SCDI Future Scotland - Europe & International

Future Scotland

Europe and International

April 2013

Disclaimer SCDI is an independent, non-aligned organisation, which maintains impartiality in matters of political debate. In this programme of work, SCDI is seeking to inform members on key economic issues relating to the debate on Scotland’s constitutional future. The contents of the Future Scotland reports are not intended to reflect SCDI policy.

SCDI Future Scotland | Europe and International | April 2013 1

Contents Page Foreword 3 Introduction 4 Executive Summary 5

Key Questions Overview 9

The United Kingdom and the European Union EU Budget

The EU and the Scottish Economy 10

The Single Market Scottish Exports to the EU Freedom of Goods Freedom of Services International Trade Freedom of Capital/ Financial Stability and Regulation Freedom of Movement Employment Law Regulation Structural Funds Common Agricultural Policy Common Fisheries Policy Energy and Environment Education and Research

Referenda 18 Possible UK Referendum on EU Membership Scottish Independence and International Law An Independent Scotland and EU Membership Alternative Options – European Economic Area or

European Free Trade Association Issues – the 2014 Referendum and, if Yes, for Negotiations with the EU 22

Influence An Independent Scotland and Negotiations with the EU Institutional Matters Euro Financial Stability and Regulation EU Budget UK Rebate Schengen – Immigration Common Fisheries Policy Common Agriculture Policy Energy and the Environment Education and Research


Page International Organisations and Global Networks 28

United Nations World Trade Organisation International Monetary Fund and World Bank G8 and G20 The UK’s International Agreements The UK’s and Scotland’s Overseas Representation Exports and the Scottish Economy Case Study – Scotch Whisky International Connectivity

An Independent Scotland – International Organisations and Global Networks 33

International Organisations (non-EU) Global Networks The UK’s International Agreements International Connectivity


Foreword Future Scotland: Future Growth In 2010, SCDI articulated in our Blueprint for Scotland the long-term vision and aspirations we maintain for a Scotland which is ambitious, enterprising and outward-looking; and which measures success in its ability to maximise its natural assets, its economic potential and the skills of its people. For more than eight decades, SCDI has pioneered thinking on the significant economic challenges of the time, from a perspective which is independent, inclusive and representative across civic Scotland. In 2013 SCDI continues to be a catalyst for debate and thought-leadership, as our economy faces the challenges of unprecedented global change and competition. As an independent organisation with a broad membership, SCDI takes no political view on issues for the Scottish electorate. However, the organisation’s role has always been to examine and consider impartially the industrial, commercial and economic challenges and opportunities facing Scotland. Amidst the current debate about Scotland’s future constitutional options, SCDI has undertaken an enquiry into key issues across the Macroeconomic and Fiscal, Europe and International, and Energy spheres. With this work, we hope to inform and provide insights to our members and stakeholders, through the identification and analysis of the issues and evidence to be considered. By way of recommendation, my engagement with expert colleagues on the Energy Working Group has been extremely useful in developing my understanding of the major issues for the sector – and the opportunities for our economy. As this body of work has developed, it has become increasingly clear that the issues raised in individual workstreams should not be considered in isolation, and that there is significant interrelation. For example, the implications for skills and employment in Scotland’s economy has been a recurrent theme across all workstreams. Therefore, it is recognised that a change in the responsibilities of governance of Scotland would not result in a series of discrete options, but rather a range of key choices, each of which would entail opportunities and constraints and many, if not all, of which would be related to others. Ultimately, the required arrangements would be determined in negotiation and with agreement of other parties. The work is informed by wide and in-depth consultation across SCDI’s broad membership, including organisations across all sectors of the economy, in the corporate sector, SMEs, public sector agencies, trade unions, local authorities, educational institutions and the third sector. Online and face-to-face interviews have gathered substantial evidence from SCDI members and our work has also been informed by relevant statistics, statements and publications from a range of experts. These reports are not intended to provide comprehensive answers, or to outline SCDI policy. They are, however, intended to provide a framework to inform SCDI members and encourage further discussion, including at the SCDI Forum. I very much hope that this extensive programme of work will prove valuable to all who wish to achieve sustainable economic growth for Scotland. Bill Drummond Chair Scottish Council for Development and Industry


Introduction In the debate about Scotland’s economic future and the constitutional context, there is a pressing need for impartial and informed analysis, and SCDI has responded to the requests from members to facilitate and inform their thinking and the discussion on key economic factors. Scotland is a small, outward-looking country with an open economy. Its success as a trading nation, and in particular its ability to export goods and services and capitalise on its innovations, is vital to its prosperity. Scots have been and continue to be renowned leaders of, and skilled workers in, industries around the world. Scotland has also increasingly attracted people to live, work, visit and study in this country. Today, following the financial crisis of 2007-08 and the ensuing recession, with long-term projections of weak domestic demand and strongest growth in emerging markets, it is widely accepted that the Scottish economy, like the whole UK economy, needs to be rebalanced from growth largely generated by consumption to higher net exports. In our Blueprint, SCDI proposed a target of doubling the value of Scotland’s exports in a decade. Recognising the importance of exports and international trade to Scotland's economy, and building on SCDI’s long history of international policy and overseas trade projects, this report presents the research of the Europe and International Workstream – a high-level working group of key business and civic leaders. In this report, SCDI has aimed to act as a safe forum and conduit for constructive debate and dialogue on Scotland’s relationships with the EU and economic and trade-related international organisations and overseas representation. While the international dimension impacts on many aspects of Scottish society, given SCDI’s remit there is a strong focus to SCDI’s report on the potential implications for Scotland’s economy. We outline the key economic issues in this area, and raise a number of themes and questions consistently asked by our diverse membership. The issues raised are central to Scotland’s attractiveness as a place to invest and grow, to produce and trade. Politicians and campaigners on all sides of the constitutional debate will need to consider these questions and in the coming year inform Civic Scotland how their proposed future will address the concerns raised. We would like to thank the Steering Group and the many SCDI members who have contributed their expertise and experience to this representative process. Robert Armour OBE Michael Urquhart Co-chairs Europe and International Workstream


Executive Summary1 The European Union (EU) is the most significant international membership organisation for the Scottish economy. Examples of the EU’s influence highlighted in the report include: Single Market – underpinned by the free movement of goods, services, capital and

people; generates 20% of global GDP and is by far Scotland’s largest export market International Trade – It has the lead role in negotiations and enforcement actions EU Budget – e.g. agricultural support, rural and regional development, innovation Common Policies – e.g. fisheries, climate change and renewable energy targets Regulation – Between 15% and 50% of UK legislation and regulation implements EU

policies e.g. significant influence on employers and employees via employment law While the focus of this report is the referendum which will take place on Scottish independence in September 2014 and the implications for Scotland’s future relationship with the EU, it also references the possibility of a UK referendum on EU membership. The Prime Minister has said that, if the Conservatives form the UK Government after the 2015 General Election, it would renegotiate the UK’s terms, then hold an ‘in-out’ referendum in early 2017. Should Scotland vote to become independent in 2014, the process by which Scotland could become independent from the rest of the UK (rUK) would have an important bearing on the future international relationships of both countries. There would be three main ways:

1. Continuation of the rUK and secession of Scotland; or 2. Separation of the UK into two continuing states; or 3. Dissolution of the UK into two entirely new states.

International law in this area is not settled and there are few, if any, applicable precedents. Moreover, the EU Treaties created a “new legal order of international law” in which its subjects are not only the Member States, but also the people or citizens of the EU. The report details the public positions of the Scottish and UK governments and the European Commission. The Scottish Government’s view is that Scotland would continue to be part of the UK and, therefore, the EU during negotiations before Scottish independence and that Scotland’s EU membership would be in the interests of Scotland, the rUK and EU. The UK Government’s view is that rUK would retain membership of the EU on the existing terms, while an independent Scotland would not automatically become a Member State. The Commission’s view seems closer to the UK’s, but the decision would be for EU Member States. Political interests at that time would be most likely to determine what might happen with membership of the EU. The report, therefore, focuses on discussing those areas likely to be central to the negotiations. Those most frequently mentioned are:

1. Membership of the euro – the UK has an opt-out from the euro. However, all new Member States are currently obliged in their accession agreements to adopt the euro while the Scottish Government’s policy is to retain the sterling monetary union with the rUK

2. The Schengen Agreement – the UK has an opt-out from the single international travel and immigration area, but all new members are bound to implement the Schengen rules. The UK Government says this would be incompatible with an independent Scotland retaining the Common Travel Agreement with rUK and Ireland

1 For all source references please see full report


3. The EU Budget and the UK Rebate – An independent Scotland would be a relatively wealthy Member State and a net contributor to the EU Budget. Currently the UK has a permanent rebate from the Budget without which in 2008/09 it was estimated that Scotland’s net contribution, as part of the UK, would rise from £16 to £92 per person.

The UK Government has said that an independent Scotland would not automatically inherit the arrangements of the UK and that they would be subject to negotiations with EU institutions and Member States. The Scottish Government has said that it would begin negotiations seeking to apply “the principle of continuity of effect”, specifically in these areas. As an existing part of the EU through the UK, Scotland complies with all aspects of the ‘acquis communautaire’ (the accumulated body of EU law), but, in the event of independence, arrangements would be necessary in certain areas which are currently reserved. The report identifies a number of areas on which negotiations would be likely:

Institutional Arrangements – e.g. number of Scottish MEPs Common Policies and Funding – the Scottish Government has said that

Independence would mean a better deal on agriculture, fisheries and structural funds UK Climate Change and Renewable Energy Targets – whether and how to divide

the UK’s 2020 renewable energy target between Scotland and rUK Financial Regulation – the EU requires that Member States have a distinct financial

regulator. The Scottish Government Fiscal Commission recommended arrangements in which the Bank of England would continue to regulate Scottish financial institutions

Higher Education – EU students (which if Scotland became independent would include rUK students) access Scottish universities on the same terms as Scottish students (i.e. no fees) and the Scottish Government wants them to pay a contribution

In some areas, there would be three-way negotiations between an independent Scotland, rUK and the EU. These might include monetary policy and financial regulation or the division of climate change and renewable energy targets (linked to negotiations on the future of the GB electricity market and support mechanisms). These would, presumably, involve some trade-offs, and domestic and international politics would have a bearing. Better understanding of what could happen in any negotiations as well as in any transition period is, therefore, important. The report acknowledges that there would be alternatives to membership of the European Union for an independent Scotland – the European Free Trade Association and the European Economic Area – but these would appear to be unlikely given the position of the present Scottish Government and the strong support across the Scottish Parliament for the EU. Aside from the EU, the report identifies several further important issues, including:

International Organisations – membership of economic or trade-related bodies, such as the World Trade Organisation, International Monetary Fund and World Bank

International Treaties – would an independent Scotland inherit the UK’s bilateral and multilateral treaties or have to renegotiate those which it might want to retain

International Connectivity – limited direct international air routes and capacity constraints at Heathrow affect Scotland’s connectivity with international markets

The future of international representative networks was a key focus for this workstream. The UK has one of the most extensive of all global footprints, with nearly 14,000 people in nearly 270 diplomatic offices around the world, backed by a further 10,000 locals in 170 countries.


