Scotland’s Place out of the EU

The fear of losing Scotland to the SNP and Independence have dominated the political landscape in Scotland since the late 1950’s.  The internal machinations and divisions in the Labour Party’s elite resulted in Donald Dewar – with a burning desire to translate acceptance that Scotland is a true sovereign nation – drive through “devolution” in 1999. This much is confirmed by Tom Dalyell’s in his recent book “The Question of Scotland”.  Although he was clearly no friend of Dewar it is without rancour that he expresses distaste at Dewar’s triumphalist announcement “There shall be a Scottish Parliament” and his portrayal of it’s opponents as being “anti-Scottish”.

 

Dewar must have realised that devolution was just a stage in the inextricable drive by the SNP to tear up the Act of Union.  They have adopted the mantle of talking for all Scots claiming that opponents are anti-Scottish and therefore of no consequence.  They build on this by persuading followers that English, Westminster, Tory, Thatcher, Cameron, Gideon and many others are pejorative terms and collective descriptions of anti-Scottish, sometimes deliberately malevolent, actions against Scotland.

 

After 9 years of SNP government business organisations should have learnt that the SNP don’t reciprocate goodwill or genuinely offer it. Many businessmen who have dealt with the First Minister and her Cabinet are only willing to admit to this in private, fearing retribution. Manifestly the SNP does not like to be held to account, especially over their management of Scotland’s finances and economy.  This may explain why the Cabinet team for these briefs appears unsuitable. These changes and the more partisan representation in Westminster are detrimental to cooperation between Westminster and Holyrood.  It worked well over Grangemouth and indeed has for shipbuilding on the Clyde.  The Motherwell and Ferguson rescues are examples of the good work the previous financial and economic team achieved.

 

One team which can be said to have been qualified for its brief, but whose work may not be beyond question, is the European and External Relations Committee.  They published their findings “EU reform and the EU referendum: implications for Scotland”.on 19 March 2016.  Their belief there was more support for the EU in Scotland than in the rest of the UK was somewhat prescient. The Committee’s Convenor is candid in her Foreword, admitting that the timing of the report was in part to influence debate in the EU referendum.

 

 

It is also clear that the report emphasises a belief that the benefits of access to the EU single market are “crucial” to Scotland.  A belief that has been the essence of the SNP’s protestations over Brexit and an insistence that Scotland requires access to the single market with compliance of the “four Freedoms” which are keystones to the EU’s increasing integration.

 

The Committee’s conclusions will reflect the fact that all political parties in Scotland supported Remain. But their claim that the Single Market is “crucial” is questionable.  They imply that the benefits far outway the disbenefits and that the Scottish Economy would materially suffer without access to the Single Market. The evidence they rely on does not convincingly support this conclusion.  Moreover they could be criticised for not robustly challenging evidence or indeed seeking out evidence which may disillusion its supporters. Although the Committee didn’t explicitly refer to them, it is right to have in mind the four Freedoms when considering the implications of Brexit on Scotland:

 

  • The free movement of goods
  • The free movement of services and freedom of establishment
  • The free movement of persons (and citizenship including free movement of workers
  • The free movement of capital.

 

The Committee are selective in their reference to the top ten international export destinations shown in “Scottish Export Statistics for 2014”.  They could also have considered that the top 20 export destinations accounted for 71% of non-UK exports.  Less than half – 45% – of which were to EU countries.  None of the non-EU countries had a trade agreement with the EU at the time.  They may also have considered the implication of both the UK and the EU being World Trade Organisation members and thereby subject to WTO rules. The Committee made no estimation of the scale of potential loss in volume nor did they question whether those giving evidence of potential loss were referring to sales volume or just profit.

 

The Committee put great emphasis on their belief that “negotiating bilateral agreements to replace the treaties that the UK is party to as member of the EU would be significant”.  There is widely much lauding of the fact that the EU has some 50 bilateral agreements and that they are in the process of negotiating more.  One major outstanding agreement being with the US (TTIP) – one of Scotland’s major exporting destinations without an EU bilateral agreement – which in any case appears to be “on the rocks”.

