“One of the most serious problems has been the drain of Scottish business out of the country”: apprentice fabricators in Glasgow weld the date of Scotland’s independence referendum onto steel © Andrew Milligan/PA Wire
In the 2011 Scottish Social Attitudes survey, respondents were asked how they would vote in a referendum if independence would make them £500 per year better off. They would vote in favour, by around two to one. If independence would make them £500 per year worse off, the result would be a two to one majority against.
There would not have been a similar result for a poll in the United States in 1775, in Ireland in 1920, or in India in 1945; nor even in relation to modern separatist issues, such as those in Quebec or Belgium, far less Kosovo. The economic issue looms larger in Catalonia, but even there it is bound up with linguistic differences and an unhappy modern history from the Spanish Civil War and its aftermath. The referendum campaign in Scotland is characterised by a near exclusive focus on economic issues. What is the answer to the question the Social Attitudes survey posited?
If states are viewed as economic rather than ethnic or political entities, the balance of advance has shifted over time. The 19th century brought the rise of large states. Countries became bigger, empires were formed. Continental Europe saw the political reunification of Germany and of Italy. France, and particularly Britain, built colonial empires. The United States expanded across the American continent.
The history of the 20th century was quite different. Empires progressively collapsed. The weak Turkish and Austrian empires were the first to fall. The process continued as Britain and France shed theirs, and by the end of the century even the Russian empire disintegrated. The number of members of the United Nations, 51 at its formation, has today expanded to 193. Some of the most successful economic performers in modern times have been small states such as Switzerland and the Scandinavian countries, which have moved from being among the poorest states in the world to among the richest.
The changing attractions of large and small were reproduced in the fall and rise of Scottish nationalism. In the 19th century people began to talk about North Britain. There was no political Scottish nationalist movement, only romantic fluff based on apocryphal history largely invented by Walter Scott. The revival of Scottish nationalism in the 20th century began as the chatter of literati in Scottish pubs. But in the 1970s it acquired an economic dimension. The discovery of oil in the North Sea allowed the Scottish National Party to campaign on the unsentimental slogan “it’s Scotland’s oil”—and to win seats in Westminster general elections for the first time.
An abortive attempt to placate this nationalist revival by re-establishing a Scottish Assembly failed in 1979, and the failure brought down James Callaghan’s Labour government. The 18-year Conservative ascendancy at Westminster followed, but Margaret Thatcher’s home counties tones alienated Scots. By 1997 the Conservatives were almost eliminated as a political force within Scotland. When Labour regained office, it quickly established a devolved Scottish Parliament. But this did not remove the nationalist threat: it gave it a platform. With Labour nationally unpopular in 2007, the SNP won enough seats in the Scottish Parliament to form a minority government. Its leader, Alex Salmond, so dominated the political scene that, despite contrary polls, he led his party to an overwhelming victory in 2011—a result which enabled, or perhaps compelled, them to call a referendum on independence to be held in September 2014.
In a world of relatively free trade, small countries can compete in global markets by specialising in narrow areas of competitive advantage. The success of peripheral small countries in western Europe is the product of such specialisation—such as the Swiss capabilities in speciality chemicals and precision engineering or the cluster of medical companies around Copenhagen. These high levels of national prosperity are conditional on being an active and effective player in a global economy. Ireland’s romantic nationalist fantasy of economic as well as political independence condemned it to 50 years of disappointing performance. Only in the 1970s did the country establish a modern state whose membership of the EU symbolised and facilitated a new, open economic order.
Over the past 50 years income per head in Scotland has moved in the range of 90 to 100 per cent of the UK average. The nadir was reached in the 1960s when that figure dipped briefly below 90 per cent: the peak was reached in the 1990s, followed by a slight relative decline. Scotland is the richest region of the UK outside London and southeast England. The growth rate of Scotland has been around 0.5 per cent lower than that of the UK but that difference is accounted for by slower population growth in Scotland, the result of net emigration. Until recently, projections suggested that Scotland’s population was likely to fall but recent immigration, primarily from Poland, has delayed or eliminated that prospect.
The industrial structure of Scotland is also similar to that of the UK. There is some truth in the claim that Scotland is more dependent on public sector employment than the UK as a whole. But, although classification differences complicate comparisons, the difference is small. Scotland, like the UK, has an economically and culturally dominant capital city. But Edinburgh is not Scotland’s largest city, and both the economy and society of Scotland are deeply affected by a steady improvement in the fortunes of Aberdeen and Edinburgh relative to Scotland’s other two principal cities, Dundee and Glasgow. Scotland is in a very different position from Wales or Northern Ireland, both of which are economically dependent on support from the UK. Independence for Scotland is certainly a feasible economic option. But would the £500 have a positive or a negative sign attached?
