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Sep 15, 2014 | 09:33 GMT

13 mins read

Scotland Approaches Its Hour Upon the Stage

Scotland Approaches Its Hour Upon the Stage
(DAN KITWOOD/Getty Images)

The pro-independence camp in Scotland has been gaining steam since the British and Scottish governments agreed to allow an independence referendum in 2012. With the Sept. 18 vote just days away, there are more questions than answers about what will happen should the Scots choose secession. The new country would need to decide on a currency and would have to find a way to keep businesses from fleeing the economic uncertainty. An independent Scotland would inherit the vast majority of the United Kingdom's oil production, but output at those fields is rapidly falling. And Edinburgh would have to establish its own military, while the United Kingdom would need to build several new bases of its own.

For the United Kingdom, the Scottish issue will not be settled if independence is rejected. Westminster would still need to find a way to win back the pro-independence Scottish voters, and demographics are not on the United Kingdom's side.

England and Scotland have traditionally had a complex relationship, marked by periods of conflict and phases of rapprochement. The process of unification began in the 17th century, but separatist and nationalist sentiments never disappeared in Scotland, and over the centuries numerous political movements sought to give the country independence or at least greater autonomy. A significant step in this direction took place in 1999, when the Scottish parliament was re-established in Edinburgh, with significant legal powers.

Scotland

The next political milestone occurred in 2011, when the Scottish National Party — which promised an independence referendum — won Scottish elections, propelling Alex Salmond into the position of first minister, head of the Scottish government. In October 2012, Salmond and British Prime Minister David Cameron reached a deal granting the Scottish government the power to hold a referendum on independence.

One of the Scottish government's main arguments for independence is the claim that the country is not getting its fair share of tax revenue from London. Salmond's assertion is that an independent Scotland with full control of its taxes and North Sea energy revenues would be able to finance a strong welfare state. He also promised that Scotland would maintain close political cooperation with London and remain within the European Union. EU officials, however, said an independent Scotland would not automatically become an EU member.

The pro- and anti-independence campaigns started as soon as Salmond announced the referendum but intensified in August when two TV debates took place. According to most opinion polls, anti-independence sentiments are slightly stronger, but the gap is shrinking. In fact, one opinion poll on Sept. 6 showed for the first time that 51 percent of voters support independence, indicating that the referendum could be closer than previously anticipated.

The Economic Heart of the Debate

The most talked-about issue leading up to the vote has been the economics of independence. In February the London Business School released a study of Scottish firms listed on the London Stock Exchange and how they would look in their own index. On the so-called Scotsie, financial and investment companies made up 54 percent of overall weightings, with utilities companies constituting a further 18 percent; the same segments in the United Kingdom make up 24 and 4 percent, respectively. These figures reflect Edinburgh's — and to a lesser extent Glasgow's — prodigious footprint in the banking and investment trust sectors, but they leave an independent Scottish economy looking heavily unbalanced toward financial services, a sector that has proved to be disaster-prone and easy to relocate, unlike heavy industry, telecommunications or oil and natural gas.

Another issue for the pro-independence side relates to currency. According to most observers, the head of the anti-independence campaign, Alistair Darling, won his first televised debate with the Scottish first minister by highlighting Edinburgh's lack of a contingency plan when it comes to currency. The ruling Scottish National Party's initial scheme was to form a currency union with the United Kingdom after independence, continuing to use the pound as a common currency and making monetary policy decisions in concert with the Bank of England. The leaders of the United Kingdom's three major political parties unanimously rejected the idea, a logical position considering that a currency union would mean the United Kingdom would be sacrificing some control over the pound for no clear gain. Despite accusing Westminster of bluffing, Salmond was said to have won the second televised debate by claiming that feted economist Joseph Stiglitz had endorsed three potential "plan B's." 

Each of these options is deeply flawed, however, which is why a currency union with the United Kingdom remains Salmond's preferred route. Using the pound without a currency union, also known as sterlingization, would put Scotland in the hands of the Bank of England's monetary policy, a risky move with two economies moving at different speeds. A rate rise in the United Kingdom could stifle a Scottish recovery or, inversely, a drop at a crucial moment could cause the Scottish economy to overheat.

No currency also means no national bank, which Scotland would need if it wanted to fulfill Salmond's dream of entering the eurozone. The former EU commissioner for economic affairs, Olli Rehn, said in early September that an independent Scotland could not join the European Union without its own central bank. Perhaps more dangerously, a country without a central bank would be unable to bail out a failing bank as the British government did with the Royal Bank of Scotland in 2008; Scotland's financial services-heavy economy would have no backstop in the event of disaster.

