January 12, 2012 / 2:19 PM / 8 years ago

Analysis: Is a breakaway Scotland brave or foolhardy?

LONDON (Reuters) - An independent Scotland, the dream of generations of nationalists, would boast a cash-rich economy buoyed by North Sea oil and Edinburgh finance, but would create another small state on the edge of Europe vulnerable to global shocks.

Postcards and a Scottish flag are displayed outside a Scottish souvenir shop in Edinburgh, Scotland January 12, 2012. REUTERS/David Moir

Nationalists argue that Scotland, an independent kingdom until 1707, is Europe’s next energy-rich Norway. Skeptics see another bailout candidate, an Ireland-in-waiting.

“Its economy is performing quite reasonably,” said Brian Ashcroft, an economics professor at Scotland’s University of Strathclyde.

“It stands very well compared to the rest of the United Kingdom. It would be quite a rich state,” said Ashcroft, before injecting a note of caution.

“Oil revenues are very volatile - it’s very dangerous to predicate your planned future spending on oil revenues.”

“I suspect that they would have to introduce tax rises or spending cuts and seek to bank the oil revenues.”

Scotland, a nation of more than five million, kept its own legal system after union with England in 1707, and has had a devolved government since 1999, with control over health, education and prisons. Proponents of independence feel the southeast of England, notably London, has enjoyed economic and social benefits at the expense of those ‘north of the border’.

Led by the shrewd Alex Salmond, the pro-independence Scottish National Party shocked the British political establishment by winning an outright majority in the devolved parliament last May and promised a referendum on independence by 2016.

Opinion polls show support for independence has been slowly increasing, with about a third of Scots backing a breakaway and around half wanting to remain in the union.

Salmond is locked in a standoff with British Prime Minister David Cameron over the terms and timing of a vote, with Cameron pressing for an early poll to remove economic uncertainty and Salmond wanting to wait until 2014 to build support.


Salmond is recognized as one of Britain’s most able politicians.

His rhetoric conjures images of Scotland’s granite cities and sparkling rivers, but he is also a pragmatist who sells the country as a great place to do business on trips overseas.

He wants Scotland to get rid of British nuclear submarines based close to Glasgow and be producing all of its energy from renewable sources by 2020. Unlike an independent Ireland, Salmond would keep Queen Elizabeth as head of state.

However, Scotland, a nation similar in population size to Norway or Denmark with just over 5.2 million inhabitants, would face an acrimonious divorce from its long-term partner.

The SNP wants 90 percent of North Sea oil revenues, estimated at around 13 billion pounds this year, and eight percent of Britain’s debt, in line with its population share.

London is likely to argue that North Sea oil is a resource that should be shared by the whole of the UK and perhaps even demand it is therefore divided by population.

As for debt, London could point out that it pumped billions of pounds into Scotland’s banks during the credit crisis, ending up with an 83 percent stake in Royal Bank of Scotland


Opinion is divided on whether Scotland would enjoy a triple-A credit rating, and depending too heavily on oil to boost the coffers is not something that analysts advise.

“It seems to me that bond rates would be reasonable but probably a little higher than the UK in the initial phase until the Scottish government built up a reputation for fiscal prudence,” Ashcroft said.

The prospect of higher taxes or spending cuts and higher government borrowing costs would prove a drag on growth in a fledgling country which already has some catching up to do.

It might also mean an end to the free university tuition and prescriptions that have many English people looking enviously north of the border.

For the three decades to 2007, according to official figures, Scotland’s average growth rate of about two percent lagged Britain’s 2.4 percent rate and was well below Norway’s annual growth of more than three percent.

Investors may, therefore, look warily at another small European economy entering the fray.

Jim Leaviss, a fund manager at M&G Investments, estimates that the combined assets of RBS and HBOS, another Scottish bank rescued in the credit crunch, amount to about 1400 percent of the Scottish economy, pointing out that Iceland’s bank assets peaked at 1100 percent of GDP in 2008.

He warned in a blog this month that Scotland’s claims of fiscal responsibility - the government boasts it has run a current budget surplus in four of the five years to 2009/10 - may not be enough for the markets.

“Countries with relatively low public debt to GDP ratios still get into difficulty because of their private sector debt,” he says.


Confusion over independence also risks scuppering some of the SNP’s own ambitions for growth, such as plans to create 130,000 jobs - a job market boost of more than five percent - by putting Scotland at the forefront of renewable energy.

Citi utilities analysts advised investors to “exercise extreme caution in committing further capital to Scotland” in a recent research note, warning the plans could prove too expensive for Scotland’s small consumer base.

Foreign investment in Scotland could also be swayed by any hiccups in joining the European Union. The SNP, which is staunchly pro-European, is adamant that Scotland should automatically waltz into the EU, but others are less convinced.

“Our understanding is the UK’s membership of the EU extends to the legal entity of the UK,” said Chris Howarth, a political analyst at the Open Europe think tank in London. “Scotland would have to apply to join the EU as a non member and would have to go through the accession process.”

Hugo Brady, a senior research fellow at the Centre for European Reform think tank and a former Irish government official, said the SNP’s assumption of automatic membership “would be a very difficult ask because it would set a precedent for other new members that might join”.

Then there is the question of the euro. New EU members are usually obliged to commit to joining the single currency bloc. That could prove a tough sell in Scotland, given the bloc’s current woes.


However, economists also point out that Scotland has the foundations of a dynamic and robust economy.

“There is no doubt that Scotland would be viable as an independent entity,” said Ashcroft.

On one measure, Scotland’s economy was the only area in the UK apart from London to grow between 2007 and 2010, ranking as the third most prosperous region behind London and the affluent south east.

Its whisky industry is a world beater, with consumers in emerging economies acquiring a taste for it. The Scotch Whisky Association said exports soared by more than a fifth in the first half of 2011 to 1.8 billion pounds.

Nationalists say independence will give Scotland the chance to thrive, free of the shackles of a London-centric government.

“I think any country which is in a position to make policy decisions that are best suited to their circumstances is in a better position to foster economic success, but also to minimize the risks in a period of global economic uncertainty,” said Angus Robertson, an SNP lawmaker in Britain’s parliament.

Additional reporting by Adrian Croft, Sarah Young, Keith Weir and Mohammed Abbas

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