A Scottish vote for independence would be followed by negotiations about what independence would mean in practice. The SNP’s proposed timetable—with an independent state coming into being 18 months after a Yes vote—seems unrealistic. The most important of such negotiations would be those with the remaining UK and with the European Union.
Campaigners for independence face a genuine difficulty in describing the specifics that they ask people to support, which is reflected in the lengthy White Paper on the effects of independence which the Scottish government published in November. That document is, perhaps inevitably, a mixture of the negotiating stance a Scottish government would adopt in international negotiations if it secured a positive result- on issues such as debt and currency; a positively spun description of how independence might function in practice—on matters such as citizenship; and an election manifesto for the SNP—on questions such as housing benefit and nuclear missiles.
Neither the UK nor EU will enter into negotiations ahead of a Yes vote; the putative Scottish government can only set out a negotiating stance. The documents that the current Scottish government produced in November are designed to reassure undecided votes that nothing much would change: the independent state would have the same Queen, the same currency, the same monetary policy and financial regulation. Most of the policy changes it describes—the most eye-catching is extensive provision of free childcare—are policies which the Scottish government already has the powers, but not the resources, to implement.
Some major issues could be deferred, to be dealt with in due course by negotiation between new sovereign states. The complexities of pension provision for the large numbers of people who have worked in both Scotland and England might be an example of such an issue, although such deferral would make it difficult for a Scottish government to implement the White Paper’s commitment to immediate reform of Scottish pension policy.
Scottish independence would require detailed legislative activity by both Westminster and the EU. It is unlikely, in fact inconceivable, that general legislation would pass unless there was a substantial degree of consensus on specific issues. The biggest immediate question—and the one that has most potential for damaging uncertainty—is the decision an independent Scotland would make about its currency.
When Ireland became independent in 1922, the currency issue was parked: people in Ireland carried on using English pounds exactly as they had been doing before. These English pounds were issued by the Bank of England through Irish banks. Only in 1927 did Ireland start to have its own bank notes and for a long period after that the Irish Currency Board backed these Irish notes 100 per cent with Bank of England notes. In 1942, Ireland established its own central bank, but the link between the Irish pound and the British pound was not finally broken until 1979.
The financial world is now very different, as illustrated by the most significant parallel in Europe in living memory: the breakup of Czechoslovakia. The intention again was to park the currency issue but this proved impossible. Three weeks after two separate countries came into being at the beginning of 1993, the countries agreed to adopt distinct currency regimes. The decision was kept secret for three weeks, after which the Slovak crown traded independently and at a discount.
There are three basic currency options for an independent Scotland. It could become a member of the eurozone; it could form a monetary union with the remainder of the UK and continue to use sterling (an unattractive variant on this option has Scotland unilaterally using that currency); or it could have an independent currency. The position of a Scottish currency would be one of many issues to be negotiated with the EU. Recent accession countries have broadly been told they must take the treaties as they are and it can be expected that much the same would be said to Scotland. There could, however, be discussion of areas where the UK has negotiated opt outs or special arrangements.
It would not be sensible for the EU to insist on Scottish accession to the Schengen agreement on a common passport zone, since Scotland’s only land border is with a state outside it. Nor need the EU require Scotland to abandon its zero VAT rate on food, clothes and other products. There is no possibility that Scotland would inherit any share of the UK’s budget rebate. Scotland would be required to accept that the euro is the official currency of the EU. However, initially, Scotland would not qualify for membership of the eurozone as it would not meet the Maastricht criteria. The longer term issue would probably be settled by vague aspiration on the part of Scotland to join the euro at some time in a future so indefinite as to be irrelevant to any current decisions.
It would be sensible, as Scottish ministers have currently proposed, for Scotland to attempt to form a monetary union with England after independence. But it would not be easy to achieve that outcome. The debate would be conditioned by recent eurozone experience. Conventional wisdom today—not necessarily well founded—is that monetary union is feasible only if there is a very high degree of fiscal coordination leading in the direction of fiscal union; if there is a banking union; and if there is also widespread coordination of other policies. It is certain that if negotiations took place between Scotland and the UK over the formation of a monetary union, this would be the position adopted by the Bank of England and the UK Treasury.