UK Trade and Investment has 162 offices in 96 countries. These networks are important to a number of the key sectors of the Scottish economy. The Scottish Government has three overseas representative offices and Scottish Development International has recently expanded its overseas network to 23 offices in 15 countries in order to support a greater number of Scottish companies in more markets. Some Scottish offices are based within UK offices. The report identifies a number of issues should Scotland vote for independence:

Future of UK Embassies – the Scottish Government’s view is that these are UK assets and an independent Scotland would be entitled to a share to help set up its own network. The UK Government’s view is that these would become rUK assets

Development of Network – how quickly could a new network be developed, always linked to affordability

Extent of Network – overseas representative networks can be most valuable to businesses in emerging and developing markets where there are growing opportunities for key Scottish industries; the Scottish Government has referenced that other small countries have developed around 100 embassies and consular offices and/ or utilised different delivery models to maximise their resources

Expertise – there is significant expertise and experience among UK representatives which it would take time to instil in a first-generation of diplomats for an independent Scotland

Continuity of Support for Scottish Exporters – during any transition and development of the network, which many businesses regard as vital given the pressing priorities for the economy

As the report states, how best to exert influence on behalf of the Scottish economy is central to the European and International dimension of the debate on Scottish independence - whether through the UK, one of the largest world economies but one in which Scotland is only one part, or as an independent state, far smaller but representing its own interests. SCDI members are seeking as much evidence as possible from proponents of change and of the status quo to support their respective positions. With this in mind and reflecting issues raised across SCDI’s membership, the Steering Group agreed a series of questions on key issues which it is putting to both sides of this debate.


Key Questions What key factors in relation to the European Union and other international organisations and trading relationships affect the Scottish economy? How could different constitutional arrangements, including the Union and Scottish Independence, impact on the question above and the following questions:

1. What can be done to attract high levels of investment to Scotland and grow substantially the value of its exports to developed and emerging markets?

2. What is the best way for Scotland and its key industries to maximise their influence in the European Union? How can Scottish businesses and academic institutions win a greater share of European Union funding for innovation?

3. What is the most effective way of supporting the success of Scotland’s existing and

new exporters and the attractiveness of Scotland for investment through international representation and trade relationships and agreements? What is the best way to further the interests of the Scottish economy and industries in international trade bodies and overseas markets, such as in trade treaties and the elimination of trade barriers, and via representation and networks in developing markets? What can be learned from other countries?

4. What impact could uncertainty, resulting from referenda, about Scotland’s future

relationship with the European Union have on investment in the Scottish economy and what could be done to minimise any potential impact?

In the event that Scotland votes to become Independent. Should there be a transitional period before an Independent Scotland becomes a Member State of the European Union, what could be the impact on the Scottish economy? What should a Scottish Government’s priorities be in negotiations on the terms of an Independent Scotland’s membership of the European Union and any transition?


Overview The United Kingdom and the European Union The United Kingdom (UK) joined the European Community (EC) in 1973. It had declined to join its predecessor organisations, the European Coal and Steel Community and the European Economic Community on their formations in the 1950s, and had instead helped to found the European Free Trade Association (EFTA). When the UK joined the EC, it was one of nine Member States. The EC became the European Union in 1993 and there followed a period of significant expansion. There are currently 27 Member States. Croatia is expected to become the 28th Member State this year, although the Accession Treaty is still to be ratified by all current Member States. There are five other potential candidate countries and another three countries are officially recognised as potential candidate countries. Kosovo is officially recognised as a potential candidate country, but it is not officially recognised by all EU Member States, notably Spain, as an independent country. The internal market of the EU is a single market, developed through a standardised system of laws that apply in all Member States, in which the free movement of goods, services, capital and persons is ensured and in which European citizens are free to live, work, study and do business. The EU is also able to enact legislation in justice and home affairs, and maintains common policies on trade, agriculture, fisheries and regional development. Through the Common Foreign and Security Policy, the EU has developed a role in external relations and defence. Within the Schengen Area (which includes 22 EU and 4 non-EU states) passport controls have been abolished. A monetary union, the eurozone, was established in 1999 and is composed of 17 member states. The UK has opted out of Schengen and the euro. The EU is based on the rule of law: everything that it does is founded on treaties, voluntarily and democratically agreed by all member countries. To join the EU a country must meet certain criteria which were defined at the 1993 Copenhagen Summit: “Membership requires that candidate country has achieved stability of institutions guaranteeing democracy, the rule of law, human rights, respect for and protection of minorities, the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union. Membership presupposes the candidate's ability to take on the obligations of membership including adherence to the aims of political, economic and monetary union.” Subsequent requirements introduced were on appropriate administrative and judicial structures, and that all prospective members must enact legislation in order to bring their laws into line with the body of European law, the acquis communautaire. Evaluation of a country's fulfilment of the criteria is the responsibility of the European Council of all Member States and unanimity is required. No Member State has ever left the EU, although Greenland, an autonomous territory of Denmark, did in 1985. EU Budget The EU budget is calculated through the Multiannual Financial Framework, which is agreed between the European Parliament, European Council and European Commission every seven years. The next framework will be for the period 2014 – 2020. EU Heads of State and Government agreed in February 2013 on a financial plan for the EU for 2014-20. At 960bn euros, the budget is around 1% of EU Gross National Income, less


than what had been proposed by the European Commission and a 3% reduction on the financial plan for the previous period (2007-13)2. The EU Budget has been agreed with the accession of Croatia taken into account. The vast majority of the EU’s Budget is spent on agriculture, rural development and poorer areas (through structural funds). In the financial plan for 2014-20, spending on the Common Agricultural Policy (CAP) will fall by 13% compared to 2007-13. Investment in growth will increase from 9% to 13% of the budget, with 37% extra in funding for research and innovation, and extra funding for youth employment3. As a member state, the UK contributes directly to the EU Budget. The UK Government broadly welcomed the EU Budget, including these specific points. The European Parliament has rejected the agreement in its current form4. Government Expenditure and Revenue Scotland5 (GERS) provides calculations for Scotland’s share of the UK’s Gross National Income (GNI)-based contribution. A population-based share of the rebate is also assigned to Scotland. In 2011-12 Scotland’s net GNI contribution to the EU budget i.e. the difference between gross contribution to the EU budget (minus the rebate) and public sector EU receipts was:

Estimate Based on Scottish onshore GDP share

Estimate based on Scottish GDP including a per capita share of North Sea GDP

Estimate based on Scottish GDP including a geographical

share of North Sea GDP £209m £228m £402m

In 2011-12 Scotland’s net payments to EU institutions i.e. net contribution to the EU Budget less its share of the EU’s external assistance aid budget were:

£124m £143m £378m

The EU and the Scottish Economy The Single Market The EU has a combined population of over 500 million inhabitants6. In 2011, it generated gross domestic product (GDP) of $17.6tr, representing 20% of global GDP measured in terms of purchasing power parity7. The EU’s single market has four ‘freedoms’: goods, capital, services and people. It is underpinned by policies aimed at eliminating or reducing anti-competitive practices and protecting the interests of individuals and companies e.g. intellectual property rights. Access into the EU single market is key for many inward investors in the UK.

2 The Economist, ‘Cameron’s budget blinder’, 8 February 2012 3 Ibid 4 European Parliament, ‘Resolution on the European Council conclusions of 7/8 February concerning the Multiannual Financial Framework’, 8 March 2013 5 Scottish Government, ‘Government Expenditure and Revenue Scotland 2011-12’, 2013 6 Eurostat, ‘Basic figures on the EU: Spring 2013 edition’, European Commission, 2013 7 IMF, ‘World Economic Outlook database’, April 2012


Scottish Exports to the EU Scotland’s exports (excluding oil and gas) in 2011, the latest figures available, were provisionally estimated at £23.9bn. This represented a £1.6bn increase from 20108. The EU is by far the largest international market by geographic area for exports from Scotland. An estimated £11bn of Scotland’s exports were destined for the EU. Of Scotland’s top 10 export destinations, seven are in the EU and two more in EFTA. For example, EU countries account for about 40% of total sales of Scotch whisky9. Scotland’s Total International Exports by geographic region (£m), 2007-11 Destination 2007 2008 2009 2010 2011 EU 27 8,935 9,640 9,770 9,615 11,030 Rest of Europe

1,880 1,820 1,895 2,280 2,115

North America 2,705 3,165 3,275 3,780 3,845 Central and South America

685 850 765 920 1,065

Middle East 865 1,090 970 1,040 1,005 Asia 2,340 2,465 2,390 2,080 2,260 Africa 930 1,005 1,040 1,195 1,130 Australasia 265 330 355 345 360 Unallocable 845 885 1,110 1,095 1,105 Total 19,450 21,250 21,570 22,350 23,915 Source: Scottish Government, ‘Scotland’s Global Connections Survey 2011: Estimating Exports from Scotland’, 2013 By way of comparison, Scotland’s exports (excluding oil and gas) to the rest of the UK in 2011, were provisionally estimated at £45.5bn, an increase of £1.9bn10. Freedom of Goods Member States are prohibited from levying any duties on goods crossing a border, both those produced within the EU and, once they have entered, produced outside. The EU applies a Common External Tariff to imports. The average tariff faced by imports into the EU single market has fallen due to trade agreements to around 3%, which most exporters can absorb. However, there are examples of much higher tariffs for imports of non-EU goods, such as for dairy imports and clothing. Freedom of Services Services account for over 70% of economic activity in the EU and a similar (and rising) proportion of overall employment. Freedom of services guarantees companies the freedom to establish themselves in other Member States, and the freedom to provide services in the territory of another EU Member State other than the one in which they are established. However, it has been recognised that this freedom is not as developed as in other areas. Complex administrative and legal requirements are barriers to cross-border opportunities,