Were Salmond to push for the creation of an independent Scottish currency, there are initial costs that would be hard for most voters to accept. Moreover, a new currency would introduce new transaction costs when dealing with the United Kingdom (Scotland's anticipated primary trading partner) as well as the European Union. Senior EU officials also said an independent Scotland would not automatically become a member of the European Union and should apply for membership like any other country. Jose Manuel Barroso, president of the European Commission, said in February that it would be difficult for Scotland to join the bloc. And even if Scotland were to enter the European Union, there would still be internal opposition. Spain's struggles with Catalonia make it wary of Scotland's campaign, and Madrid would block Edinburgh wherever possible. Spain still does not recognize Kosovo as an independent state for similar reasons. 

Not Personal, Just Business

Salmond suggested that if the United Kingdom does not recognize Scotland's partial ownership of the pound, Edinburgh might not recognize its partial responsibility for national debt. British public debt currently stands at 1.4 trillion pounds ($2.28 trillion and 90 percent of gross domestic product), and an independent study puts the Scottish share at 143 billion pounds based on historical taxes (The Scottish National Party's estimates stand at 100 billion pounds). The United Kingdom is anxious not to be left with a disproportionately high share that would directly affect the interest rates it would have to pay to service its debt, leading to raised taxes and/or spending cuts. 

In August, 130 Scottish business leaders signed a letter saying the business case for independence had not been made. Considering the uncertainty of creating a new nation, Scottish businesses could opt to be based in the United Kingdom if Scotland secedes. Financial services companies in particular might find the business decision compelling should uncertainties around currency arise, especially considering that many of their customers reside in the United Kingdom. Standard Life and Lloyds both said they would strongly consider moving their head offices south of the border if Scotland became independent. Tellingly, many Scottish companies have already established themselves in London.

Several significant military-industrial companies, including British Aerospace Engineering, Raytheon and Selex, have assets in Scotland and may be hurt by any move away from the United Kingdom. Over 12,000 personnel are employed in the defense sector, including specialized professions in naval architecture, shipbuilding and radar technology. Given that much of the industry is based on contracts issued by the British Ministry of Defense, any negative downturn or nonrenewal of export licenses could affect Scotland's economy.  

The Energy Conundrum

Critical to any independent Scottish economy is the predicted revenue from the North Sea oil and natural gas industry, estimated by Edinburgh to be more than 50 billion pounds in tax revenues by 2018, although Westminster's predictions are significantly lower. Should Scotland devolve, the partition of legal liabilities, responsibilities, taxes and royalties from Britain's energy fields will be highly contentious. Also problematic is that no maritime border between Scotland and England is recognized by international law, although there are two domestic maritime borders that represent a starting point for negotiations.

British Continental Shelf Oil and Gas Fields

British Continental Shelf Oil and Gas Fields

The most obvious starting point for any international maritime dispute is a maritime border based on equidistance, essentially a line of equal distance from the English and Scottish coastlines. This line was effectively codified in 1999 by the Scottish Adjacent Waters Boundaries Order, which split up fishing royalty and taxation rights between the two. Oil production north of this line is about 740,000 barrels per day, or 96 percent of the United Kingdom's current production. It also represents 20 billion cubic meters of natural gas production, or around 40 percent of the United Kingdom's current level. Based on overall oil reserves, a Scottish secession could take an overwhelming majority of the United Kingdom's reserves with it — an estimated 15 billion to 24 billion barrels of oil equivalent. 

The southern demarcation, a continuation of the border drawn straight across the North Sea in 1968 and ratified in the Civil Jurisdiction (Offshore Activities) Order of 1987, gives Scotland civil and criminal authority north of the line. If Scotland succeeded in having this line recognized as the official maritime boundary, England would hold on to only 15 percent of its current reserves.

In the event of Scottish independence, all existing laws and agreements between oil and natural gas companies would remain in effect until the Scottish Parliament enacted new laws to regulate the sector. For companies operating in the North Sea, especially in aging and mature fields, continuity will be the most important thing as construction permits and production and development costs are streamlined to make largely marginal fields economically viable. Both Westminster and Edinburgh have an interest in ensuring this happens — the United Kingdom for energy supply reasons and Scotland for tax purposes.