So could the outcome of such a negotiation be consistent with aspirations for an economically independent Scotland? The asymmetry between a country that represents 8.5 per cent of a monetary union and one that makes up 91.5 per cent is a fundamental difficulty. The rest of the UK would seek fiscal oversight over the Scottish economy and would be unwilling to concede reciprocal oversight. At the very least the Scottish government would have to prepare for the possibility that these negotiations would not succeed. The principal alternative for an independent Scotland would be a separate currency.
The possibility of such an outcome has economic consequences not just from the day of independence but from the day at which independence becomes a serious option. If there were to be a Yes vote—indeed, if it were believed to be likely that the vote in Scotland would go in favour of independence—sophisticated individuals and businesses would start positioning themselves to ensure that they benefited from, or at least did not lose out from, the establishment of a separate currency.
They would start to ask, as Czechs and Slovaks asked, “what will happen to my bank account, and my life insurance policy? Is my mortgage to be repaid in Scottish pounds or in English pounds?” Instability follows uncertainty. It is difficult to know what the outcome of monetary negotiations would be and yet vital that everyone knows the answer.
An independent currency would impose costs on Scotland, as well as a degree of monetary freedom—but the costs should not be exaggerated. It would be sensible for Scotland to peg its currency to the pound, as the Irish did for so long. The Danish krone has been pegged against the euro since the establishment of the eurozone (and the Hong Kong currency has been linked to the US dollar for 30 years). Danish businesses maintain accounts in krone and in euros and the peg provides Denmark with much of the stability that a formal currency union would offer. That said, it must be acknowledged that most Danish politicians and business people would like the country to join the eurozone. It has not happened because voters will not agree.
Allocation of debt between the two countries would naturally be based on population or share of onshore GDP—there is little difference between the two. The recent announcement by the UK Treasury that it would stand behind the UK’s debt is simply a statement of the obvious since the rest of the UK (as successor state) would be liable for it in any event. Scotland would presumably be responsible for servicing a pro rata share and might roll over that share into Scottish debt as the historic stock matured. Scotland could expect to pay a modest premium for the unfamiliarity and relative illiquidity of a new small country’s debt, although this might initially be offset by some patriotic purchases (both in Scotland in the diaspora). The borrowing capacity of the new state would be limited by a debt to GDP ratio not very different from the unfavourable debt to GDP ratio for the UK as a whole.
The current fiscal position is that Scotland receives a block grant from the UK government for the bulk of its expenditure. Health and education are the main expenditure items among devolved functions. The allocation to Scotland in that block grant is around 10-12 per cent higher per head of population than the corresponding figure for the UK as a whole. That cross subsidy—perhaps not coincidentally—equates roughly to the gain to Scotland from an allocation of oil revenues by reference to the general principles of territorial rights in the North Sea in international law. An independent Scotland would have a budgetary position that was more volatile and more uncertain but on balance neither substantially more or less favourable than the status quo. However this position would tend to deteriorate as oil revenues tail off and unfavourable demography makes its impact.
The additional per capita public expenditure in Scotland is mainly used to implement higher staffing levels in health and education services. But while Scotland employs more doctors, nurses and other ancillary workers per head of population than England, its mortality figures are worse than that of the UK as a whole. Scotland is the worst health performer among major countries in western Europe. That is partly but not wholly accounted for by particularly poor figures in Glasgow and the west of Scotland.
Scotland spends a lot in its public sector and it is not very clear what it gains from it. As a result of the spending splurge which took place in the UK from 1999-2006, Scotland was given more money through the block grant than it could sensibly spend in the early years of devolution. Over these seven years, public expenditure in Scotland increased by almost 50 per cent in real terms.
But these discussions as to whether Scottish voters would, in the short term, be net gainers or losers from the replacement of a subsidy from the UK by a windfall from the oil industry are hardly a serious basis for a decision as to whether Scotland should become an independent country.
What would independence mean for the performance of business in Scotland? Since the economic performance of small states depends on successful specialisation in a global market, the issue becomes: “What competitive advantages does Scotland have, or might Scotland have, that would enable Scottish businesses to compete as effectively as Swiss businesses, or Danish businesses, or Swedish businesses, first within the EU and then in a worldwide market?”
Scotland has a traditional strength in financial services, the product of a long Scottish involvement in imperial trade and finance. The record of Scottish finance over the last decade has certainly been distinguished. Having established a reputation for prudence and conservatism over a century or two, Scotland’s banks managed to dissipate that reputation in a short-lived phase of folly. Scotland no longer has the position in international banking to which it once aspired. It nevertheless retains a strong position in insurance, and in asset management, where a reputation for conservatism and competence remains largely intact.
