WHAT CAN SCOTLAND LEARN FROM UKRAINE'S EU PIVOT?

BLOOMBERG: The Ukrainian Argument for Scottish Independence

Scotland faces economic hardship as a result of a break with the rest of the UK but longer term prospects may be bright

Leonid Bershidsky
Wednesday, 29 March 2017 17:31

Now that the U.K. has formally triggered Brexit and the Scottish Parliament has voted in favor of seeking a second independence referendum, the battle lines are drawn. The Scottish nationalists led by Nicola Sturgeon are telling Theresa May's U.K. government that they'd rather be in the European Union than an independent U.K. But, after failing to make an economic case for independence in 2014, nationalists should stress the long view.

Despite a preponderance of data in favor of staying in the U.K., the answer for Scotland isn't clear cut. Sometimes, nations are willing to accept a serious amount of short-term economic pain for the sake of a civilizational choice. Ukraine's 2014 decision to move toward closer cooperation with the EU and away from Russia has been an economic leap into an abyss, but few people outside Moscow denounce the decision. Just as Ukraine is gambling on a brighter future tied to the EU rather than Russia, Scottish separatists should argue that the gloomier economic outlook for a post-Brexit U.K. favors their claims.

It is often claimed that the economic case for Scottish independence has worsened since 2014. The previous secession vote was held when oil cost $90 per barrel, and independence advocates predicted it would go up in price, bolstering Scotland's revenues. But the oil price has almost halved since, and a big rebound is not on the cards. It has been argued, too, that a Scotland inside the EU but outside the U.K. would suffer an immediate trade shock: 63 percent of Scotland's exports are to the U.K., and the country wouldn't be able to do an independent trade deal with its southern neighbor. It would also be impossible for EU member Scotland to keep the pound sterling as its currency, as it intended in 2014 (though the government in London told it to abandon those expectations). It would probably have to adopt the euro, with unpredictable but probably negative consequences to its competitiveness. The pound -- the currency of Scotland's main export destination -- has slipped against the euro since the Brexit vote.

Then there's the matter of Scotland's 10 percent fiscal deficit, covered by subsidies from London (the U.K.'s budget deficit reached just 2.9 percent of gross domestic product last year). The EU doesn't need another violator of its fiscal compact that limits deficits to 3 percent of GDP, and the opponents of an independent Scotland within the EU, such as Spain, would not hesitate to use this argument against Scottish membership (even though Spain itself is not compliant with the 3 percent rule).

The U.K.'s subsidies to Scotland are worth about $12 billion a year. Government data for 2015-2016 show that Scotland, with about 8.2 percent of the U.K.'s population, provides just 7.9 percent of its fiscal revenue. At the same time, Scotland spends more per capita than other areas of the U.K., because its population is older and more rural.

The EU also subsidizes Scotland. Agricultural subsidies, the biggest EU transfer, reached 613 million pounds ($762 million) in 2015. But as part of the U.K., Scotland is a small net contributor, not a net recipient, of EU funds, according to government data.

All this means independence in order to keep, or, more likely, regain EU membership will inflict an immediate economic contraction and years of enforced austerity on Scots. Ukraine is an extreme case -- the U.K. is certainly not going to invade any part of Scotland if it votes to secede -- but it did suffer a 6.6 percent economic contraction in 2014, worsening to 9.8 percent in 2015, mainly as a result of shrinking trade with Russia and not enough compensatory growth in trade with the EU. Reorienting an entire country's economy toward a different export market -- even if it's much bigger than the old one -- is traumatic.

Oxford University economist Simon Wren-Lewis argues that in the long run, the pivot would benefit Scotland: "Imagine two parts of this island, one which has easy access to the huge market which is the EU and one which did not. It is obvious which part would be expected to grow more rapidly." That sounds a lot like Ukrainian patriots' arguments that gradually growing trade with the EU and other developed market economies is healthier in the long run than clinging to the Russian market.

Like Ukrainians, the people of Scotland ultimately have to make a choice that is not economic in nature, though secessionists will still need to address the economic implications. Ukraine would have been better off economically as a Russian satellite, but politically it wanted to be part of the West. Despite three years of hardship, there's still little support among Ukrainians for returning to Russia's sphere of influence.

There's a similar argument for Scottish independence. "Voting to remain in the self-destructing, inward-looking, xenophobic and rudderless U.K. is now the risky option," Gordon McIntyre-Kemp wrote on the pro-independence Business for Scotland website right after the Brexit vote. As in Ukraine, secession can be framed as being on the right side of history.

Trying to avoid a second independence vote, as May is clearly planning to do, is a dangerous tactic. In the Brexit letter delivered to the EU on Wednesday, May proposed a "bold and ambitious" Free Trade Agreement; that may not be enough to placate Scots who would prefer full access to the Single market. May will also have to hope and pray the domestic economy doesn't sag as she negotiates -- and, whatever happens, those subsidies to Scotland can't be cut. May has to prove to Scottish voters that they're not worse off with Brexit; calls for a second plebiscite will become louder if growth falters.

So far, Brexit hasn't increased Scottish support for independence. Secessionists may call for an early vote, but they're probably praying silently for more time to let May shoot herself in the foot and to work on a new set of arguments they didn't use in 2014 -- ones that stress both the civilizational arguments for staying with the EU and the long-term economic downside of remaining in the U.K.

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