Dividing oil and natural gas rights is complicated, but there is an even more complex relationship between past oil revenue, division of national debt and aging oil and natural gas production facilities. Much of the United Kingdom Continental Shelf is in stark production decline, a fact that is particularly true for legacy fields such as the Forties and the Brent oil field. With oil and natural gas production moving farther north, many facilities are reaching the end of their operational lifetimes and will be decommissioned.

Under current laws, the United Kingdom provides 50 percent tax breaks to oil and natural gas companies for decommissioning facilities, a costly process in itself. If an energy company becomes insolvent, international law demands that host countries pay for decommissioning, effectively with past oil revenue. For the United Kingdom this liability is coverable, though not ideal; for Scotland it is much more difficult.

Scotland would likely assume the same responsibilities and could end up requesting assistance from Westminster to help cover these obligations, or negotiate them out by insisting for a smaller percentage of the United Kingdom's national debt. In turn, Scotland's intention to create an oil fund could be derailed by problematic negotiations over debt levels: Scotland's debt obligations will prevent it from becoming as effective a producer as Norway, which has three times the oil revenue per capita.

Long-standing nationalistic trends within the Scottish oil sector have already caused contentious debates in the North Isles, Shetland in particular. Given the amount of resource potential adjacent to Britain's northern islands, similar independence movements within Shetland or the Orkney Islands could take new oil production away from Scotland and either become independent of the Commonwealth themselves or align with another state, even rejoining the United Kingdom.

A New Military

Losing Scotland would be damaging to Britain's military in more ways than one. Were the British economy to shrink as a whole — as it would if Scotland seceded — the Ministry of Defense, which is already reducing its force levels and capability, would suffer further budgetary setbacks. Scottish independence would further stress the United Kingdom's attempts to maintain expensive fleet and air assets alongside future procurement and development projects. More directly damaging to the way the British military operates, however, would be the loss of bases in Scotland. Scotland currently hosts the British nuclear submarine fleet in Faslane, the largest Royal Air Force fighter base in Lossiemouth and, in Coulport, the biggest concentration of the British nuclear weapon inventory.

Military Bases in Scotland

Military Bases in Scotland

Scottish lawmakers have already said the continued presence of nuclear weapons on Scottish soil after independence would be unacceptable. In response, the British government has discussed securing sovereign base areas for critical installations in Scotland, similar to the British military presence in Cyprus. But even this may still require Britain to relocate its Trident nuclear fleet, and it would be in conflict with Scottish plans to turn Faslane into a conventional naval base and joint headquarters of Scottish defense forces. Faslane is currently the only Royal Navy base capable of hosting the British submarine fleet, which constitutes a critical part of the British nuclear deterrent. Without Faslane, the United Kingdom would have to construct another specific and costly naval base somewhere else, and it would lose the strategically valuable northern location of Faslane.

An independent Scotland would organize its own armed forces. Edinburgh is already planning for a 2.5 billion-pound defense budget, significantly lower than neighboring Nordic countries. Scottish politicians are counting on a transfer of military assets and existing base locations as a foundation for this defense force, but the British government has repeatedly voiced its reluctance to leave behind critical assets or hand over Scottish regiments to Edinburgh. Instead, Westminster said it may continue to allow Scots to serve in the British Army, and in unofficial polls more than 90 percent of Scottish soldiers in the army have said they would be willing to do so.

The Future of the Union

When the Scottish government and the British government agreed on Scotland's independence referendum, London was confident that the anti-independence camp would easily win the vote. As the referendum draws closer and the "yes" camp grows stronger, however, Cameron's government is becoming increasingly worried. While the referendum is legal and its mechanisms are clear, there is not a clear roadmap for what would happen should Scotland vote for independence.

According to the Scottish government, there would be a short transitional period and the country would become independent by March 26, 2016. But the existing agreements between the governments do not mention a date for independence, and Westminster is not obliged to follow Scotland's timetable. Additionally, if the independence camp wins, the British Parliament would have to pass several laws transferring prerogatives to Scotland. This means that a potential "yes" vote would mark only the beginning of a long and complex period of negotiations, without a rigid end date.

Should the "no" vote win, Westminster's main challenge would be to win back the support of the large number of Scots who believe the British government was not doing enough to improve their lives. Notably, the only age group that has been consistently supportive of the "no" vote has been voters over 65, suggesting that if the independence movement does not succeed at first, it will continue to become more pronounced as time goes on.

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