Monday , June 17 2024

Brexit has ruined the economic case for Scottish independence

A majority of Scots believe the break-up of the UK is inevitable, Nicola Sturgeon has her “material change in circumstance” that would allow her to trigger a second referendum and commentators crow about how 2016 was the “Year the Union died”.

They are all wrong. Far from creating the circumstances for the dissolution of the UK, our exit from the European Union has delivered a mortal puncture wound to the cause of Scottish independence.

Brexit has shifted the ground beneath the Scottish constitutional debate and raised the issue of the European Union to its front and centre. The central question to be considered is no longer “Should Scotland be an independent country: Yes/No” but “Which political union should Scotland be a part of: the UK or the EU” and when the question is weighed up in such a way the EU comes a distant second to the UK in terms of economic, political, cultural and social importance to Scotland. The potent emotional appeal of Scottish independence is also undermined because the EU is a supranational body demanding ever increasing levels of sovereignty from its own member nation states.

If there is to be a second Scottish referendum, it was framed, won and lost the morning of 24th June 2016 when Nicola Sturgeon rushed out of the starting blocks and grafted the cause of Scottish independence to full membership of the European Union, and therefore to the economic fate of the European Single Currency.

Brexit has made the costs, risks and downsides of Scottish independence vastly greater. The case for independence offered in 2014 was a gradualist one based on Scotland becoming independent but remaining in the same UK currency and banking union and being part of the same EU single market.

This arrangement would have ensured the minimum disruption and economic cost whilst establishing a new state. With the UK leaving the EU this offering has been shredded and is no longer possible. The EU will consider it legally impossible for Scotland to join as a new member whilst being in a currency and banking union (i.e. a form of political and economic union) with a foreign country that is outside the EU so any chance of Scotland keeping Sterling after independence is at an immediate dead-end.

Assuming the EU 27 accepts Scotland as a new member state, and it is a big if because there will be unambiguous voices from the Spanish and French governments about vetoing Scottish accession, it will now be in a position of having to find tens of billions of pounds to establish a new currency (Denmark, a similar sized small country has to keep approx. £60 billion worth of foreign exchange to peg its currency to the Euro), that because it is new and untested and the Scottish government lacks credit-worthiness will begin life trading at a discount to the UK pound. If there are financial challenges upon independence, such as Scotland having a trading deficit with rUK, experiencing capital flight or a recession then this discount will be even more pronounced.

As the Scottish government will have to finance these currency reserves, prove its credit worthiness as well as pay for increased debt costs this will result in massive cuts to public spending compared to what Scots currently enjoy.

But perhaps most evident and detrimentally to every Scot in the land, while people will now receive wages and benefits in Scottish pounds, all existing liabilities such as mortgages will remain in UK pounds. For example, let’s imagine the Scottish pound starts life trading at a 1:1 ratio with the UK pound, your wages are paid in Scottish pounds and your mortgage is in UK pounds. If your mortgage is worth 3 times your income and the Scottish pound then falls in value by 25% to the UK pound, the value of your mortgage has risen to 4 times your income. Your monthly mortgage payments also increase by a third. Banks are privately owned entities and such mortgage and other debt contracts will have no provision to automatically change their value into Scottish pounds as this would affect the bank’s profits and their shareholders would not allow it. Also, the Scottish government would have no powers to force private banks to automatically change all existing liabilities into Scottish pounds.

The effect of this would be to immediately impoverish vast swathes of Scottish society, particular those on lowest incomes and in receipt of government benefits, who are least able to cope with a sudden rise in their debt burden. A raft of bankruptcies on mortgages and business loans could even precipitate a banking crisis as banks suffer mass writedowns on their assets.

However it would not just be individuals and businesses who would feel the financial pain of this asset-liability currency mismatch, the Scottish government would perhaps be its worst victim because its share of UK debt would remain valued in sterling and even a moderate problem in Scotland’s economy could see its debt-GDP ratio balloon to unsustainable levels.

We can also expect the Scottish pound to come under assault by every hedge fund, trading desk and currency speculator from New York to Shanghai. As during the 1992 George Soros-led attack on the pound, such speculative frenzies have the power to fracture any artificial price peg and force a currency down to its natural trading level. The new Scottish central bank could find itself spending tens of billions to support a price peg with the UK pound for no good reason.

To add even more worry the SNP government have a track record of being exceptionally cavalier about Scotland’s financial future. In the final few weeks of the 2014 referendum, the SNP were threatening to refuse to accept Scotland’s share of the UK’s national debt if they did not get their way in post-referendum negotiations. The SNP can dress this up however they wish, but international financial markets would view this only one way, that the fledgling Scottish state has chosen as its first act of national becoming to default on its historic financial obligations. If the Scottish government followed through on this after a new Scottish currency had been established, Scotland’s credit worthiness would be ruined for generations and the value of the Scottish pound would plummet as investors fled. When Argentina defaulted on its debt in 2001 its currency plunged in value by 80% against the dollar. Anyone who earned money in pesos but held liabilities in dollars witnessed the value of their debt rise relative to their income by 400%. Sovereign defaults can precipitate banking crises, currency crises and social breakdown. Argentinians experienced mass bankruptcies, huge drops in living standards and wages along with civil unrest leaving multiple people dead followed by the collapse of the government.