8 Scottish Government, ‘Scotland’s Global Connections Survey 2011: Estimating Exports from Scotland’, 2013 9 Ibid 10 Ibid


especially for SMEs. A Eurobarometer survey showed that currently only 8% of EU SMEs engage in cross-border activities11. As the services sector in Scotland comprises an even larger proportion of the economy than for the EU economy as a whole, arguably, a less developed single market when compared to freedom of goods is to its relative economic disadvantage. Freedom of services is underpinned by the harmonisation of the rules relating to company law and corporate governance, as well as to accounting and auditing. EU law on public procurement also aims to increase competition and transparency (but it does create concerns that local economic impact cannot be taken into account). International Trade The EU has a common trade policy and number of trade agreements. Free Trade Agreements covered less than one quarter of EU trade before 2006. Concluding the on-going negotiations with Canada, Singapore, India and other ASEAN states would increase this to half of its trade. A large reduction in the 150% import tariff on Scotch whisky in an EU-India Free Trade Agreement would be significant for the sector. Plans to reach new agreements with the US and Japan would mean two thirds of EU trade was conducted under an FTA. The EU has been as successful as the US over the past five years in defending its interests before the World Trade Organisation, with a slightly lower number of cases initiated, but with a higher rate of success12. Freedom of Capital/ Financial Stability and Regulation Free movement of capital enables integrated, open, competitive and efficient European financial markets and services. For example, EU citizens are able to open bank accounts or purchase property abroad, while companies are able to invest in and own companies in other EU countries and take an active part in their management. While the EU single market for financial and other services is not yet complete, “passporting rights” already entitle investment companies, banks and insurers based, for example, in Scotland to establish branches or provide services across the EEA13. The EU has an increasing role in financial services policy and financial supervision. Following the financial crisis of 2007-08, proposals for significant changes to the supervisory architecture have been developed by the European Commission. EU Member States have been discussing plans to create a ‘Banking Union’. The Commission’s proposals called for a single supervisory mechanism, whereby the European Central Bank would have powers to supervise all banks in the euro area by 2014, with a mechanism for non-euro countries to join on a voluntary basis. These plans will mean that the EU’s bailout funds can now be injected directly into a financial institution rather than a Government. The plan also proposes an EU-wide deposit guarantee scheme which requires national governments to make large contributions in order to insure savers against the collapse of a bank.

11 ‘A Single Market for Services’ http://ec.europa.eu/internal_market/top_layer/services/index_en.htm 12 European Commission, ‘Concluding trade deals could boost EU’s GDP by 2 per cent’, MEMO/12/587, 20 July 2012 13 The Economist, ‘Making the Break – How Britain Could Fall Out of the European Union and What It Would Mean’, 8 December 2012


The final shape of the proposals is uncertain and the timescale outlined by the Commission would appear unlikely to be met. Germany has said that the implementation of the full proposals would require significant Treaty changes. It also wants the Banking Union to be underpinned by EU oversight of, and limits on, any structural deficits a Member State is allowed to run and on the ratio of their public sector debt to GDP. While supporting its creation, the UK Government has stated that it would not sign up to a full Banking Union, believing it should only apply to Eurozone members. It is concerned that joining would be a very significant loss of the UK’s sovereign powers. The UK does support a strengthened single market in the EU for financial services14. It is unclear, at this stage, what the impact of the package would be on non-eurozone Member States. The Commission stated that national regulators, like the Bank of England, would have to work in “close co-operation” with the European Central Bank15. Eleven EU Member States have signed up to a financial transactions tax between financial institutions. Transactions would be charged 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts16. The UK has not agreed to this tax, believing that, in the absence of a global agreement, it would harm the international competitiveness of the financial services industry based in the UK. Freedom of Movement The free movement of persons is a fundamental right guaranteed to EU citizens. EU citizens are entitled to:

Look for a job in another EU country Work there without needing a work permit Reside there for that purpose Stay there even after employment has finished Enjoy equal treatment with nationals in regards to access to employment, working

conditions and all other social and tax advantages This is underpinned by entitlements for EU nationals to have certain types of health and social security coverage transferred to the country in which they seek work. Professional qualifications differ across member states. To allow free movement of these skilled workers, the EU has established rules and guidance for mutual recognition in some occupations. The minimum training requirements have been harmonised for sectoral professions, for example medical, and specific EC Directives allow some professionals to work under home-country titles, for example legal17. Free movement of workers and social security coordination also apply, in general terms, to European Economic Area countries: Iceland, Liechtenstein and Norway.

14 BBC News, ‘Brussels plans European banking union from 2013’, 12 June 2012 15 BBC News, ‘Q&A: The eurozone’s banking union’, 13 December 2012 16 Šemeta, A., ‘The Robin Hood tax takes a step closer’, The Guardian, 21 February 2013 17 European Commission, ‘Everything you need to know about the recognition of professional qualifications’, User Guide Directive 2005/36/EC


At a UK level EU nationals account for 30% of arriving immigrants18. Between January and December 2011 an estimated 154,000 from other EU countries resided in Scotland, including 81,000 from the 2004 Accession Member States (A8)19. Migration from the A8 to the UK is less than half of the numbers at the peak in 200720. The Scottish Government’s Economic Strategy has a target to match average European population growth over 2007-201721. Attracting migrants will be central to achieving this target. Statistics for Scots living in the rest of the EU are harder to source. Approaching one million UK citizens are estimated to live in other EU Member States. Total Scottish out-migration to all EU and non-EU countries was estimated to be 16,900 in 2010/1122. Employment Law The EU has a fundamental influence on employment law. It has established minimum requirements in the field of labour rights and work organisation, collective redundancies, insolvency and the transfer of undertakings, the consultation and information of workers, working hours, equal treatment and pay, and posted workers. This has been supplemented by framework agreements which have led to the introduction throughout the EU of the right to parental leave and leave for family reasons, and has facilitated part-time work and limited the use of successive fixed-term contracts. Regulation EU regulation has a very significant impact on the Scottish economy and businesses. In relation to the annual percentage of UK legislation and regulation which comes from the EU, it has been found that it is “possible to justify any measure between 15% and 50% or thereabouts, depending on the approach.”23 Over 90% of the legislative acts proposed in the 1985 White Paper on the Internal Market have been adopted by the EFTA, including abolition of checks on goods at internal frontiers, the liberalisation of capital movements, the opening up of public procurement markets, and the adoption of regulations on work and health in the workplace24. Structural Funds European Structural Funds provide EU Member States and regions with assistance to overcome structural deficiencies, to enable them to strengthen competitiveness and increase employment. For 2007-13, EU Structural Funds are allocated between two programme areas in Scotland, the Highlands and Islands programme, which was designated as a Convergence region, and the Lowlands and Uplands programme, designated as a Competitiveness and Employment region. The recent EU financial plan contains revised arrangements for allocating structural funds according to unemployment, youth unemployment, regional gross domestic product, total regional population, population density and other technical factors. The UK’s overall 18 The Migration Observatory, ‘Immigration by Category’, 2012 19 Office of National Statistics, ‘Population by country of birth and nationality’, 30 August 2012 20 General Register Office for Scotland, ‘Local Area Migration statistics’, 2012 21 Rolfe, H and Metcalf, H. ‘Recent Migration into Scotland: the Evidence Base’, National Institute of Economic and Social Research, 2012 22 General Register Office for Scotland, ‘In, out and net migration by age group between Scotland and overseas, 2001/02 to latest’, 24 July 2012 23 Miller, V. ‘How Much Legislation Comes From Europe?’, House of Commons Library, amended 13 July 2011 24 EFTA, ‘The European Economic Area and the Single Market 20 Years On’, 2012


allocation for 2014-20 will fall by approximately 6%. Initial calculations for Scotland suggested that it could face an overall reduction of over 30%25, with by far the biggest reduction occurring in the Highlands and Islands, notably Orkney and Shetland. However, the UK Government and devolved administrations have agreed alternative allocation methodology, which will mean that funding for Scotland will fall by 5%. The UK Government has said that Scotland would have faced a 32% cut as an independent Member State, but that the UK Government has been flexible in sharing the cut across the UK26. The Scottish Government has said that other Member States negotiated top-ups, but the UK Government did not. The UK Government has also replied formally to the European Commission. Its response includes the case for eligibility for the entire Highlands and Islands region. Common Agricultural Policy The CAP provides income support for farmers, helps rural development and offers market support, for example when bad weather destabilises markets. Proposals from the European Commission are agreed by the European Council with the European Parliament. Day-to-day running is the responsibility of Member States. The EU financial plan for 2014-20 included a real terms reduction in the CAP budget. The CAP is vital to Scottish agriculture. Scotland has a very large part of the Less Favoured Area Support Scheme under the CAP (around 85% of land farmed in Scotland is covered). Scotland has received around €600m annually from CAP27. EU agriculture funding per capita was £98 in 2008/09, compared to £39 in England28. NFU Scotland has stated that the link to Europe is essential to Scottish agriculture with 88% of the total income from Scottish agriculture in 2012 from CAP payments29. Scotland currently receives the fourth lowest rate per hectare for direct payments (Pillar 1) – lower than all other parts of the UK and lower than all EU member states except Estonia, Romania and Latvia. The UK currently receives €3.65bn a year. Of this, Scotland gets €596.6m. This is equivalent to €229 per hectare for the UK and €130 per hectare for Scotland. The EU average is €268 per hectare. Scotland receives the lowest rate per hectare for rural development (Pillar 2) funding – lower than all other parts of the UK and other Member States. The UK received around €1.9bn from Europe for 2007-13, of which Scotland received around €360m. This is equivalent to €15 per hectare per year for the UK and about €9 per hectare per year for Scotland, compared with an EU average of €115 per hectare (per year). Scotland received €360m under the Rural Development Regulation 2007-13, compared to the €2.1bn allocated to Finland (similar to Scotland in population) or the €2.3bn allocated to Ireland (similar in size in terms of the utilised agricultural area)30. The Scottish Government has said that there is a “very real prospect” that Scotland could end up with the lowest per hectare payments in the EU for both pillar 1 and pillar 2 of CAP. The EU budget includes a convergence mechanism under which member states with payment rates per hectare less than 90% of the EU average would receive an uplift designed to close by one-third the gap between their current position and 90% of EU 25 BBC News, ‘Nicola Sturgeon to lobby MEPs over EU structural funding’, 26 February 2013 26 BBC News, ‘EU deal ‘avoids big cut for Scots’, says UK Government’, 26 March 2013 27 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.13, Questions 641-724, 2012 28 Thorp, A. and Thompson, G., ‘Scotland, independence and the EU’, House of Commons Library, SN/IA/6110, 2011 29 Lochhead, R., Speech presented at the NFUS AGM, 12 February 2013 30 ‘CAP budget negotiations – the facts’, http://www.scotland.gov.uk/Topics/farmingrural/Agriculture/CAP/CAPEurope10112012/budget-facts31102012


