Q 865 Back

136   Q 876 Back

137   Q 878 Back

138   Q 864 Back

139   Q 128; Q 475 Back

140   Q 873 Back

141   Speech at Bloomberg, 23 January 2013  Back

142   Q 413 Back

143   Q 413 Back

144   Q 797 Back

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