This of course is all just a precursor to preparing for the final destination of Scottish independence, full membership of the Eurozone. There is no escaping the reality that an independent Scotland will have to commit to becoming a full member of the Euro as this is a prerequisite condition for all new member states. The opt-out on the Euro that the UK enjoyed was just that, an opt-out and by its nature exceptional.

This process may take two years or it may take ten and the Yes campaign will likely present Scotland as having some kind of say over doing so or not. The only point to bear in mind is that by joining the EU the Scottish government will be committed to preparing itself to meet the Eurozone entry conditions and in time to accept every consequence of full blooded Eurozone membership. There is no long term vision of the EU that does not involve every member state using the Euro and as Brexit has proved that countries outside the Eurozone can break away easier it is likely that pressure will be placed on the non-Euro EU states to adopt the Euro as soon as possible. The Euro is considered by its members to be the grandest civilisational achievement of the European project and its design is central to the integrationist aims of the bloc. In short, an independent Scotland in the EU means an independent Scotland in the Eurozone.
To meet the Eurozone membership criteria, Scotland will need its own independent central bank and will have to maintain strict controls over its spending and debt levels with fiscal deficits kept below 3.5% and debt maintained at less than 60% of GDP.

Scotland’s current fiscal deficit, i.e. the difference between Scotland’s public expenditure and what Scotland raises in tax revenue, is 10% and where Scotland already independent it would have the highest deficit in the European Union and its population share of the national debt would be almost 90%. Therefore for Scotland to meet and maintain the Eurozone fiscal criteria Scots would need to accept increased taxation and severe restrictions on public spending for decades.

Once in the Eurozone and free of the automatic UK fiscal transfers that cushion any fall in tax revenue Scotland would be fined hundreds of millions of Euros for running deficits above 3.5%. An annual fiscal deficit of 10% would see the EU, ECB and IMF called in to impose the kinds of austerity on Scotland that we have witnessed in recent years being imposed on Greece, Portugal and Spain, the result of which has been to reduce incomes for the lowest paid by up to 70% and render these nations with persistent levels of 50% youth unemployment.

The Eurozone is a macroeconomic abomination that is imposing generational impoverishment on the countries of the Mediterranean. Because the SNP have used the EU as their means to advance the cause of a new referendum the fate of Scottish independence has now been tied to the fortunes of a European single currency area in perpetual structural crisis and stagnation, that imposes eye-watering austerity on its weaker member states and whose democratic unaccountability is fostering militant nationalism and violence across the continent. Not only would Scotland be at risk of the fates of Spain, Portugal and Greece being inflicted upon it where it in the Eurozone, but it will also be complicit in imposing such social and economic cruelty upon other EU member states.

Combined with the near total collapse in tax revenues from oil, the consequences of joining the Euro and of facing the asset-liability currency mismatch that come with establishing a Scottish pound, the social justice message that was so persuasive in 2014 that leaving the UK would precipitate higher public spending and borrowing for the NHS, education and welfare and allow Scots to build a more equal and fairer society has been instantly demolished. It is now very easy to demonstrate not only that independence will deliver massive cuts to Scotland’s public services and its ability to support the lowest paid and most vulnerable but also that almost everyone in an independent Scotland will be made immediately poorer through increased liabilities.

With a promise of economic hardship and shorn of the exceptionalism rationale that Scotland needs independence to become the progressive beacon that destiny has accorded it any campaign for independence becomes one long screeching expression of raw Scottish identity and one that in the face of all the evidence of dire economic and political consequences will sound increasingly coarse, angry and resentful. The idea of taking Scotland into the Eurozone as a means to realise Scotland’s socialist potential is laughable.

Public debate has not caught up to these facts yet and it may take the course of a full second referendum campaign for them to become apparent. These new currency issues will dominate indyref2 in a way that supersedes the currency debate in 2014 and I suspect we will only know it is game over for Scottish independence when we see the panicked queues form outside every single bank in the country.

Scotland has become a highly successful and prosperous country since the Act of Union over 300 years ago and it is precisely because the SNP cannot point to any form of oppression to justify separatism that they have to argue for it in terms of making Scots wealthier and of spending more money on public services. Scottish nationalism is a tame form of tribalism and it is because of this timidity that Scots won’t sacrifice anything for it, even the prospect of an extra 10% added to their monthly debt payments.

Attaching Scottish independence to membership of the EU is no minor tactical error and cannot easily, if at all, be rowed back from. One cannot use an event such as Scotland being swept out of the EU due to a UK majority in favour of leaving as the main instigator for an independence referendum without that event dominating every step of the following campaign for independence. Because if Scotland is not going to apply to join the European Union as a full member on day one of independence, then what is the point of having a new referendum when one has legally promised to abide by the clear and unambiguous result the Scottish electorate gave in 2014?

There is something tragic about it. Brexit will give the SNP their rationale to trigger a second referendum but will provide the means by which they shall be defeated in that very referendum by an even larger margin than the last. The SNP’s Europhilia is the rope that will hang them.

About Joe Ray

Joe Ray lives in Edinburgh and works in the social investment sector. He writes about Scottish and British politics and in particular how Brexit has changed the dynamic of the Scottish constitutional debate.

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