average. The Scottish Government has said that based on its calculations, if this methodology were applied to an independent Scotland, it would receive an additional £250 million a year approximately by 202031. Common Fisheries Policy Scottish territorial and offshore waters represent one twelfth of the total area of the EU’s seas. The Scottish fishing industry is one of the largest in the EU, with over 60% of the total catch of the UK landing in Scotland32. The Common Fisheries Policy (CFP) is the fisheries policy of the European Union (EU). The European Commission is responsible for setting total allowable catches and the allocation of national catch quotas to Member States. The CFP also includes a fund for market interventions. The UK and Scottish Governments support greater regional management of the CFP. The EU is at present considering proposals from the European Commission for reform. Energy and Environment Scotland has 25% of Europe’s tidal power potential, 25% of its offshore wind potential and 10% of its wave power potential. It is estimated that Scotland has half of Europe’s storage capacity for Carbon Capture and Storage (CCS)33. Scotland is estimated to be the largest producer of hydrocarbons in the EU, accounting for 64% of EU oil production in 2010, and is estimated to account for nearly 60% of total EU reserves34. EU agreements have a strong influence on energy and climate change policy. The EU has promoted electricity market liberalisation and security of supply, as well as the creation of a genuine internal market for energy to give consumers a choice of suppliers and make the market accessible for all suppliers, especially the smallest and those investing in renewable forms of energy. Making the internal energy market a reality will depend above all on having a reliable and coherent energy network. EU Member States have committed to an integrated approach to climate change, unilaterally committing to cutting emissions by at least 20% of 1990 levels by 2020. Each Member State has agreed to statutory targets for renewable energy in 2020. This has been implemented under the ‘Energy 2020 strategy’, which also prioritises the free movement of energy, security of supply, technological development and international partnership35. The Scottish Government has considered that influencing European policies is vital to its own renewable energy and climate change policies. The EU 2014-20 Budget includes €5bn for the co-financing of cross-border networks. Development of a European super-grid is ultimately envisaged, which will connect EU member states and surrounding regions together in the hope that this will allow for wider use of renewable energy, reduce energy costs, and increase security of supply. The Scottish Government’s long-term plans for renewable electricity generation depend on the development of a super-grid to export power to Europe. NER300 is a European Commission competition for Carbon Capture and Storage (CCS) and innovative renewable projects. Those successful in the first tranche of financing include ScottishPower Renewables’ tidal array in the Sound of Islay and SeaGen/Marine Current 31 Lochhead, R., Speech presented at the NFUS AGM, 12 February 2013 32 Marine Management Organisation, ‘UK Sea Fisheries Statistics 2011’, Office for National Statistics, 2012 33 Scottish Government, ‘Towards a Low Carbon Economy for Scotland: Discussion Paper’, March 2010 34 Scottish Government, ‘Oil and Gas Analytical Bulletin’, 11 March 2013 35 ‘Energy: competitive, sustainable and secure energy’ http://europa.eu/pol/ener/index_en.htm


Turbines’ Kyle Rhea tidal turbine deployment, which will receive €20.7m and €18.4m respectively. No further UK projects will receive funding under this round of calls. The Award Decision does not allocate funds to any of the applicants for CCS. The European Commission hopes to be able to re-allocate the unspent funds to CCS projects applying in the second round36. The EU has also launched the European Union Emissions Trading Scheme (ETS). This adopts a ‘cap and trade’ principle, limiting the total amount of emissions emitted by those participating in the scheme, with companies able to buy and sell emission allowances to one another, with the intention being that the flexibility will allow emissions to be cut where it is most affordable. The scheme is mandatory for large energy intensive installations, and almost 100 installations in Scotland participate37. Emissions from international aviation have been included in the scheme since 2012. The European Commission is proposing a new framework for 203038. This considers whether targets of 40% for emissions reduction and 30% for renewable energy should be set and hints at a single emissions only target. The Commission suggests that there is a need to ensure greater co-ordination of national efforts. It questions whether there should continue to be differentiated national targets taking into account factors such as the starting point and economic capacity of each country, and suggests that a concentration of increased EU financing tools on lower income countries would be a more equitable approach than varied levels of targets. The UK Government does not support a binding target for renewables as it wants a range of low carbon technologies to compete against each other. The Scottish Government previously supported a binding target for renewables to provide confidence for the renewables industry and secure commitment to tackle climate change. In 2012, the European Commission proposed regulation of offshore oil and gas safety. This was opposed by the industry and both the UK and Scottish governments as it would have replaced the existing North Sea safety regime with a new centralised EU regime. The Commission subsequently agreed to replace the regulation with a directive, providing more flexibility for interpretation and implementation. Education and Research The number of students from EU Member States enrolling at Scottish universities in the last year increased by 7% to almost 17,50039. This continues the significant growth of recent years. Due to EU rules, students from EU Member States are entitled to study at Scottish universities on the same terms as Scottish students. This means that they do not pay tuition fees. The cost to the Scottish Government, including teaching grants to universities and fee support, was around £75m in 2010-1140. The EU provides grants in order to co-finance research, technological development and demonstration projects. The current funding term for the Framework Programme 7 (FP7) runs from 2007-2013 and has a total budget of over 50.5bn euros41. Universities and

36 European Union, ‘Questions and Answers on the outcome of the first call for proposals under the NER300 programme’ MEMO/12/999, 18 December 2012 37 ‘EU Emission Trading Scheme’ http://www.scotland.gov.uk/Topics/Environment/climatechange/international-action/eu/EUETS 38 European Commission, ‘Green Paper: A 2030 framework for climate and energy policies’, 27 March 2013 39 ‘Headline Statistics: Scotland 2011/12’ http://www.hesa.ac.uk/ 40 Universities Scotland , ‘Universities in a dynamic constitutional environment: policy issues for consideration’, 2012 41 ‘The 7th EU Framework Programme’ http://cordis.europa.eu/fp7/home_en.html


businesses from outside of the EU can participate in bids for FP7 funding – but they may not individually get funding. The EU’s new programme to support research and innovation from 2014 to 2020, Horizon 2020, will have a budget of £80bn42. Institutions’ income from both competitively won income for research contracts from EU and international sources and non-EU international student fees is currently set at £396m, which is nearly double the amount from five years ago. Institutions have expressed their ambition to achieving a further 50% over the next five years43. There were 1,331 international pupils in independent schools in Scotland last year. Of these, over half were boarders (65.2%). The number of international boarding pupils has been increasing steadily since 2007. The countries sending the most international pupils were Germany (around 25%), China, Hong Kong and Russia44. Referenda Possible UK Referendum on EU Membership The UK held a referendum on continuing EC membership in 1975, with 67% voting in favour of remaining a Member State. Earlier this year, the Prime Minister stated that, while he supports the UK’s membership of the EU, he does not support the status quo. He believes that there is a need for a new settlement and fresh consent, and that the opportunities for a new settlement will grow after the next major EU Treaty negotiations. The UK Government has launched a review of the balance of competencies between the UK and European Union. They will be broken down into a number of individual reports covering specific areas of EU competence over four semesters up to autumn 2014. The Prime Minister has announced that the next Conservative Manifesto in 2015 will ask for a mandate from the British people for a Conservative Government to negotiate a new settlement with the UK’s European partners in the next Parliament. This would be followed by an in-out referendum on whether to stay in the EU on these terms or come out altogether. Legislation is to be drafted before the next election. If a Conservative Government is elected it will introduce enabling legislation immediately and pass it by the end of that year. Negotiations will be completed and a referendum held within the first half of the next Parliament. It is thought that a referendum would, in this scenario, be held in 2017. The Prime Minister highlighted areas such as working-time, the environment, social affairs and crime as those in which he would seek the transfer of powers from the EU to the UK. The UK Government is currently looking at ways to restrict access to social security for EU citizens. He rejected the idea that the UK could have a relationship with the EU which would be similar to Norway or Switzerland. The Prime Minister has not stated what position a Conservative Government would take if its negotiations with other Member States did not result in an acceptable agreement to it on the transfer of powers. The Labour and Liberal Democrat parties do not support an “in-out” referendum, but have not completely ruled out a referendum on the EU. Reaction from other EU leaders has been mixed. There is, generally, a willingness to talk, but also clear statements that an “a la carte” EU would be unfair and unworkable.

42 European Commission, ‘Breakdown of the Horizon 2020 Budget’, 2011 43 Universities Scotland , ‘Universities in a dynamic constitutional environment: policy issues for consideration’, 2012 44 Scottish Council of Independent Schools, ‘International Pupils in SCIS Schools in 2011’, 2011


Scottish Independence and International Law Several ways have been proposed by which Scotland could become independent: continuation and secession (in which the rest of the UK (rUK) would retain treaty obligations and memberships and an independent Scotland would not); separation (both entities would retain them); and dissolution (both would lose them)45. The UK Government’s view is that rUK would be considered the continuing state and an independent Scotland would be a new state. This is based on the following:

1. The majority of international precedent 2. The retention by rUK of most of the population and territory 3. The likelihood that other states would recognise rUK as the same legal entity as

before Scottish independence, not least because of the UK’s pivotal role in the post-war world order

4. The fact that when one state is dissolved and two new states are created peacefully from it, this tends to happen by mutual agreement

The UK Government’s view is that there cannot be two continuator states because, as a matter of law, the continuator state must be the same state as the predecessor. The Scottish Government’s view is that Scottish independence would mean the dissolution of the Treaty of Union of 1707 which created the UK. In consequence, Scotland and rUK would be equal successor states in law and that an independent Scotland would also retain the international treaty rights and obligations and memberships of the UK. It has pointed to the 1978 Vienna Convention on Succession of States, Article 34, paragraph 1, which states that “any treaty covering the entire territory of the predecessor state, which is in force at the time the new countries are formed, continues in force in respect of each successor state”. The Vienna Convention has been ratified by 22 countries, and, as a result, the Committee of Legal Advisors for the Council of Europe has agreed it does not reflect customary law. The UK is not among those which have ratified it and it should be noted that, even if it had, the Convention explicitly does not override the conditions for the operations of international organisations, such as EU membership46. An Independent Scotland and EU Membership The EU Treaties create a “new legal order of international law” in which its subjects are not only the Member States, but also the people or citizens of the EU. Consideration of whether or not an independent Scotland would continue to be a Member State of the EU must, thus, include international law and the EU Treaties. The Scottish Government’s view is that Scotland would continue to be part of the UK – and, therefore, an integral part of the EU – during negotiations before Scottish independence. It says that Scotland has been in the EU for 40 years as part of the UK and that there is no provision in the EU Treaties for the disapplication of those treaties for the removal of EU citizenship from a country exercising its democratic right to self-determination. The Scottish Government has said that there would be negotiations on the terms of an independent Scotland’s continuing membership of the EU, but that these negotiations would take place from within the EU rather than with an independent Scotland negotiating to accede. The

