Banquo’s Ghost: the Growth Commission, the EU and Scottish Independence

Kirsty Hughes | 27 May 2018

© 2017 SCER

Like Banquo’s ghost, the European Union makes rather few appearances in the report of the SNP’s Growth Commission. But its rather invisible presence can be felt throughout. Given the Scottish government – and SNP’s – policy that an independent Scotland should be in the EU, this side-lining of the EU in a comprehensive report considering productivity, competitiveness, migration, inequality, trade, and macro-economic policy, including currency, is rather curious.

The Commission does eventually suggest, though it doesn’t include it in its long list of key recommendations, that Scotland should be in the EU single market, but that too receives strangely little focus. The net result is a missed opportunity to consider a whole range of key questions, given Scotland’s interests.

These would include questions such as: what sort of industrial strategy the EU should develop (from Scotland’s point of view) or how its current strategy would help or hinder Scotland; key EU approaches in completing the digital single market and how that might impact on new digital policies in Scotland, or boosting EU sustainable technology competitiveness and how that could play to Scotland’s strengths, to pan-EU infrastructure and how that could help Scottish infrastructure, to future EU trade policy to what an independent Scotland’s future migration policy would look like if it was in the EU and so part of free movement (and how that would impact on relations with/the border with the rest of the UK). And too the Commission sidesteps difficult challenges such as arguments over joining the euro, or indeed the pros and cons of an independent Scotland joining the EU or the European Economic Area once independent.

Yet these choices would be crucial to an independent Scotland’s future economic policies – and are also critically impacted on by the nature of the rest of the UK’s future relationship with the EU post-Brexit. Brexit, as the report does periodically note, will have a major and negative impact on the Scottish economy but how an independent Scotland should respond and choose its European future is simply not addressed. The overall effect, leaving the EU as a ghostly presence in the report, is that it reads as if an independent Scotland, like the 12 key small economies it is compared with, would just be facing global markets and challenges. Yet this is clearly not the case. And indeed the key currency proposal in the report would place a clear block in the way of an independent Scotland’s accession to the EU.

EU or European Economic Area

All the European countries, amongst the 12 that the Growth Commission focuses on, are either in the EU, the EEA, or in the Swiss case in EFTA (with its own particular version of single market compliance and access.) And two of the top three countries highlighted as important comparators are EU member states – Denmark and Finland. Surely, an independent Scotland would not be choosing a UK hard Brexit, Canada-style free trade deal like the UK (and the Growth Commission is, at least, clear that Brexit is damaging so presumably it wouldn’t support this). And so an independent Scotland’s future industrial strategy, research policies, regional strategies, infrastructure and more would all be part of either the EEA or EU and the whole panoply of related policies – and funding support – available. Yet the European level of policy-making and how it would interact with the various Scottish policies considered in depth by the Growth Commission is, in the main, simply not addressed.

The report does make a recommendation (in Section A) on Brexit and market access: “Securing frictionless borders with the rest of the UK and EU should be a top strategic priority of the Scottish Government. Brexit places a material risk on Scotland’s access to export and import markets and the free movement of people, capital, goods and services and must therefore be resisted vigorously.”

So Brexit should be resisted, which might be taken to imply an independent Scotland should be in the EU. But later (in Section C) in the context of the briefest mention of the euro, we read “If Scotland became an EU member in the future…”. So it’s if not when and, overall, the EU is mostly just not mentioned.

Borders: Securing frictionless borders with the UK and EU is set down as a top strategic priority (and later in the report for the whole world too: “Scotland’s economic interests will be best served maximising frictionless trade and ensuring access to UK, EU and wider global markets”). But quite how this might happen is not investigated – some might call it ‘cake and eat it’ and it is reminiscent of Theresa May talking of ‘as frictionless a border as possible’ as she tries to square the contradictory circle of her Brexit red lines. Indeed, the current core Brexit challenge, threatening to torpedo UK-EU talks, is precisely how to avoid a border both on the island of Ireland and in the Irish Sea. With the UK leaving the customs union and single market, that option does not exist – there will have to be a border somewhere.

So if the UK does go ahead with a Brexit outside the EU’s customs union and single market, there will not be frictionless borders for an independent Scotland – a choice will have to be made. This conundrum is left unsolved – other than a claim that it isn’t a challenge and even that Scotland can be positioned as a bridge between the EU and UK: “It is wrong to suggest that Scotland would have to choose between the two markets. But to enjoy the best access to both markets Scotland must be positioned in the EU single market.”

Customs Union Impact: There’s another related conundrum a future independent Scotland might face. If the UK abandoned its insistence on leaving the customs union (perhaps because Westminster voted for that), and instead chose to stay in a customs union with the EU, then that impacts directly onto future Scottish choices.

If Scotland chose, like Norway, to be in the EEA but outside the EU, then it wouldn’t be in the customs union while the rest of the UK would be. That’s a route to a hard border between Scotland and the rest of the UK. Equally, if Scotland then decided it was going to be in both the single market and the customs union then the obvious way to do that is to stay in the EU. But none of this is addressed (beyond a brief mention of the Scottish government’s preferred outcome – not currently on the cards – of the UK staying in both the single market and the customs union).