Scotland has an obvious source of competitive advantage in tourism. But tourism levels in Scotland relative to other European countries are lower than Scotland’s potential, given its evident attractions as a tourist destination. And it is hard to identify Scottish firms that will compete effectively and globally in that sector—no large tourism businesses are now based in Scotland. They once existed but have mostly been absorbed into global corporations: Stakis Hotels disappeared into Hilton, Gleneagles became Diageo Turnberry part of Starwood
One of the most serious problems has been the drain of Scottish business and Scottish headquarters out of the country. Scottish and Newcastle Breweries, Bells, Teachers and Whyte and Mackay, Scottish Widows and General Accident, the Glasgow Herald and Grampian Foods have all moved their head offices. Is this due to Scotland’s membership of the UK? Or would much have happened anyway in a world in which London is a major financial and business centre, and in which merger and acquisition activity across borders has become progressively easier? Certainly Scotland has not been able to adopt policies to retain corporate headquarters within its boundaries in ways that it might and probably would have been able to do as an independent country.
Scotland has a potential competitive advantage in premium food and drink. Scottish salmon, beef, shellfish and whisky are prized and valued around the world. Yet Scotland combines some of the best food products with the least healthy diet in the EU. It is difficult to see Scotland as an international premium food producer if that disjunction is not addressed.
No product in global markets is as clearly identified with a single country as is whisky with Scotland: customers routinely ask simply for a Scotch. Yet the two largest producers of Scottish whisky are Diageo—with a minimal headquarters presence in Scotland—and the French spirits manufacturer Pernod Ricard. Still, the arrival of Diageo and Pernod Ricard in the Scottish whisky industry has revived a sector which was previously in decline. The takeover by Guinness of the Scottish based Distillers’ Company in 1986 put an end what is probably one of the worst and longest sagas of mismanagement in British business history. That decline of Scotland’s whisky monopoly from the 1920s to the 1980s has wider lessons. Both whisky and banking are stories of loss of competitive advantage through management failure, and responsibility for these failures is located in Scotland, not outside it.
Scotland has some new sources of competitive advantage, such as the energy services sector that has developed around the growth of North Sea oil production. Scottish doctors have also been renowned around the world for at least 200 years. Not only is Scotland still a major centre for medical training but spin-off businesses have recently emerged in life sciences.
What is needed is a climate of enterprise and entrepreneurship within Scotland. A number of successful new Scottish companies have been created, such as KwikFit, Stagecoach, and Clyde Blowers—mostly by idiosyncratic individuals outside the traditional educational ladder climbed by “lads o’pairts” who went on to Edinburgh or Glasgow Universities from Scotland’s famous academies. Among more conventional middle-class products of the Scottish education system, many people have been successful in business—but outside Scotland. An independent Scotland might offer an environment more conducive to the development and retention of such individuals in future. So the result of independence could be a much more vibrant economic environment. Devolution has led to some revival of Scottish identity and self-confidence, and independence might do more.
But independence might evolve in a different way. Scotland—and especially Glasgow and west central Scotland—suffered in the 20th century from a municipal socialism which, initially idealistic and well-intentioned, became reactionary and mildly corrupt, in a way that damaged both individual aspiration and business enterprise. Small countries are also vulnerable to the crony capitalism which produced such disastrous results in other west European economies such as Ireland or Iceland. It is not difficult to see how a combination of the two might have a baleful effect on any kind of entrepreneurial culture. It is on the balance of these two forces—the greater dynamism of a more self confident state and the complacent self-congratulation too often characteristic of Scottish culture—that the economic progress of an independent Scotland would likely depend.
But the likelihood of such an outcome from September’s referendum is small. The “yes” campaign remains well behind in the polls. Perhaps Salmond can pull a last minute rabbit from the hat; perhaps some recovery in the economy might bring with it a recovery in Conservative prospects of re-election at Westminster which would further alienate Scottish voters to whom David Cameron and George Osborne have little appeal. But the odds are stacked against this. While the UK government, and particularly the opposition parties in Scotland, have indicated the possibility of further moves towards devolution after a “no” vote, it is difficult to imagine that such measures would be a priority for a Westminster parliament once the independence threat had been removed. A 60/40 margin of defeat for Salmond would leave the issue still on the table. A 70/30 margin would kill it for the foreseeable future, and put in question the future of both Salmond and the SNP. There is still a lot to play for.