45 Thorp, A. and Thompson, G., ‘Scotland, independence and the EU’, House of Commons Library, SN/IA/6110, 2011 46 Murkens, J. E., ‘Scotland’s Place in Europe’, The Constitution Unit, UCL, 2001


Scottish Government has commissioned specific legal advice from its law officers on EU membership. The Scottish Government has also cited the economic, social and political interests of the EU as reason to believe that Scotland would continue in membership of the EU, particularly Scotland’s fishing, oil and gas, and renewables resources, its value as an export market for other Member States, the thousands of EU students studying at Scottish universities and the number of EU citizens who live and work in Scotland. Unravelling these interests and others from the EU would be highly complex. The UK Government’s view is that because rUK would be the continuing state in international law it would retain membership of the EU without the need for any Treaty amendments and on the existing terms, with some technical adjustments. It has said that an independent Scotland could not automatically become a member of the EU upon independence because there is no explicit provision for this process in the EU’s own membership rules. It recognises that, in practice, rather than being purely a matter of law, the mechanism for an independent Scotland becoming a Member State of the EU would depend on the outcome of political negotiations47. In 2004, the European Commission stated: “When a part of the territory of a Member State ceases to be a part of the state, e.g. because that territory becomes an independent state, the treaties will no longer apply to that territory. In other words, a newly independent region would, by the fact of its independence, become a third country with respect to the Union and the treaties would, from the day of its independence, not apply anymore on its territory…any European State which respects the principles set out in…the Treaty on European Union may apply to become a member of the Union. An application of this type requires, if the application is accepted by the Council acting unanimously, a negotiation on an agreement between the Applicant State and the Member States on the conditions of admission and the adjustments to the treaties which such admission entails. This agreement is subject to ratification by all Member States and the Applicant State”48. More recently the President of the European Commission Jose Manuel Barroso has said, in response to an inquiry by the House of Lords, that “the European Commission has noted that scenarios such as the separation of one part of a Member State or the creation of a new state would not be neutral as regards the EU Treaties…The EU is founded on the Treaties which apply only to the Member States who have agreed and ratified them. If part of a Member State would cease to be part of that state because it were to become a new independent state, the Treaties would no longer apply to that territory. In other words, a new independent state would, by fact of its independence, become a third country with respect to the EU and the Treaties would no longer apply on its territory”49. The Scottish Government has replied that the Commission, “however important, is not the final arbiter of these matters”50.

47 Scotland Office, ‘Scotland analysis: Devolution and the implication of Scottish independence’, HM Government, 2013 48 Thorp, A. and Thompson, G., ‘Scotland, independence and the EU’, House of Commons Library, SN/IA/6110, 2011 49 Barosso, J.M., ‘Reply to letter of Lord Tugendhat’, House of Lords Select Committee on Economic Affairs, 10 December 2012 50 Scottish Government, ‘Statement on European Union’, 12 December 2012


Alternative Options – European Economic Area or European Free Trade Association The European Economic Area (EEA) comprises Norway, Iceland, and Liechtenstein, and these countries participate in the four freedoms, meaning that movement of goods, services, capital and persons with the EU are guaranteed. Other policy areas, such as CAP and CFP, are not shared. Members of the EEA are required to accept all internal market regulations, but have no influence over the legislation. For example, they are not able to contribute to EU policy on energy and the environment51. The EU reserves the right to discontinue its EEA arrangements with a non-EU member of the EEA if they fail to adopt and implement EU legislation52. Switzerland is not a member of the EEA, but is a member of EFTA. Switzerland does business with EU Member States through bilateral deals, and by routinely aligning its regulations with those made by the EU. Switzerland has a comprehensive bilateral agreement with the EU covering trade in goods, but it has no equivalent agreement for financial services. Its firms which export to the EU generally have subsidiaries in EU Member States through which they can trade freely. The EU is trying to change its relationship with Switzerland into one more closely resembling Norway’s53. The Norwegian Government recently commissioned a report on membership of the EEA. It concluded that the economic benefits are largely positive. However, it said that, in practice, Norway is bound to adopt EU policies “without voting rights” on policy-making. For instance, Norway had to rely on the UK and other EU Member States to lobby against a recently proposed regulation on offshore oil and gas safety54. Norway has adopted three-quarters of EU legislation (6000 legislative acts), including signing up to a number of EU acts beyond the EEA agreement, covering areas like borders, immigration, foreign policy, agriculture and police co-operation55. Ultimately, Sweden joined the EU as it lacked influence as a member of the EEA56. The EFTA countries tend to follow the EU in Free Trade Agreements, though in some cases – South Korea, for example – they go first. Their experience suggests it is usually possible to obtain similar, though not as good, terms to those won by EU57. Those who wish to withdraw from the EU argue that even if the UK had to adopt three-quarters of the EU’s legislation, like Norway, this would still mean 25% fewer regulations. Some also state that, as many of the regulations from the EU are derived from global bodies on which the UK is currently represented by the EU, but outwith the EU would have its own seat, the UK would have greater influence. The present Scottish Government has a clear preference for EU membership.

51 Furby, D., ‘Scottish Independence and EU Accession’, Business for New Europe, 2012 52 Murkens, J. E., ‘Scotland’s Place in Europe’, The Constitution Unit, UCL, 2001 53 The Economist, ‘Making the Break – How Britain Could Fall Out of the European Union and What It Would Mean’, 8 December 2012 54 Ibid 55 Hughes, K., ‘Non-EU Norway ‘almost as integrated in union as UK’, BBC News, 17 January 2012 56 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.3, Questions 117-187, 2012 57 The Economist, ‘Making the Break – How Britain Could Fall Out of the European Union and What It Would Mean’, 8 December 2012


Issues – the 2014 Referendum and, if Yes, for Negotiations with the EU Influence The UK has argued that, as one of the EU’s largest countries and economies, it has influence in the EU which smaller countries do not and that this delivers for Scottish interests. It points to its ability to influence agreements, form and lead coalitions and its successes in securing opt-outs from EU legislation. For example, in order to limit Member States’ contributions, the UK was one of a group of countries which argued for a lower EU budget than had been proposed by the European Commission. The UK Government has acknowledged that in the European Council, “smaller countries have tended to have a higher voting weight proportional to their population than larger ones.” The Nice Summit extended Qualified Majority Voting (QMV) to more policy areas58. The UK Government has said that the new voting system agreed under the Lisbon Treaty (in which legislative proposals will in general need to be backed by over 55% of the Member States, and by countries together representing over 65% of the EU’s population) will tend to increase the voting weight of the larger Member States, including the UK, relative to the current position, and diminish the voting weight of smaller Member States59. Smaller Member States within the EU are sometimes said to have less influence in getting their priorities for market access for industries onto the EU trade agenda. Most devolved policy areas also form a part of the EU policy agenda; however the UK Government negotiates on behalf of its constituent parts and there is no room for dissent – so Scottish Ministers need to be invited by the UK to attend EU fora, such as the Council of Ministers. The Scottish Government has argued that Scotland’s interests are, in some key respects, not as high a priority for the UK, or are not aligned to the UK’s position. It believes that small countries, sometimes working in partnership, have been shown to be successful in EU negotiations and that a seat at the top table for Scotland as a Member State in its own right would enable it to deliver more favourable agreements. It argues that the UK’s more sceptical approach to the EU reduces its ability to work with others and that it will lose influence because of the referendum on membership. Those small states which appear to be most active and influential in EU negotiations, such as Denmark and Ireland, typically have a clear strategy which identifies priority issues, the knowledge and capacity to prioritise EU matters in their domestic Ministries, and have diplomats in Brussels who proactively gather support for priorities. If Scotland were to become a Member State it would have an advantage over some other new small Member States in terms of language and an existing knowledge base and network within the EU institutions on which it could build60. An Independent Scotland and Negotiations with the EU Previous accessions to the EU have taken anywhere from three years (Finland) to decades (Turkey). As an existing part of the EU through the UK, Scotland complies with all aspects of

58 Murkens, J. E., ‘Scotland’s Place in Europe’, The Constitution Unit, UCL, 2001 59 Foreign Affairs Committee, ‘ The foreign policy implications of and for a separate Scotland: written evidence’, House of Commons, SCO 8, 2012 60 Panke, D., ‘Scotland and the European Union’, Speech presented at the Royal Society of Edinburgh, 13 March 2013


the acquis communautaire’, but arrangements would be necessary, such as for a central bank, tax collection structures, and securities regulators61. The Scottish Government’s view is that an independent Scotland would be negotiating from within the EU and there would be a shared interest among the UK and Scottish Government, EU institutions and Member States, in working together to conclude these negotiations. The Deputy First Minister has recently stated that the Scottish Government does not “take the process of EU membership for granted”, and that it understands that “it is essential to respect the legitimacy of existing treaties” and Scotland’s “continued membership will require negotiations, and the agreement of other nations”62. It has been said that negotiations could be completed within 18 months following the referendum; and as Scotland would still be part of the UK before independence in 2016, it would not ever be outwith the EU. In contrast, a Legal Opinion for the UK Government has stated that it is difficult to see how Scotland could evade the accession process for new states in the EU Treaties. The UK Government’s view is that the situation after a “Yes” vote would be complex and that, while there is no way of knowing how long this process would take, it would be likely to take a considerable period of time. The European Commission has offered to provide a view on a “precise scenario” from the UK Government. The Scottish Government considers that it is possible to prepare and publish such a scenario and has called on the UK Government to join with it in making such a submission63. The UK Government has said that it will not “pre-negotiate” and does not obtain its legal advice from the European Commission. The Scottish Government has said that it would begin negotiations seeking to apply “the principle of continuity of effect” so that an independent Scotland would “retain the prevailing terms of the UK’s membership” on issues like the Euro, Schengen and the UK’s rebate64. The UK Government has said that an independent Scotland would not automatically inherit the UK’s opt-outs and its budget rebate and that these would be subject to negotiations with EU institutions and Member States, a number of which have always resented the UK’s opt-outs in these areas and the UK’s rebate. As previously noted, with no precedent and no provisions in the EU Treaties and as the decisions would be the responsibility of those heads of state or government who would be in power following a “Yes” vote in October 2014, any mechanism for an independent Scotland becoming a Member State of the EU would depend on political negotiation between the UK and Scottish Governments, Member States and EU institutions. The success or otherwise of bilateral negotiations between the Scottish Government and the UK Government would have a bearing. There may be political and practical reasons why EU institutions and Member States would not want part of an existing Member State to leave the EU, even temporarily. Member State Governments would wish to consider what the effect would be, if any, on public opinion in their own countries and on any indigenous independence movements. It is possible that agreement could be fast-tracked. However, this would be likely to depend on whether the negotiations were on institutional matters (number of MEPs, voting weight etc) or political (extension of current UK opt-outs and rebates)65. Proposals to lower the rates of corporation tax would be likely to be a key item66. 61 Murkens, J. E., ‘Scotland’s Place in Europe’, The Constitution Unit, UCL, 2001 62 Sturgeon, N. ‘Speech to the European Policy Centre in Brussels’, 26 February 2013 63 Ibid 64 Ibid 65 Furby, D., ‘Scottish Independence and EU Accession’, Business for New Europe, 2012 66 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.2, Questions 56-116, 2012


