06 September 2022

LSE: Why an independent Scotland might have second thoughts about joining the EU

An independent Scotland would be a net contributor to the EU budget, and economic modelling for the Scottish Government suggests that Scottish exports of goods to the EU are back to where they would have been if Brexit had not happened, writes Derrick Wyatt.

He asks whether Scottish voters would opt for a European identity and a federal future, even if it brought no obvious economic advantages.

Scottish independence is an unknown quantity. It might never happen. If it does happen, it will not be for some years yet. None of this means that only nationalists or indeed only Scots should be thinking about it or discussing possible links between an independent Scotland (IndyScotland) and the EU, the wider world, and the New UK (NUK) which would emerge from Scottish secession.

Part of the SNP’s plan is that an independent Scotland would join the EU. For many Scots, this sounds like a good way of fixing Brexit, and a recent poll suggested that 72% of Scots supported Remain and that 69% would seek to reverse Brexit. Scottish First Minister Nicola Sturgeon has said that ‘the people of Scotland went to the polls’ in the 2016 Brexit referendum ‘as citizens of the European Union and overwhelmingly voted to remain as such’. Yet the lack of Scottish enthusiasm for the euro and the fact that Scots are even less likely than other Brits to identify as ‘European’ could mean that Scottish support for EU membership is based more on the belief that it will bring tangible advantages to Scotland than on the ideal of an ‘ever closer union among the peoples of Europe‘.

Officials of the Scottish Government have modelled the impact of Brexit on Scottish exports to the EU during 2021, and their model ‘finds no significant impact of EU Exit on exports to the EU beyond the first quarter’. It is early days yet, and imports of goods from the EU did fall significantly, but the rapid bounce back of Scottish exports of goods to the EU could be significant for Scotland, because 60% of Scottish exports to the EU are exports of goods.

If Scottish exports of goods to the EU under the EU/UK Trade and Cooperation Agreement (TCA) can match Scottish exports to the EU when it was part of the EU’s Single Market and Customs Union – which is what the Scottish Government’s model implies – how much does Scotland really need the Single Market and Customs Union?

The picture is likely to be different for exports of services to the EU, both by the UK as a whole and by Scotland. Financial services are the top services export to the EU of the UK as a whole, and in the first three quarters of 2021 they were 25% down on exports in 2018, regarded by the ONS as the last year of stable trade with the EU. Financial services, along with insurance, are major business sectors in Scotland, and they are Scotland’s top services export to the combined destinations of the EU, rest of the world, and rest of the UK. Yet Brexit will leave this sector in Scotland largely unscathed, because before Brexit only 6.5% of exports in this category (2018) went to the EU, with 10.5% going to the rest of the world, and 83% (£10.5 billion) going to the rest of the UK. If the reduction in Scottish exports of financial services and insurance as a result of Brexit turns out to be the same as that for UK’s exports of financial services (though the UK’s insurance exports more than held up and Scotland’s might have too), the impact would amount to 1.25% of Scotland’s total exports to the EU.

One remedy for Scotland’s financial services sector would be for IndyScotland to stay out of the EU and instead to enter into a financial services union with the NUK, initially in conjunction with a sterling pact, which would allow the Bank of England to regulate banks and insurance companies on both sides of the border.

Scotland’s third highest exporting industry is professional scientific and technical services. In 2018, Scotland exported £3.8 billion worth of services in this category to the rest of the UK, £2.3 billion worth to non-EU countries, and £1.2 billion worth to the EU. For the UK overall, exports of professional services dipped in the first three quarters of 2021 by 10% compared with 2018, but this was matched by a rise of 11% in exports of technical services to the EU. If Scottish exports turn out to reflect the overall UK position, Brexit is having little or no overall impact on Scottish exports of services in this category. Moreover, as the above figures from the Scottish Government show, 52% of Scotland’s exports of services in this category go to the rest of the UK, with only 16% going to the EU.

Any discussion of potential trade gains for IndyScotland as a result of joining the EU should take account of Scotland’s export record during its actual participation in the EU Customs Union and Single Market over a period of thirty years or so. Prior to Brexit, 60% of Scottish exports went to the UK, 21% of Scottish exports went to non-EU countries, and 19% of Scottish exports went to the EU. There is no obvious reason why an IndyScotland should expect better results second time round if it joined the EU in the coming years. In fact, the 19% figure overstates exports to the EU and understates exports to non-EU countries. Two of Scotland’s top five international export destinations are the Netherlands and Belgium. In both cases some of the transactions recorded as exports of goods to those countries will actually be exports through Rotterdam and Antwerp to non-EU destinations. This anomaly is known as the Rotterdam effect or the Rotterdam-Antwerp effect, and it is acknowledged in the Scottish Government’s Publications on Export Statistics.

If IndyScotland joined the EU, it would join an EU which had much evolved since Brexit. An important part of that evolution has been the EU issuing bonds on behalf of all Member States to finance EU activities. The decision of the EU to borrow 750 billion euros to fund a post-pandemic Recovery Plan was a remarkable exercise in solidarity that the UK would almost certainly have vetoed had it still been in the EU.

The German Finance Minister at the time (and now Chancellor) Olaf Scholz described agreement on the Plan as a ‘Hamiltonian moment’. This was a reference to measures adopted by the United States’ first Treasury Secretary Alexander Hamilton, and what Scholz meant was ‘we have just taken a step towards a United States of Europe’....

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