 

However the Committee haven’t made any assessment of how significant trade with the “50” is.  A good number of them cannot be termed as being potentially significant customers in size  For example, Akrotiri, Isle of Man, Guernsey, Jersey, Iceland, Andorra, Liechtenstein, Monaco, PLA, and San Marino.  Others would not appear to be significant in terms of the size of their economy and their need to export to the EU is possibly the most significant factor in them reaching agreement with the EU.

 

It may prove impossible to reach a bilateral preferential trade agreement with the EU after Brexit, at least for some time.  But with the UK having a c£60bn trade deficit with the EU (almost half with Germany) and being members of WTO it is not unreasonable to assume that a starting point will be at worst a “most favoured nation” MFN position.   At current rates the average tariff would be less than 2.5%.  Although on motor vehicles it could be 10%, which would not only affect the UK’s car industry – Scotland doesn’t have a car industry – it would also affect Germany.  Tariffs on agricultural products are high – average 18% – although the Scotch Whisky Association are confident that after Brexit the tariff would remain at nil, under WTO rules.

 

The Committee could also have been expected to test their conclusions against the sensitivity of exchange rates. The Euro/Sterling rate has ranged from 1.1 to 1.4 over the last five years and is currently at an all time low.  As can be seen since the referendum, UK exporters have gained from a weaker pound. In fact there are exporters and investors who have gained substantially from the weakness of Sterling against the Dollar as well as against the Euro and other important currencies.  Currently, as a result of a weaker pound, substantial gains in tourism and increased manufacturing production are being reported.

 

An important issue the Committee didn’t give attention to is the potential loss of “passporting” rights for financial services. Although no commentators are suggesting they are “crucial” it is a common belief that there would be a negative impact on UK’s – thereby Scotland’s – financial services industry if the UK and the EU do not reach a bilateral agreement to replace the current EEA provision.

 

The Committee refers to the importance of FDI from the EU under what may be seen as a misleading introduction, “membership of the single market also means EU businesses can invest across borders thereby creating opportunities for FDI”.  Nobody is suggesting that the UK will take measures to stop EU countries investing in Scotland.  Indeed it is doubtful to what extent being members of the EU has on an investment decision.

 

The “EY attractiveness survey Scotland 2016” shows the scale and importance of FDI from the EU and other sources.  In 2015 the US contributed to 43% of the investment projects whereas EU countries, including Norway, contributed 35%.  Reference to the latest “Scottish Annual Business Statistics 2014” (excludes financial services) shows how important non-EU international and rUK investment is to Scotland.  By number they amount to 12% but by output they account for 50% and employ 33% of the workforce.  Whilst the Committee is correct in its analysis of the EU ownership it would also be worth noting that the rUK is of greater importance.  Any argument which uses FDI as a reason for staying in the EU applies more to staying as part of the UK.  Investors have shown no appetite for Independence from the UK.

 

The Committee should also have given consideration to how restrictive EU competition regulations are to re-developing Scotland’s economy.  Scotland has no home registered company with the capacity to carry out major infrastructure work.  All such work is undertaken by either by EU or UK companies with some involvement from other foreign companies.  Whereas by comparison Norway’s infrastructure is built by Norwegian companies that have grown as Scottish companies have sold-out.

 

Another reason where the Committee can be seen to be selective is their reliance on the “UK Review of the Balance of Competence between the United Kingdom and the European Union”.  It was instigated by the Coalition Government in 2012 and it issued 32 separate reports.  The report on the “Single Market” was issued in 2013 and should therefore have deserved robust interrogation by the Committee to determine how it applies to Scotland.

 

The review was carried out by the Departments of Government and although the report on the Single Market reaches conclusions it does not make recommendations, nor does it imply political interpretation or bias. It is hard to summarise as it is intended to inform others to assist in deciding on their own strategy and policy regarding the UK’s future in the Single Market.  But on balance it appears to be reasonable to come to a qualified conclusion that the UK and other EU members would benefit by the UK staying in the Single Market.  Chief amongst the qualifications is the level of future integration and limitations on the influence of the Eurozone and the continued process of globalisation.

