What future for the Scottish-EU relationship?

Published: 19 August 2013

Guest blog by Dr Fabian Zuleeg, Chief Executive Designate of the European Policy Centre, a Brussels-based independent think-tank. This article is based on a paper prepared for the ESRC Conference ‘The Future of the UK and Scotland’ on 2-3 May 2013.

Speculating on the future Scottish-EU relationship is tricky, not least as many issues are still to be resolved – be it the Scottish independence referendum or the UK’s potential EU in-out referendum. But given the centrality of this relationship to the Scottish independence debate, it is important to try to shed light on some possible future scenarios and their implications.

Even the status quo (Scotland remaining part of the UK and the UK remaining in the EU) implies significant change, as both the EU and the EU-UK relationship are changing. The Eurocrisis is forcing deeper Eurozone integration, making ‘exceptionalism’ - a strong theme in the EU-UK relationship - less politically feasible. A marginalisation of non-Eurozone countries in the EU is likely, which will make it more difficult to pursue UK, and, by implication, Scottish, interests in the EU.

Further devolution of fiscal powers to Scotland (implemented after a Scottish ‘no’) might also be restricted by EU economic governance changes: regions with fiscal powers will have to follow agreed national limits. This can potentially affect borrowing or spending of a fiscally autonomous Scotland.

Alternatively, the UK, including Scotland, could decide to leave the EU. An in-out referendum is likely - it will be very difficult for any party to ‘deny’ the UK population a vote on EU membership after the next election whatever the outcome - and might well result in a ‘no’ to EU membership.

What would be the future of the UK outside of the European Union? Economically, there is a trade-off between autonomous decision-making and access to the Single Market, implying that the UK would face restrictions in accessing the Single Market, which is likely to have a significant impact on long term investment and location decisions of global and UK firms.

Politically, the UK would lose influence in the world, not least in areas where the EU carries a lot of weight such as trade negotiations. For Scotland, a small open peripheral economy, it would be costly to be outside the Single Market and not having the UK around the table in EU trade negotiations with the rest of the world.

An independent Scotland could, of course become an EU member in its own right. However, there are very different views expressed about the process and the implications in terms of the Euro, Schengen and the various UK special arrangements, particularly regarding Justice and Home Affairs or the budget rebate.

Scottish EU membership is, in essence, a political question, which would require negotiations at EU level. How Scotland is seen by others would be greatly influenced by the state of the then current relationship between the UK and the EU and whether Scotland shows itself to be a ‘good European’: other EU Member States and the institutions are unlikely to be predisposed to demands of opt-outs and special treatment.

A number of Member States would be concerned that Scottish independence could set a precedent for secessionist/independence movements in their own countries. For these countries, an amicable separation would raise fewer concerns but even if the process for Scotland is smooth, they could still have doubts if it offered clear additional benefits. Itt might serve as demonstration of what a newly independent country can gain, fuelling other regions’ independence aspirations.

Most likely, Scotland would have to accept the body of EU law in its entirety, including a commitment to eventually join the Euro, although an independent Scotland could avoid introducing the Euro by not fulfilling the conditions for membership. Most EU-wide economic governance arrangements would apply to Scotland immediately on accession, requiring Scotland to keep a tight fiscal reign. With regard to Schengen, a compromise is likely which would see Schengen temporarily suspended provided there is a border-free travel zone with the rest of the UK. There would also be some transition agreements, for example on the budget rebate or the number of Scottish MEPs.

If, after independence, Scotland retains Sterling and the UK chooses to stay in the EU, there would be no immediate pressure for Scotland to change currency arrangements, although there is a degree of marginalisation implied by being outside the Eurozone.

However, Scotland would face a stark choice if the UK chooses to leave the EU. The fundamental (and yet untested) question is whether a country can be part of a currency union (with binding fiscal commitments) with a currency outside the EU and simultaneously be part of European Economic and Monetary Union (with a strengthened fiscal/economic governance framework), even if the country in question is outside the Euro for the time being. It is difficult to envisage such an arrangement, as a clash between two sets of rules could occur, creating legal uncertainty. With a UK facing restrictions in entering the Single Market, Scotland would also be required to implement them on English goods and services, potentially imposing very substantial costs on the Scottish economy.

Thus, if the UK votes for EU exit, there is a distinct chance that the UK will end up with restricted access to the Single Market, negatively impacting Scotland, whether independent or not. If an independent Scotland gains retains Sterling and the UK leaves the EU there would also be a fundamental question whether such a currency union would be compatible with EU membership, given the obligations of European Economic and Monetary Union.

The Scottish independence vote is thus inextricably bound to the potential UK in-out referendum For the debate in Scotland, when considering the potential future relationship of Scotland with the EU – whether independent or not - it is thus essential that the impact of the UK referendum is factored into considerations.

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