The Scottish Government proposes that an independent Scotland would confirm that all existing EU and UK legislation would apply until it might be amended. If it is not (for a period) a member of the EU, all EU regulation would probably still be applied. Institutional Matters The Lisbon Treaty set a cap on seats in the European Parliament. Small Member States have disproportionately greater numbers of MEPs for the size of populations. An independent Scotland might have 12 MEPs rather than six. There may or may not be negotiations about the number of MEPs from rUK. This may not be straightforward, and an increase in representation from Scotland would, therefore, be likely to require a reassignment of the number of MEPs across Member States. This is what has happened in order to prepare for the accession of Croatia to the EU. If Scotland becomes a member of the EU, it will need to establish and staff an Office of Permanent Representative in Brussels. While its size would be a matter for the Scottish Government, it would probably need to be far larger than its existing office. Euro Seventeen of the twenty-seven Member States of the European Union use the euro, along with a further five European countries. The UK and Denmark negotiated specific opt-outs. All other members of the EU are obliged, in their accession agreements, to adopt the euro. To join the euro, Member States are supposed to meet strict criteria, such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average. Being part of the Exchange Rate Mechanism II (ERM II), in which the Member States’ currency is pegged to the euro for two years, is a required criterion prior to joining the euro. Under the terms of its accession in 1994, Sweden is obliged to join the eurozone when it meets the necessary conditions and it now meets the majority. However, a referendum in 2003 rejected membership of the euro and Sweden has since argued that, because joining ERM II is itself voluntary and it has no plans to do so, Sweden has a de facto opt-out from adopting the euro67, until a “Yes” vote in a referendum. The EU Commission accepts this position. While the criteria for joining the euro were not applied strictly in the past, the eurozone crisis has led to a rethink. It is clear that an independent Scotland would be unlikely to meet the criteria soon, for example in relation to its deficit and debt68, and it would be unlikely that eurozone members would, at least while it is trying to resolve the sovereign debt crisis in a number of eurozone countries, force a country which had not met these criteria to join the euro. The Scottish Government has said that an independent Scotland, like Sweden, would not join the euro until and unless it is in Scotland’s interests to do so and it has satisfied all the criteria for doing so. The Scottish Government intends to remain in a formal monetary union with rUK and it, therefore, would not join ERM II. The Scottish Government could argue that the UK’s opt-out would continue to apply to an independent Scotland so long as it continues to use sterling69. The UK Government’s view is that an independent Scotland would not automatically inherit the opt-out the UK negotiated from the euro.

67 Government Offices of Sweden, ‘Sweden’s Convergence Programme’, 2012 68 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.1, Questions 1-55, 2012 69 Furby, D., ‘Scottish Independence and EU Accession’, Business for New Europe, 2012


Financial Stability and Regulation The EU financial regulation framework is subject to major and uncertain change. EU Member States’ central banks provide capital for the European Central Bank (ECB). Non-euro area central banks provide a fee towards the operational costs incurred by the ECB for their participation in the European System of Central Banks (ESCB). An independent Scotland’s capital subscription to ECB would be around 74m euros in the euro or 4m euro outside. It is likely that an independent Scotland would become party to the new European Stability Mechanism, providing funding guarantees. Based on its proposed size this would be 1.4% of 700bn euros – 9.8bn70. Under article 130 of the Treaty on Functioning of the EU, each Member State must have in place an institution that is capable of participating in the ESCB and its national law must ensure the independence of such an institution. The institution must have “institutional, personal and financial independence”71. Scottish Financial Enterprise believes that an independent Scotland would need its own financial regulator or ‘competent authority’72. The Scottish Government’s Fiscal Commission noted that EU Member States are required to designate one or more independent competent authority to oversee financial regulation, and that arrangements vary significantly across the EU. It believes that there are a number of institutional structures and arrangements that Scotland could adopt to achieve this requirement in EU law. It recommended that Scotland establish one or more independent competent authorities to oversee financial regulation, with key elements of prudential regulation (macro and micro) to be discharged by the Bank of England. It suggested that microprudential regulation could be discharged in Scotland directly by the Bank of England on behalf of the Scottish Government or by a new Scottish Monetary Institute working in partnership with the Bank. Other, non-prudential areas of financial protection, such as consumer protection, could be discharged in Scotland73. EU Budget If Scotland votes “yes” to independence, an independent Scotland would probably join the EU at some point during its financial plan 2014-20. Unlike for the accession of Croatia, this scenario has not been planned for. There is a need to clarify whether, should an independent Scotland be outwith the EU, even if only briefly, there would be an impact on funding to or involving Scotland. The Scottish Government has some different priorities for the EU budget than the UK Government and its view is that Scotland should receive additional funding in areas such as CAP. There is a question as to whether the financial plan for 2014-20 would be unaffected and whether an independent Scotland would seek to negotiate on these areas for the next budget. UK Rebate In 1984 the UK secured a permanent rebate as it faced disproportionately high net contributions despite (then) being one of the EC’s poorest member states. This was due to the relatively small benefits from the Common Agricultural Policy (CAP) to the UK. The UK’s rebate was worth £3bn in 2011. Many other European countries have consistently argued 70 Thorp, A. and Thompson, G., ‘Scotland, independence and the EU’, House of Commons Library, SN/IA/6110, 2011 71 Kelly, O., ‘Scottish Independence and Financial Services – An Industry Observer’s Perspective’, 2012 72 Johnson, J. ‘SNP pledge on separate Scotland bank regulation illegal, says industry’, The Telegraph, 13 June 2012 73 Fiscal Commission Working Group, ‘First Report – Macroeconomic Framework’, The Scottish Government, 2013


that this imbalance no longer applies and have sought to end this arrangement, but the UK has threatened to veto any proposal74. The UK’s rebate remains unchanged in the EU’s Budget for 2014-20. A new rebate for Denmark was agreed. Austria agreed a three-year rebate. Sweden and The Netherlands also have rebates, which have been cut75. Based on its relative wealth, an independent Scotland would be likely to be a net contributor to EU Budget. It is estimated that in 2008/09 Scotland’s net contribution, as part of the UK, to the EU budget was approximately £16 per person. It has been suggested that without the UK’s rebate, the net contribution from Scotland would rise to around £92 per person76. The Scottish Government has said that the rebate would be part of the negotiations with the EU77. Schengen - Immigration The Schengen Area operates as a single international travel and immigration area with no border controls for people travelling between Schengen countries and only external border controls for those travelling in and out of the area. The Schengen area was created in 1985 and it was incorporated into the EU legal framework since 1997. As the Schengen agreement has now become part of the acquis communautaire, new members to the EU are now bound to implement the Schengen rules. However, for new member states substantial parts of the Schengen acquis are implemented following a separate European council decision to be taken after accession. The Schengen area has been expanded to include 26 states, This includes all EU Member States with the exception of EU members Bulgaria, Cyprus and Romania - which do not yet meet the conditions for abolishing the internal border - the United Kingdom and Ireland with exemptions, and the non-EU states Iceland, Norway, Liechtenstein and Switzerland78. Ireland has not signed the Schengen Implementation Convention in order to preserve the Common Travel Area (CTA) with the UK which has been in place since 1923 and which means that there are minimal or non-existent border controls between the countries, including on the land frontier. The Scottish Government states that an independent Scotland will inherit the CTA which exists between the UK and Ireland, and will, therefore, remain outside of the Schengen Agreement79. The UK Government has stated that membership of Schengen and the CTA are incompatible. It has questioned whether an independent Scotland would inherit the UK’s opt-out. If it did not, this would result in border controls between Scotland and rUK. It has also said that membership of the CTA would need to be negotiated with all members. It has stated that membership would require an independent Scotland to adhere to the rUK’s immigration policy80. This is seeking to reduce net migration to below 100,000 per annum. Serious concerns have been expressed about the impact of this policy on Scottish businesses and on the ability of Scottish universities to host fee-paying, non-EU international students81.

74 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.2, Questions 56-116, 2012 75 European Council, EUCO 37/13. 7/8 February 2013 76 Thorp, A. and Thompson, G., ‘Scotland, independence and the EU’, House of Commons Library, SN/IA/6110, 2011 77 Scottish Parliament, ‘Official Report, Meeting of the Parliament’, 13 December 2012 78 ‘The Schengen Area and Cooperation’ http://europa.eu/legislation_summaries/justice_freedom_security/free_movement_of_persons_asylum_immigration/l33020_en.htm 79 Scottish Parliament, ‘Official Report, Meeting of the Parliament’, 13 December 2012 80 Brooks, C., ‘Scots ‘could face border guards’’, The Press & Journal, 25 July 2012 81 Ibid