 

After Brexit it would appear inevitable that the Eurozone would have greater influence over the pace and scale of integration.  The Single Market was conceived when globalisation was in its infancy.  Times have moved on and the EU cannot adopt a “fortress Europe” mentality to trade.  It has to be open to the global economy and thereby to lower cost products from emerging markets as well as dumping of surpluses – such as steel from China – and the Chinese drive through it’s “one belt, one road” policy.  The latter has manifested itself in Scotland through the Heads of Terms recently signed by the First Minister and steel supplies to the New Forth Bridge.

 

The review offers no suggestion as to the likely outcome of the Single Market after Brexit.  James K Galbraith offers a plausible scenario in his recent book “Welcome to the Poisoned Chalice – the destruction of Greece and the future of Europe”.  Professor Galbraith is an American economist of some note and advised the Greek Ministry of Finance throughout their monetary crisis.   He opines that a sustainable market cannot be larger than the State and that the way the current Single Market works it is not sustainable.  He believes that the the Eurozone will fully integrate and become its own Single Market, or the whole of the EU will.  Neither of these scenarios would seem attractive to an independent Scotland as a member of the EU after Brexit.

 

Then there is what has become a conundrum.  Should we stay in the Single Market and retain open borders or should we retain open borders and stay in the Single Market?  The First Minister appears to promote the first option, but in effect she accepts that the UK won’t be able to have one without the other.  The Committee record evidence from a Minister: “It is critical to our success, our population growth and our economic productivity for the future that we are able to attract migration to Scotland”.  There is little doubt that migration of economically active migrants is required to grow Scotland’s economy and that it would grow its population and, as the Committee observed, improve demographics. What is critical is the Government taking steps to attract skilled economically active migrants and retain existing skilled people.

 

But there is no reason to assume that given Scotland willingly goes about its transformation within the UK that it would be barred from attracting suitable migrants without committing the UK to uncontrolled mass economic migration from existing and new EU members.

 

The Committee would have served their audience better if it had considered the history of Polish immigration to the UK.  Until 2004 – when Poland became a full member of the EU – the Polish born community in the UK had remained relatively constant since WWII.  It increased by a factor of 10 by the 2011 Census, but it has flattened out again.  Germany and Ireland experienced similar levels of economically active Polish migrants.

 

The First Minister would serve her country well by considering what is now taking place in the EU as a reaction to the German Chancellor’s “open arms” policy.  For example, perversely, Poland is refusing to take refugees and at the same time urging their emigrants to return home.  Even the liberally minded Scandinavian countries are tightening their attitude to migrants.  The real-politik is that the principle of mass migration is an anathema to populations which are affected by it, as parts of rUK have been.  To date Scotland hasn’t had that experience, and there is little risk of it happening in the future in any event.

 

Scotland’s best interests would be served if its political leaders accepted that the European and External Relations Committee was wrong in its conclusion that membership of the Single Market is crucial and freedom of movement is critical to Scotland’s economy.  Whilst leaving the Single Market may cause some significant and specific loss to rUK trade, any to Scotland will be minor and may well be offset by gains.

 

The leader of the Conservatives in Scotland should realise that her analogy likening Brexit negotiations to the process leading up to devolution is false.  Unless the UK take the lead and exercise the 2 year guillotine it may be an understatement to say that the Brexit process will be difficult and grossly expensive.  It will require all parties to dig deep into their spirit of compromise and no doubt many who voted to leave the EU will regret it and many EU citizens will blame their leaders for letting it happen.  It may even catalyse the break-up of the EU.  But under Article 50, once triggered, there is a two year potential guillotine on negotiations.  Unless negotiations are at a favourable stage, the Westminster government can use it.

 

In these circumstances it is difficult to see anything but political opportunism in Scotland pursuing membership of the EU independent of the UK.  Moreover the First Minister and her party should realise that a country of 5m situated in a non-strategic location in Europe, with 50% of its output in non-EU ownership, no indigenous capacity to either fund or build its infrastructure, running a substantial current deficit and governed by a left wing anti-austerity government would not be a “must have” new member for the EU.  Added to the disincentives to ECB support there would be the lack of not just a currency and central bank but also having no indigenous retail banking.

