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A Tale of Two Unions

By Johann Benson, Transatlantic Economy Analyst


On September 18th of next year, the citizens of Scotland will vote to become an independent nation or remain in the United Kingdom. While polls show it is unlikely that the Scots will choose to leave the UK, their grievances mimic the UK’s displeasure with the European Union. 

The independence movement in Scotland mainly claims that London is holding back the Scottish economy and the solution is to join the EU as an independent nation. Similarly, many in the UK believe that membership in the EU hinders economic growth and reduces the availability of jobs. Although anti-EU sentiment has always bubbled just beneath the surface in much of the UK, concerns are rising as the Eurozone moves forward with the creation of a banking union and closer fiscal integration. Recent points of contention between London and Brussels include the proposed financial transactions tax and a cap on bonuses for bankers.

While no one questions the right of British citizens – Scot and non-Scot – to decide their own fate, they should be careful not to confound internal problems with membership in broader unions. Nor should they be inclined to believe that one simple vote will make all these problems disappear.  

A few facts make a rather convincing case for Scotland’s continued inclusion in the UK, and the UK’s continued membership in the EU:

From 1997 to 2007 annual growth in the UK averaged 2.89%, easily outperforming Germany (1.67%), France (2.31%) and Italy (1.45%). While many factors allowed the UK to achieve this growth rate, it is worth considering that it was likely enhanced by membership in the EU’s Single Market and Eurozone spillover effects, such as increased trade. The UK’s primary trading partner – by a large margin – is Germany, and its 2012 trade volume with the Netherlands was greater than with China.

What’s more, around 40 percent of total daily turnover in euro-denominated foreign exchange takes place in the United Kingdom and about 350,000 people are employed in London’s financial services sector, easily making “the City” the largest financial center in Europe. However, from 1997 to 2007 the combined growth of business and distribution services contributed nearly four times more than financial services to the overall growth of the British economy. As Sir Richard Lambert, the director of the Confederation of British Industry, has noted: “The single market is of crucial importance to non-EU firms locating a subsidiary in London and operating across the EU. . . . because, like firms from within the EU, the single market gives them a passport to carry their services across all 27 countries in the Union.” And London now has the greatest international retailer presence of any city in Europe.

With all this going for it, the UK only stands to gain from greater involvement in EU policymaking. And of all the countries in the EU, Britain is expected to benefit most from the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the U.S. – something Scotland would also risk losing out on if it becomes independent. While disagreements with the Eurozone may get all the media attention, the greatest risks to the British economy are probably domestic.

One internal concern for the future of the British economy is its lack of diverse lending sources. The UK banking landscape is now dominated by a handful of banks – Barclays, Lloyds, HSBC, RBS, and Santander – and as these major banks continue to tighten credit standards, small and medium-sized businesses in the UK have experienced increased difficulty securing funds. Moreover, according to the World Economic Forum, the UK ranks 24th worldwide in terms of infrastructure, and the UK’s traditionally low levels of public investment have been further reduced since the onset of the recession. This does not bode well for either the British economy or the Scottish economy in the long-run.

An independent Scotland in the EU would probably do quite well, as Scotland has substantial offshore oil, gas, wind, and tidal resources. However, it has already been made clear that Scotland would not be granted automatic membership in the EU (or NATO, for that matter), but would need to apply. Among the countries that might block Scottish membership in the EU are Spain and the UK, but others, with less obvious reasons, have been mentioned as well. A failure to join the EU would also leave it outside the lucrative TTIP. Seeing as how it only takes one country to hold up the process of accession, the Scots should be taking a long, hard look at how well an independent Scotland would fare outside of the EU.

It’s also worth noting that the Scots are not particularly keen on the euro. As an independent nation, Scotland would continue to use the pound, effectively remaining in a currency union with the UK. Paradoxically, should an independent Scotland leave the UK, this would be the equivalent of the UK adopting the euro while leaving the EU.

In short, both independence-minded Scots and eurosceptic Brits are overly focused on the gains from greater independence while ignoring internal issues and risks. The crucial difference is that where the Scots tend to blame London for their troubles, eurosceptic Brits tend to blame the EU for theirs. At the end of the day, the Scottish referendum could be just what British eurosceptics need – a chance to look in the mirror.


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