Four major concerns for separatist Scots

Scottish Independence, flagThe issue of Scottish independence is becoming a subject of note in the global conversation. Many have strong opinions on the topic, others do not. Those in favor of Scottish separation tend to incite feelings of patriotism and long-held feelings of resentment toward the English imperialists of the past in order to garner almost fanatical support from those within the Scottish population susceptible to subtle emotional manipulation.

The realities of a hypothetical split, however, come down to pure economics and prove that much of the idealism coming from pro-separatists is guided by little more than well-intentioned, misleading, and misguided rhetoric.

Recent polls seem to indicate that public support for independence in the upcoming September 18 referendum is, indeed, rising. The question that arises is this: What will the real and immediate effects of separation be for both Scotland and the whole of the UK? 4 issues appear to come to the surface in a deeper analysis of this issue.Scottish IndependenceThe process of devolution (granting of powers to the Scottish parliament previously held by Westminster) has slowly brought certain areas under the near-direct control of the individuals which the pertinent policies affect. Scottish independence would be seen as the final achievement of this.

I. Trade and Resources

The first, that of Scotland’s place in the global marketplace, stems, in large part, from several of the other variables that will be discussed. The Scottish economy is unique in that it does not necessarily mirror many of the other systems with which it is connected.

Second, Scotland has an abundance of resources. It has been argued that these stores will be able to serve as the basis for an economy completely independent from both the taxation and the help (in the form of subsidies and government welfare) of the government in Westminster. It is true that Scotland’s possession of these resources certainly strengthens its position with respect to its independence, however the efficient control and management of these stores (especially of oil) over the long term must be of primary concern.

scottish independence impact chartMany pro-independence activists in Scotland believe that the newly-independent nation will be able to effectively assimilate into the global economy. The issue of trade, especially in relation to the ways in which Scotland manages the export capacities of its own economic system, are necessarily in need of significant scrutiny.

Quite a large portion of the Scottish economy comes from exports. the production of Whisky makes up almost a quarter of this statistic. In fact, Scotch Whisky production has increased over 87% in the last decade.

The production of North Sea oil is also a large part of Scotland’s value on the world stage. The oil is shared between mostly Norwegian and UK corporations. Scottish independence would necessitate that a portion of this would change hands.

An analysis paper, the fifth to be published by the coalition government, entitled: Scotland Analysis – Macroeconomic and Fiscal Performance states that, “An independent Scottish state could try to smooth its public finances and manage volatile and declining oil and gas revenues by establishing an oil fund”

The paper continues, suggesting of the influence of oil funds on public spending:

large-6400-scottish-trade-statistics-ft-590x335“Implementing an oil fund in a similar way to Norway would imply very significant tax increases or cuts to public spending, over and above the plans that have been set by the UK government to repair the impact of the financial crisis.”

Salmond has earmarked up to 1 Billion Pounds per year in oil-generated revenues to be entered into one such fund. An independent Scottish administration would be required to demonstrate the ability to effectively manage the revenue generated from North Sea oil well into the future (even as output declines) in order to maximize total utilization all the time.

The acceptance of a newly-independent Scotland into the European Union would also be a concern of value. Once again Scotland would be required to demonstrate economic solvency over the long term as a stand-alone entity to validate its entry into the union.

scottish independence impact chartMany in favor of separation contend that the EU would jump on the opportunity to approve Scottish membership to the union. The actual realities may not be so simple. Looking at Scotland’s balance sheet combined with the prospect of a new currency being in circulation create the model for a potentially volatile situation. The entrance of a potentially economically unstable Scotland into the European Union may be in question to the officials tasked with evaluating this entrance. The stability of a possible Scottish currency is an even greater concern.

Scotland does, indeed, possess a great store of natural resources. Sovereignty over the North Sea, especially in relation to control of its oil resources (which represent the largest such stores in the European Union), has been a subject of struggle between the Westminster and Holyrood governments.

To those in favor of independence, this would appear to be a sign of Scotland’s ability to operate autonomously from Westminster. These same individuals must consider, however, that an economy becoming reliant on the revenues from oil drilling also becomes highly-exposed to fluctuations in global commodity prices. It is also true that North Sea oil yields have been steadily decreasing since 1999.

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David Cameron has stressed that the reserves in the North Sea would be best managed with Scotland remaining as a part of the Union.

With respect to energy independence, it appears that Scotland, in a hypothetically-free future, would actually fare pretty well. Scotland is actually a net exporter of electricity. While much of its energy at present comes from less-than-renewable sources, the country has been endowed with a significant abundance of natural energy sources (water, wind, etc.). Looking forward to the possible future of a new, free Scotland, it is clear that the management of these resources will become extremely important.

II. Banking and Governmental Systems

Third, the banking and governmental systems of Scotland and the rest of the UK are incredibly interconnected. A severing of many of the ties which currently exist would leave serious holes to fill in the Scottish financial and legal systems.

The same, previously-cited paper from above also indicates that, “Institutional and policy divergence between Scotland and the continuing UK would be likely to lead to a weakening of economic integration.”

In relation to the connections between the capital markets in Scotland and the rest of the UK it stated that over the longer-term, some business networks might end as a result of economic, historical and cultural ties being weakened. Devolution would end, along with the pooling of fiscal risks across the UK, the stabilizing role of fiscal transfers between different parts of the UK, and the ability to share costs and coordinate policies across the UK.”

Scottish Independence, GDP

The economies of both  Britain and Scotland are intertwined throughout nearly every sector. Obviously with the course of time many of the gaps that will be opened by Scottish independence can be efficiently filled. The variables that concern analysts, however, are slightly more subtle. It is clear that that the means by which separate systems operate often lead to inefficiencies which would otherwise never have existed.

The paper also uses the example of Czechoslovakia. It states that in that instance, “the fall in trade shares between the two new states was very rapid. Combined with regulatory divergence, Scottish independence would lead to barriers to trade and obstacles to labor and capital mobility where there presently are none.”

III. Currency

Fourth, a newly independent Scotland will have to contend with a currency problem. Scotland currently uses the British Pound. In the event of an independence vote it is clear that something would have to change. Westminster has asserted that this may spell the end of the pound as Scotland’s official currency. What other options are there? It seems that many of them come with serious exposure to the global debt market.

The prospects for a currency union look doubtful, seeing as this would require Scotland to remain at the hands of the money-printers down in Westminster. Then what are the other options? The enactment of an informal union has much the same problems. The creation of a new Scottish currency would put the country in danger of receiving higher-interest loans. It would also inevitably be more exposed to fluctuations in global interest and currency rates.scotlandcompare

These are all problems that can be solved in a new, Independent Scotland. It does not seem likely however, that at the present time the movement for separation will be able to effectively cope with them.

Philip Hammond recently stated of the issue “The reasons we could not have a currency union between the rest of the UK and Scotland are not political. It is not because there would be bad blood, it’s because there are sound economic reasons why a currency union without deep fiscal and political union doesn’t work.”

IV. Conclusions

It is clear that many believe that Scotland will be able to govern itself. This may, indeed, be true. The ability of Scots to look over their own affairs cannot be overlooked. The problems which it appears will inevitable plague the newly independent nation, however, can also not be ignored.

One can also understand the thinking which underlies the desire for autonomy. If a vote for independence goes through, must not the desires of individuals in Wales and even Northern Ireland for independent rule be considered?

In the end independence looks to be ill-conceived. Economy efficiency over the long term must be considered to be a primary goal of all countries making up the United Kingdom. At present material market and capital variables do not seem to be making a good case for an independent state either. If the vote fails, efforts must be made to better-represent those in Scotland as all members of the democratic system should be included.

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