Cost of Scotland’s sovereignty may more than Scots can stomach

But the cost of Scotland’s complete sovereignty may be more than Scots can stomach.

Scotland's First Minister and leader of the Scottish National Party, Nicola Sturgeon, after being declared the winner of the Glasgow Southside seat on Thursday during counting for the Scottish parliament elections. She will want ‘the stars to align’ before seeking another secession referendum. Picture: Andy Buchanan / AFP

Scottish secession is edging closer. Parties that support an independence referendum will command a majority in Holyrood after last Thursday’s parliamentary elections.

Brexit, which 62 per cent of Scots rejected, has been grist to their mill.

The government in Westminster is now caught in a trap. The longer it refuses to allow a referendum, the greater the nationalists’ case for sovereignty becomes. Tragically, for those of us who don’t want to risk a break-up of the union, the trail of breadcrumbs leads inexorably to another plebiscite.

Scotland can make a success of independence. Singapore, Denmark, Norway and Ireland all have populations of a similar size and are all wealthy nations.

There is no reason Scotland, with its experience in resources, cannot switch from exporting oil to renewables. Its creative and technology industries are blooming. But the path to success is narrower and longer than nationalists would have people believe.

Independence is the idea of a static future state; stable, reassuring and empowering. To get there, though, a country must go through the volatile act of secession, an awkward and usually painful process. Britain has been seceding from the European Union since June 2016 and although Brexit was formalised this year, there are still details to iron out and temporary arrangements, like the Irish Sea border, to be resolved.

One lesson from Brexit is that change takes time. Another is that the junior partner in the negotiations will not get what it wants. It took five years for Britain to leave the EU, with a deal shorn of all its early ambition. As Scotland is bound even more tightly into the UK, full independence could take twice as long.

Yet that scarcely seems to matter these days. Since the financial crisis, something has shifted in the public psyche. We appear to have developed an unlimited tolerance for upheaval. First the 2014 Scottish referendum, then Brexit, then coronavirus, with three general elections thrown into the mix over the past four years. You might have thought that was enough. Apparently not.

Nicola Sturgeon, Scotland’s First Minister, is in no hurry to call a referendum. She will want the stars to align. But when she does, secession – rather than independence – will move centre stage. Just how messy that process will be and how long it will take will depend on her vision of the end-state.

In 2014, the calculation was relatively simple. By leaving the UK and joining the European Union in a single act, trade would be unaffected. Since Brexit, there is no longer any easy option. Scotland either chooses a customs union with the rest of the UK, the destination for 60 per cent of its exports and the source of 60 per cent of its imports, or single market membership with the EU, where only 20 per cent of Scottish exports end up. Does it peg to the pound, create a Scottish sterling or join the euro?

Scottish nationalists are still wrestling with their plans, but the signs are they want to take the hard path, joining the EU in some form and fudging the currency issue by using the pound until conditions are right to switch to something else. That route would risk turmoil in Scotland. A hard border with England would be inescapable. Even under a loose customs union with the EU, Brussels would demand border checks to protect the single market, adding cost to the two thirds of Scottish exports that are destined south.

Using the pound would tie Scotland to UK policy with no say in the matter, a move entirely contradictory to national sovereignty. Much of Edinburgh’s financial services industry would relocate to qualify for Bank of England support schemes. With no central bank backstop, markets would charge higher interest rates for Scotland to borrow.

Which brings us to the public finances. With no fiscal transfers from the rest of the UK, Scotland would have to fund a budget deficit of about 8 per cent. Taking its share of UK public debt would mean an independent Scotland started with a debt-to-GDP ratio close to 100 per cent. Oil would not come to the rescue. Once decommissioning costs are included, the dregs of the once-buccaneering industry barely raise any money. Taxes would rise and austerity would be imposed.

Fiscal problems would only escalate if Scotland moved to its own currency. A new Scottish pound would devalue, reflecting relative economic strength, making its sterling-denominated share of the UK public debt even more expensive to service. Joining the euro would provide currency stability, but nationalists do not want to go down that route.

Independence does not have to be quite so hard, though. There are lessons to be taken from the only recent example of a successful breakaway: the “Velvet Divorce” of Slovakia from the Czech Republic in 1993.

In the short run, Slovakia, the junior partner, struggled. In 1992, as plans for separation were laid, Slovak households moved their savings to banks in the stronger Czech Republic. Slovakia suffered a 6.5 per cent recession that year and a 3.7 per cent contraction in 1993.

After a tricky birth, though, both countries prospered, but only by tying their futures together. To protect internal trade, they formed a customs union with a common external tariff. Both joined the EU accession process, binding their political and economic goals together, and became EU members in unison in 2004. Both countries created separate central banks with a joint currency on the day of the split in 1993. Though valued at par on day one, the Slovak crown soon depreciated by 10 per cent and remained the weaker of the two.

The Velvet Divorce worked because the Czech Republic and Slovakia clung together even as they pulled apart. The chosen end-state determined the cost of separation, which in turn determined the success of the independence project.

Follow the breadcrumbs to their logical conclusion and it’s clear that Scotland’s best chance of making independence a success is to take the same path; to choose to tie itself closely to the rest of the UK rather than the EU.

But what’s the sell? Sovereignty in exchange for higher taxes and a weaker currency? Even Sturgeon might struggle with that.

Philip Aldrick is economics editor of The Times

The Times