 

If Scotland is to flourish, whatever the outcome of Brexit, all of these disincentives need addressing. Critical to Scotland’s economic future is making Scotland an attractive place to work and invest.  In particular, attractive to young entrepreneurial people with globally marketable skills.   That’s what political leaders should be concentrating their minds on, and the efforts of advisory panels.

 

“Devolved Scotland” is in effect a new unique type of nation and its leaders should let it be motivated by new ideas, new people and new businesses.  Dewar was wrong in asserting that Scotland “had got its Parliament back”.  The Scotland of 1999 bore no resemblance to the Scotland of 1957 let alone of 1707 and the constitution of the new parliament bears no comparison to the limited representation in 1707.

 

Scotland is in a paradoxical state. More than half of its population want to remain in a political union with Europe and nearly half want to leave one with the UK. It’s safe to say that nearly a half would choose the EU in preference to the UK.  The reality is that Scotland has no control over the outcome of Brexit – it can and should seek to influence the terms – but it can decide on whether it remains in the UK and it has influenced the terms.

 

As a member of the EU – whatever some may say – the people of Scotland would carry very little weight in deciding on major issues which are fundamental to their prosperity and welfare.  Whether or not one agrees with Brexit, it cannot be denied that membership of the EU entails handing over a significant sum of money for others to decide on how we spend it.  Again

paradoxical for Scotland – building a new dynamic nation state – not to prefer to exercise greater control of its funding, as part of the UK, than handing some of it to Brussels to control.

 

Another paradox is the fact that Scotland, as part of the UK, has come through an economic maelstrom intact.  Why would it want to plunge itself into another which is building up in Europe, where the German banking system is suffering as the UK’s did in 2008.  Many commentators predict the financial meltdown of the Eurozone and possible restructuring of the EU?

 

On the other hand there is a certain amount of reason in the First Minister’s protestation that Scotland will exit from the EU along with the rest of the UK and they didn’t vote for it.  If the Holyrood government took positive steps to make the best of the unique new powers then Westminster should recognise that the timing of the disruption and uncertainty of Brexit is not helpful.  Holyrood doesn’t need more new powers but it should get assistance through funding and by taking advantage of being released from the EU’s restrictions on competition, procurement and state aid.

 

The Leader of the Conservatives in Scotland did instigate a panel of advisors in the “Independent Commission for Competitive and Fair Taxation in Scotland”.  In January 2016 they issued their report “A dynamic Scotland: the role of Competitive and fair taxes”.  The Conservative Party didn’t exercise any influence over the Commission. Nor could they.  The Commissioners were chosen by their chairman not just for their knowledge and experience but also for their independent mind set.  An added safeguard of their independence from any political persuasion was the appointment of Sir David Edwards as Scrutineer.  So, even if their recommendations may need refinement they are a useful base to work from.

 

Its work no doubt reflected the input of its secretary, a young well educated immigrant from Eastern Europe. But it still couldn’t claim to represent the Scottish Population.  Future advisory panels should have more representation of those who will experience the results of building a new Scotland.

 

In doing its work they created for themselves a vision of what Scotland could become as part of the UK and using the unique devolved powers it has.They decided on five guiding principles:

 

  • Simple
  • Progressive
  • Incentivising
  • Local
  • Transparent

 

Their proposals for tax reform could be seen as being bold in so far as they would be an investment in a Scotland which attracts people to live and stay and businesses to thrive and grow. They intend more control being given to local areas who can best decide the way forward for their communities.

 

To develop their proposals for a competitive tax regime the Commission gave a substantial amount of thought to the Scottish Economy which they characterised as

 

  • A labour market dependent on a small number of large companies and a large number of very small businesses.
  • A population aging faster than the UK and European average.
  • A mutually dependent trading relationship with the rUK.
  • A narrow export market and the need for greater export opportunities.
  • A reliance on oil and gas, and financial services in Scottish city regions.
  • A dependence on FDI and especially the retention of existing foreign owned companies.
  • A GDP growth level masked by an unsustainable rate of expansion in public infrastructure investment.