Common Fisheries Policy Scotland’s fisheries industry would like to negotiate special terms. Malta has its own unique arrangement82. But there are more countries interested in the North Sea83. The CFP is being reformed. The scope for further renegotiation by an independent Scotland would probably be influenced by the terms of any accession by Iceland. Common Agriculture Policy The Scottish Government has a fundamentally different view about the future of CAP from the UK Government and believes that an independent Scotland would qualify for, and also give a higher priority to, negotiating more funding for Scottish agriculture84. The National Farmers’ Union Scotland is concerned about Scottish independence jeopardising, even if only temporarily, relations with the EU and funding from CAP. Energy and the Environment The potential impact of Scottish independence on the UK’s renewable energy and climate change targets for 2020 is unclear. The future of the UK’s targets would probably form part of the negotiations between the Scottish and rUK Governments and the European Commission should Scotland vote for independence and continue in membership of the EU. If an independent Scotland immediately joined the EU, negotiations on whether and how to divide the UK’s existing 2020 renewable energy target between Scotland and rUK would probably take place alongside negotiations between Scotland and rUK on the future of the GB market and rUK support for projects and associated infrastructure in Scotland. Similar considerations would apply to the UK’s climate change commitments.85 Any transition arrangements would have to be clarified. If an independent Scotland did not immediately become a Member State and the overall EU target remained the same, there may be a negotiation on how to reallocate the existing target between Member States. Scotland already has over 30% of its electricity production from renewables. The Scottish Government has set a target for renewable electricity generation above what is needed to deliver the current target for the UK for all renewable energy. The EU recognises the present day position when setting future targets so it might be expected that in the event of Scottish independence a new, higher target will be set. Progress with renewable energy in the rest of the UK has been significantly slower. The UK would appear unlikely to meet its target at the current trajectory so rUK might use the division of targets to argue to the European Commission that it should have a revised target more in line with what it would be possible for it to achieve. Member States are allowed to buy renewable energy from outwith their country in order to meet their own targets. The UK Energy Bill which is currently before the UK Parliament would enable the UK to subsidise renewable energy generation elsewhere through new Contracts for Difference if it would be counted towards its own targets. If the rUK’s targets for renewable energy are revised downwards on Scottish independence, this may reduce its 82 Furby, D., ‘Scottish Independence and EU Accession’, Business for New Europe, 2012 83 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.2, Questions 56-116, 2012 84 Scottish Government ‘Rural Affairs, Environment and Climate Change: Taking Forward our National Conversation’, 2009 85 Energy and Climate Change Committee, ‘The Impact of Potential Scottish Independence on Energy and Climate Change – March 2012’, House of Commons, SCO 15, 2012


willingness to continue to subsidise, through rUK’s consumers’ bills, renewable energy generation from Scotland. Education and Research Scottish universities are currently entitled to charge students from the rest of the UK for tuition, with the cap as of 2012/13 being set at £9,000. If Scotland became independent, under current arrangements students from the rUK would qualify for free tuition under the same terms as EU students, with implications for higher education institutions’ revenue. The Scottish Government has estimated the cost of current numbers at £150m86. The attractiveness of Scotland as a destination would increase and Scottish-domiciled young people may face more competition for places. The Scottish Government has said that it is continuing to work with the European Commission to examine how it might be possible to see students domiciled in the rest of the EU make a contribution to the costs of their Scottish university education. International Organisations and Global Networks United Nations The UK was a founding member of the United Nations (UN) and is a permanent member of the Security Council. There are strong geo-political interests in avoiding discussion of the permanent membership of the Security Council87. This was a reason why the Russian Federation was held by the international community to be a continuation in international law of the USSR, when, for example, Serbia was not held to be a continuation of Yugoslavia. World Trade Organisation The World Trade Organisation (WTO) deals with the global rules of trade. WTO agreements cover goods, services and intellectual property. They include countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. The goal is to help producers of goods and services, exporters, and importers conduct their business. The UK is a member but for all practical purposes it works through the EU, as required by the Common Commercial Policy. All Member States of the EU are WTO members. Smaller countries are said to benefit from membership of the WTO because without it they would have to negotiate and deal with the major economic powers individually88. Any state or customs territory having full autonomy in the conduct of its trade policies is eligible to accede on terms agreed between it and WTO Members. These include commitment to WTO rules on market access for goods and services and the transition period for making legislative or structural changes where necessary. WTO membership relies on a consensus vote by all members, and can be held up by specific trade issues. Once approved, the country can sign the Protocol of Accession stating it approves the accession package subject to ratification in its Parliament89.

86 MacNab, S., ‘Scottish independence: Funding fees for EU students would cost £150m, Mike Russell reveals’, The Scotsman, 18 October 2012 87 Happold, M. ‘Scotland Europa: independence in Europe?’ Centre for European Reform, 1999 88 Membership, Alliances and Bureaucracy http://www.wto.org/english/thewto_e/whatis_e/tif_e/org3_e.htm 89 ‘How to become a member of the WTO’ http://www.wto.org/english/thewto_e/acc_e/acces_e.htm


In 2011 the UK contribution to the WTO was £9.4m, representing 4.8% of the WTO total budget, while Denmark contributed £1.9m, Ireland £1.2m and Norway £0.8m90. International Monetary Fund and World Bank The International Monetary Fund is a global monetary institution. The IMF has a near global membership of 188 countries. To become a member, a country must apply and be accepted by a majority of existing members. Upon joining, each member of the IMF is assigned a ‘quota’ which broadly reflects its size in the global economy. This defines a member’s financial and organisational relationship with the IMF, including; ‘subscriptions’ (the maximum financial resources the country is obliged to provide the IMF, which it must pay in full upon joining); voting power; access to financing; and international reserve allocations. The UK holds a seat on the Executive Board and is one of the fifth largest quota holders. Smaller members have to be represented by Executive Directors representing a group of members91. The World Bank is primarily a development institution for middle-income and poorer countries. Membership of the IMF is necessary before joining the World Bank92. G8 and G20 The Group of 8 (G8) is for the governments of what were the eight wealthiest countries in the world, including the UK. Since 2009, the Group of 20 (G20), again including the UK, has replaced the G8 as the main economic council for wealthy nations and forum for cooperation and consultation on the international financial system. The EU is one of the members of the G20, along with 19 major countries. The UK’s International Agreements The UK has been involved in up to 14,000 treaties, bilateral and multilateral93. A large number of these are historic or very specific. EU Member States’ bilateral trade agreements with countries are generally being superseded by bilateral and multilateral treaties which are negotiated and signed by the EU for all of them. Double Taxation Treaties are international treaties regarding how tax is paid across different jurisdictions. This is most relevant for international companies. Negotiations can take many years. The UK has 120 double tax agreements and Ireland has over 6094. Investment Promotion and Protection Agreements are bilateral treaties between Governments which provide legal protection to investors. They are generally long term in nature and set international standards which cannot be changed unilaterally.

90 ‘Members’ contributions to the WTO budget and the budget of the Appellate Body for the year 2011’, http://www.wto.org/english/thewto_e/secre_e/contrib11_e.htm 91 ‘Membership’ http://www.imf.org/external/about/members.htm 92 Ibid 93 ‘ UK Treaties Online’ http://www.fco.gov.uk/en/publications-and-documents/treaties/uk-treaties-online/ 94 Select Committee on Economic Affairs, ‘The economic implications for the United Kingdom of Scottish Independence’, House of Lords, Evidence Session No.8, Questions 368-429, 2012


The UK’s and Scotland’s Overseas Representation The UK has nearly 14,000 people in nearly 270 diplomatic offices around the world, who are backed by a further 10,000 locals in 170 countries. The UK Government has embassies located in 101 countries, as well as 37 High Commissions in 37 Commonwealth countries. This network of British embassies is supported by 78 consulates, as well as a further 100 honorary consulates both of which carry out consular work assisting with minor diplomatic issues, as well as acting as a link between British and local institutions and UK businesses95.The UK has recently announced that it will establish joint diplomatic missions with Canada, in an agreement which may eventually include Australia and New Zealand. It says that such a move will increase Britain’s reach globally while reducing its costs96. UK Trade & Investment (UKTI) is the UK government department which works to develop exports and attract inward investment. UKTI has 162 offices in 96 countries. UKTI identifies a top 20 “priority high growth markets”: Brazil, China, Colombia, Egypt, Hong Kong, India, Indonesia, Malaysia, Mexico, Qatar, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, Thailand, Turkey, UAE, and Vietnam97. The British Council promotes the English language, the arts and education globally. They are ‘on the ground’ in over 100 countries. They manage the International Association for the Exchange of Students for Technical Experience (IAESTE) in the UK, a student exchange organisation with over 80 member countries, providing paid work experience to degree students abroad through an exchange scheme, with foreign students taking up placements in the UK. The Scottish Government European Union Office is based in Brussels. The Scottish Government has Scottish Affairs Offices in the British Embassies in Washington and Beijing. Scottish Development International (SDI) is a joint venture between the Scottish Government, Scottish Enterprise and Highlands and Islands Enterprise which works to develop exports and attract investment. SDI has a staff of around 250, 90 of whom work abroad across 23 offices and 15 countries. SDI has been increasing its overseas staff to 115 and has opened new offices in China and India, while expanding in the Middle East, Canada, USA and Germany, and establishing a presence in Brazil, Norway and West Africa98. SDI is a UKTI “partner organisation”. The Scottish Government has recently published a refreshed International Framework99. It states that it will maximise the resources available. It will work with the UK Government’s overseas network and UK Trade and Investment around the world to maximise business, cultural and educational opportunities for Scotland, and it will also engage directly with the British Council, so that the Scottish Government can effectively showcase Scotland's cultural and educational excellence abroad. On priority countries and regions, the following are referenced in the strategy: the EU, USA, Canada, Australia, New Zealand, South Africa. China, India, Pakistan, South Asia, the Gulf States, and Brazil and other emerging South American economies.

95 ‘Find an Embassy’ http://www.fco.gov.uk/en/travel-and-living-abroad/find-an-embassy/ 96 BBC News, ‘Britain and Canada to have joint diplomatic missions overseas’, 26 September 2012 97 UK Trade & Investment, ‘Britain Open for Business: Growth through International Trade and Investment’, 2011 98 BBC News, ‘SDI agency to expand global footprint’, 27 July 2012 99 Scottish Government, ‘Scotland’s International Framework’, 2012


Exports and the Scottish Economy Scotland's total export activity (if exports to the rest of the UK are included) is similar to other small, open economies, such as Denmark and Sweden, at around half of GDP, although significantly lower than Ireland's. However, if exports to the rest of the UK are excluded, exports are substantially lower, at 20% of GDP. This shows the importance of the rest of the UK to the Scottish economy and the need and opportunity to grow international trade. Exports as % of GDP