Yet these are core choices to Scotland’s future economic policies and competitiveness. The Growth Commission does finally, just about, come down on the side of staying in the EU’s single market: “Independence and membership of the EU Single Market would create new opportunities for businesses in Scotland to do just that [i.e. build stronger trade links with other countries]..”. But there’s no recommendation to that effect. And this preference does not lead to any exploration of how to maximise the best Scottish economic policy choices in the single market/EEA context. And some policy choices will, of course, be constrained by being in the EEA or EU – whether, for instance, the tax breaks proposed by the Commission to attract skilled migrants would pass state aid rules would be one important question to consider.

Using the Pound – A Barrier to Joining the EU

An independent Scotland, if it did decide to apply to join the European Union, would, of course have to meet the EU’s accession criteria. But without its own monetary policy – in the Growth Commission’s ten year transition of using the pound – Scotland would face a serious accession challenge. The EU expects accession countries to be functioning market economies and democracies. But for the EU, a functioning market economy has to ensure price stability. And, beyond that, even member states outside the euro have to treat their exchange rate as a matter of common concern and have an independent central bank.

Scotland couldn’t do this while using the pound. So even before considering the question of joining the euro, EU membership is potentially pushed a decade back or more by the Growth Commission’s sterling policy.

There might be a rather unlikely way round this. In a comment for this blog, Andrew Duff (President of the Spinelli Group and visiting fellow at the European Policy Centre) suggested that, in the Growth Commission’s scenario, the EU would have to negotiate with the Bank of England over whether the UK’s and so Scotland’s monetary policy met with EU criteria (if Scotland was in accession talks): “A member state must have an independent central bank and a currency. A Scottish application to join the EU within the ten year period would have to be negotiated via the Bank of England and HM Treasury. It could be done – but not without UK government consent.” This looks politically a little difficult it might be said.

The Euro: the Growth Commission, having not considered whether an independent Scotland should be in the EU, does not consider in any detail whether Scotland could or should be in the euro. The report simply states – in response to a question they themselves pose “Will an independent Scotland adopt the euro?” – “Scotland would retain sterling”. That seems to be a ‘no’ until the next paragraph where the report emphasises Denmark having a derogation on joining the euro before stating: “Scotland would join the euro only if and when such a decision is in the best interests of both Scotland and the EU, and the relevant criteria of the Maastricht Treaty were met.” So Scotland might be in the EU or it might not, and it might join the euro or it might not.

This is surely a missed opportunity to discuss some key challenges for an independent Scotland. What would be the pros and cons of joining the euro – given the detailed analysis the Growth Commission does provide of the desirable objectives of monetary policy and strategy? It is also a missed opportunity to face up to the tough fact that there is little likelihood of an independent Scotland being able to get a derogation as Denmark did back in the 1990s. It might, as the Growth Commission hints at, be able to do what Sweden has done – not get a derogation but nonetheless simply not join indefinitely. But an independent Scotland joining the EU would have to commit in principle to eventually joining the euro, which needs to be acknowledged in the debate. And again not having its own currency would make such a commitment a little tricky (even if the aim was, like Sweden, to postpone joining indefinitely).

The Growth Commission does set 6 criteria, for future use, when deciding whether an independent Scotland should ditch the pound and create its own currency – including in these criteria: “Fit to trade and investment patterns: Would the new arrangement better reflect Scotland’s new and developing trading or investment patterns?”. That would be a good question to put to consider whether a Scottish currency or joining the euro were the best answer to that. If an independent Scotland did aim to join the EU, would it and should it aim to be like Sweden and Denmark (outside the euro) or like Finland, Ireland, Austria, the Netherland and Belgium (inside the euro – and all in the Commission’s group of 12 countries)? But while the European and EU level is so ghostly in its presence in the report, these crucial questions are not put let alone answered.

Scotland, the EU and Brexit

The UK is currently, chaotically, heading towards a hard Brexit – but uncertainty reigns. Will Theresa May manage to get to an agreed Withdrawal Agreement – which implies an effective backstop solution for the Irish border? Will any agreement pass this autumn at Westminster – and if not what then? Might the UK stay in the customs union (still a hard Brexit but less damaging than a Canada-style free trade agreement)? These questions and more are fundamental – for Scotland and for the whole UK.

The Growth Commission rightly, and repeatedly, emphasises the damage Brexit will do to trade and growth. But in setting out future options for Scotland, it sidesteps Scotland’s European choices. In doing so, it mostly leaves the EU or EEA level of policy-making out of its wide-ranging policy discussion – a huge and strange gap. And it sidesteps, in many ways, the damage Brexit will do even to an independent Scotland. Irish government estimates suggest the Irish economy will be hit almost as hard as the UK economy by a hard Brexit. How and in what ways independence might protect Scotland from some of Brexit’s impacts – but not all – and how it will create barriers and a border between Scotland and the rest of the UK are very tough and key questions that are just not faced up to. If Brexit does go ahead, then the policy debate around independence really will be different to 2014 – and in many ways much harder. What the independence debate can’t do is leave the European question out of the discussion.

Kirsty HughesKirsty Hughes | Twitter

Scottish Centre on European Relations

Dr Kirsty Hughes is Director of the Scottish Centre on European Relations. She is a researcher, writer and commentator on European politics and policy, and she previously worked for a number of leading European think tanks.