 

The Commission decided that there had to be transparency and improved accountability (recently echoed by the Auditor) to achieve the level of cooperation required between Westminster and Holyrood.  Enabling businesses to grow in size and number and to ensure that skills and talent which align with demand are attracted and retained.

 

Since the Commission reported in January 2016 there has been two fundamental changes which the Commission could not have considered. Revenue from the oil and gas industry has collapsed, and there have been job losses in the tens of thousands in that sector, and of course the outcome of the referendum on EU membership.

 

Bearing in mind that despite reported record levels of FDI between 2008 and 2014 there has been relatively stagnant output from foreign owned companies. This may be because some foreign companies have ceased to trade or reduced their output or some investment has been in companies registered in Scotland, either startup or existing.  Then looking at the overall picture, output stagnated in the 2008 to 2014 period.

 

Taxation is not the only factor which can and should be addressed by Westminster and Holyrood together.  Clearly, if Scotland is to grow it needs the Westminster Government to recognise Scotland’s needs. In closing UK borders to mass economic migration it must provide a means of satisfying Scotland’s demand for skilled immigrants.

 

Funding is another factor.  Local banks have been closed and SME’s are unable to enjoy a local contact who will have a personal understanding of the potential borrower’s business plan. There are de facto no retail banks under Scottish ownership.  Decisions which affect Scotland are made outwith Scotland.  The Westminster Government should take steps to rectify these factors and reinstate local up to date banking.  Local bankers should have the power to make funding decisions including reducing levels of personal guarantees and charges.

 

Local government should have power to invest in local companies, particular those – such as visitor attractions – which have knock-on potential for the local economy.  They should also have powers to intervene when locally important small companies get into financial difficulties.  The Westminster and Holyrood governments should cooperate in making additional funds available.

 

In giving Local government more power there should be a resolution to reduce the cost of governing Scotland.  Whatever Is meant by Brexit leading to neo indepence hopefully it is akin to neoliberalism.  It may be said that it is critical that Scotland reduces the cost of the public sector and makes some of its productive capacity available to the private sector.

 

Brexit will remove the restrictions on state aid and competition as well as widening funding choices, potentially giving a boost to key activities:

 

  • Scotland is enjoying a booming tourist industry. Local planning authorities should be given the powers to develop tourist infrastructure in areas hitherto protected.  As an example, purpose built holiday accommodation would take the pressure off housing for local people.

 

  • Whilst the agricultural industry could suffer without access to the Single Market there are measures governments can adopt which should mitigate the losses. A more fit for purpose agricultural support scheme tailored for focused needs could be of benefit to the whole of the UK farming industry.

 

  • The Scottish Fishing Industry are enthusiastic about the chances Brexit creates to end the Common Fisheries Policy. They argue that trawlers from EU member states may then be excluded from access to the “best fishing grounds in the world”.

 

  • Development and maintenance of infrastructure and transport could be restricted to UK companies assisting key industries such as public transport, construction and shipbuilding to regenerate. The Scottish Government would have greater freedom to determine its own funding model without having to comply with European spending rules.

 

If Scotland enthusiastically grabs the powers given in the 2012 Act, under the UK’s umbrella it can attract people with new skills and talents.  It can regenerate its business structure and prosperity.  But there has to be a change in attitude.  The”kilt” has to be saved for festive occasions and not be a symbol of racial elitism. A common language, English, has to be embraced.  In the 2011 census there were 6 times more immigrants than Gaelic speakers.  Scots need to speak the language of the World Wide Web.

 

In the 2014 referendum hustings much was said about the Nordic Model.  Well in Scandinavian countries old prejudices are buried. The people live for today and the future.  They don’t dwell in the past, swimming in a sea of resentment and hatred.  The rUK have to recognise that since Scotland was granted new powers the oil & gas industry has collapsed and the UK has voted for Brexit.

 

The Leave campaign’s slogan was “get control back”.  With a positive attitude from its leadership Scotland can look to a bright future.  It has no need to make itself an issue in the debate between Brussels and Westminster.  But in return the change in circumstances places a greater responsibility on the rUK to help Scotland make the most of their unique powers and to allow them to control their economy without unnecessary detriment because of Brexit.

 

 

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