2011 Average over period 2002-2011

Austria 57.1% 54.1% Canada 31.1% 34.7% Denmark 53.4% 50.0% Finland 40.7% 41.9% France 27.0% 26.2% Germany 50.2% 43.5% Iceland 59.3% 43.7% Ireland 104.9% 87.8% Japan 15.2% 14.6% Netherlands 83.0% 72.1% New Zealand 29.8% 29.0% Norway 41.5% 42.7% Sweden 50.0% 48.9% Switzerland 51.2% 49.5% United Kingdom 32.5% 28.4% United States 14.0% 11.5% Euro Area 44.0% 39.4% Scotland (ROW) 19.3% 19.1% Scotland (RUK & ROW) 55.9% 54.9% Source: Scottish Government, ‘Council of Economic Advisers: First Annual Chair’s Report’, 2013 Case Study – Scotch Whisky Scotch Whisky is Scotland’s leading manufactured export by value. In the full 12 months to the end of June 2012, exports increased by 12% from £3.8bn to £4.2bn100. The Scotch Whisky Association (SWA) analysis identified 660 separate barriers to trade in Scotch whisky in 186 markets. It has said that “the industry works closely with the UK Government on such issues, including with FCO, BIS, UKTI, DEFRA, and the British Embassy network…the industry and government can point to numerous trade barriers that have been removed, supporting the competitiveness of the sector. “Effective and influential representation on the EU Trade Policy Committee and Market Access Advisory Committee, for example, is key…Ensuring the UK’s trade voice is heard within the EU is vital given the lead role of the European Commission and the EU’s overseas delegations on trade issues. Such representation assists in securing a high profile for UK industry priorities in the on-going free trade agreement negotiations between the EU and major developing trading partners…. “The global footprint of the British Embassy network, with its excellent local connections and knowledge, as well as commercial diplomacy expertise, supports the industry’s market access agenda…The support received from UK departments and the UK Permanent Representation in Brussels on EU internal market issues is invaluable, for example in 100 SWA, ‘Exports Remain at Record Levels’, 2 October 2012


relation to complex dossiers regarding product labelling… Whilst it is the EU which leads on relevant issues, the UK Mission in Geneva, which is well staffed and well respected, plays an important role in relation to trade negotiations and World Trade Organisation issues (including technical barriers to trade and trade policy reviews), as well as the World Health Organisation. “The [SWA] aims to keep the Scottish Government and public agencies updated on industry trade policy priorities…there is limited involvement in pursuing such issues, reflecting where responsibilities for external trade lie under the devolution settlement. There is some limited co-operation on trade promotion activities with Scottish Development International when SDI are represented in third country markets” 101. International Connectivity There are comparatively few international flights from Scottish airports to non-EU countries, with 12 routes to only five countries. Of the priority markets identified by the Scottish Government in its International Strategy, Scotland has a limited number of direct flights to the US, Canada and the Gulf (Dubai). Of UK Trade and Investment’s top 20 priority high growth markets, Scotland currently has direct flights to only five: Egypt (Sharm El Sheikh from Edinburgh and Glasgow), Mexico (Cancun from Edinburgh and Glasgow), Russia (St Petersburg from Edinburgh from May 2013), Turkey (Istanbul from Edinburgh; Antalya from Glasgow; Dalaman from Aberdeen, Edinburgh, Glasgow; Bodrum from Glasgow) and UAE (Dubai from Glasgow)102. Many of these destinations are primarily associated with leisure rather than business purposes. Access to the UK’s hub airport at Heathrow for UK regional flights is declining due to a shortage of capacity. The European Commission currently does not allow Route Development Funding from government. The UK and Scottish Governments support its reintroduction. The UK Government has significantly increased rates and restructured Air Passenger Duty (APD) since 2007. Rates for short haul travel have increased by around 160% with long haul rates increasing by between 225% and 360%. The UK has now been ranked at 139th out of 140 countries for the competitiness of its aviation taxes103. Meanwhile, countries such as Ireland and Spain have cut their equivalent aviation taxes and The Netherlands has abolished them. A report has estimated that this will cost Scotland over two million passengers per annum and up to £210m in lost tourism spend per annum by 2016104. Scotland is less well-connected than the UK as a whole in terms of direct deep-sea shipping and airfreight services105 and freight to and from Scotland will, therefore, often travel through English gateways. Between 1995 and 2011 only 3% of additional large distribution centre capacity was located in Scotland. This follows decades of new warehousing capacity gravitating towards the English Midlands and M1 corridor106. In 2009, 34.2m tonnes of freight were lifted by road, rail or water from Scotland and delivered to the rest of the UK, and 22.9m tonnes were delivered to Scotland from the rest of the UK. In the same year, 39.2m tonnes of freight were delivered outside the UK from 101 Foreign Affairs Committee, ‘ The foreign policy implications of and for a separate Scotland: written evidence’, House of Commons, SCO 10, 2012 102 Websites of Edinburgh, Glasgow, Prestwick, Aberdeen and Inverness Airports [last accessed 22/3/13]. 103 World Economic Forum, ‘The Travel and Tourism Competitiveness Report 2013’, 2013 104 York Aviation, ‘The Impact of Air Passenger Duty on Scotland’, 2012 105 McKinnon, A, and Piecyk, M., ‘Scottish Logistics Report; Report prepared for the Freight Transport Association’, 2012 106 Ibid


Scotland, almost all by sea. Freight from outside the UK to Scotland was 14.2m, again almost all by sea107. Container shipping feeder links, mainly from Grangemouth, provide exporters and importers with access to a number of deep-sea ports on mainland Europe or in southern England, and the amount of freight transported this way has substantially increased108. The Rosyth-Zeebrugge service is Scotland’s only direct trailer unit shipping service to the continent. The volume of trailer units shipped on this route is well below peak and the service is reported to be loss-making, with speculation about its future109. Most airfreight to and from Scotland flies in or out of English rather than Scottish airports. It has been estimated that between 2004 and 2008 around 8% of airfreight handled by Heathrow originated or was destined for Scotland110. An Independent Scotland – International Organisations and Global Networks International Organisations (non-EU) An independent Scotland would be expected to apply for membership of the UN. Its admission would require support from the Security Council and the General Assembly under article 4 of the UN charter. The application process could be completed within a relatively short space of time without any serious objections111. Concerted opposition, at a political level, to an independent Scotland joining the WTO would appear unlikely, particularly if it had already become a UN member112. World Bank and IMF membership would be likely to be rapid for an independent Scotland after UN membership is granted113. An independent Scotland would be likely to be represented by a group seat rather than its own single seat on the IMF114. The UK Government has stated that an independent Scotland would “not belong to, or be invited to join” international economic groupings such as the G8 or G20115. The Scottish Government has said that “pre-independence negotiations will be pursued with other international organisations that Scotland is already a member of as part of the UK… [to] ensure that Scotland will become an independent member of these organisations as quickly as possible, in accordance with the particular rules”116.

107 Transport Scotland, ‘Scottish Transport Statistics: 2011 Edition’, No.30, 2011 108 McKinnon, A, and Piecyk, M., ‘Scottish Logistics Report; Report prepared for the Freight Transport Association’, 2012 109 Ibid 110 Ibid 111 Foreign Affairs Committee, ‘The Foreign Policy Implications of and for a Separate Scotland’, House of Commons, HC 643-iv, 2013 112 Foreign Affairs Committee, ‘ The foreign policy implications of and for a separate Scotland: written evidence’, House of Commons, SCO 7, 2012 113 Ibid 114 Ibid 115 Ibid 116 Scottish Government, ‘Scotland’s Future: from the Referendum to Independence and a Written Constitution’, 2013


Global Networks The UK Government has stated that there would be a ‘significant impact’ on Scottish citizens travelling and working overseas, and on businesses, with the loss of UK consular and trade and investment networks and resources after Scottish independence.117 The Scottish Government has highlighted that small European countries of a comparable size to Scotland, such as Norway and Ireland, have 100 and 97 consular offices respectively. Other methods for small countries to expand their global network exist, for example Sweden has a system of “flying ambassadors” who are based at home and dispatched to other countries. The Scottish Government has indicated that an independent Scotland would concentrate on emerging markets118. The cost of running a typical overseas embassy is thought to be at least £1m per year119. Independence will require the training of a ‘first generation’ of Scottish diplomats120. The Scottish Government’s view is that the UK’s overseas embassies and consular offices are shared UK assets and that an independent Scotland would be entitled to a share of them to contribute towards the costs of setting up its own network121. The UK Government’s view is that the UK’s diplomatic, consular and trade network would remain intact and remain the property of the rUK122. The Scottish Government points to the example of shared premises, services and consular activity, as recently agreed by the Governments of the UK, Canada, Australia and New Zealand. The UK Government has said other countries are charged for this information. EU law is also presently moving in the direction of consular protection for all EU citizens123. The UK Government has said that arrangements to provide ‘first line’ consular assistance to citizens of other EU or Commonwealth Member States will not extend to cases which are challenging or sensitive and that there will be no arrangements for businesses sharing services124. Issues around defining citizenship in an independent Scotland are unclear. It may be the case people would need to either opt-in to Scottish citizenship or opt-out of British citizenship. Likewise British nationality law currently accepts dual nationality. People would be likely to opt for the option which allows them the most freedom125.

117 BBC News ‘ Scottish Independence: UK foreign policy ‘may be put at short-term risk’’, 18 October 2012 118 Foreign Affairs Committee, ‘The Foreign Policy Implications of and for a Separate Scotland’, House of Commons, HC 643-iv, 2013 119 Salmon, T., ‘Diplomatic questions to be answered’, The Scotsman, 29 January 2013 120 Foreign Affairs Committee, ‘ The foreign policy implications of and for a separate Scotland: written evidence’, House of Commons, SCO 4, 2012 121 Foreign Affairs Committee, ‘The Foreign Policy Implications of and for a Separate Scotland’, House of Commons, HC 643-iv, 2013 122 Foreign Affairs Committee, ‘The Foreign Policy Implications of and for a Separate Scotland’, House of Commons, HC 643, 2013 123 Scottish Affairs Committee, ‘The Referendum on Separation for Scotland, Session 2012-13: Oral and Written Evidence’, House of Commons, HC 139-II Ev 166, 2013 124 Foreign Affairs Committee, ‘ The foreign policy implications of and for a separate Scotland: written evidence’, House of Commons, SCO 8, 2012 125 Scottish Affairs Committee, ‘The Referendum on Separation for Scotland, Session 2012-13: Oral and Written Evidence’, House of Commons, HC 139-II Ev 166, 2013


The UK’s International Agreements The FCO has warned that a withdrawal from the UK’s bilateral and multilateral treaties would harm the Scottish economy126. The UK Government’s view is that rUK would automatically inherit these treaties, while an independent Scotland would not. The Scottish Government has said, following a “yes” vote in the referendum, it would implement a constitutional platform to allow for the transfer of sovereignty to an independent Scotland, including to “provide for the continuing application to Scotland of international arrangements with other countries and international organisations” and in order to “give the Scottish Parliament powers to ratify international treaties.”127 When Czechoslovakia separated, the UK took the position that the treaties and agreements between them remained in force between UK and successor states. The UK Government’s view is that this was a special case because neither the Czech Republic nor Slovakia claimed to be or was recognised as the continuing state128. Air Service Agreements (ASAs) designate air routes between two countries. Between 1945 and 1989 21 agreements designated London, and in a few cases Manchester and Birmingham, for scheduled flights. Since then, six further agreements have designated London for international flights operated by designated foreign airlines. ASAs no longer list particular airports, however non-public negotiations between governments still establish airports and flight slots for routes. No Scottish cities have been designated. In the late 1990s, the UK adopted an explicit open access policy, whereby other countries were offered, on a reciprocal basis, unrestricted access to airports in Northern Ireland, Scotland, Wales and regional airports in England, and in exchange UK airlines would have unrestricted access from these airports to those of the other country. In its draft Aviation Framework published in 2012, the UK Government has said that the UK could go a stage further and adopt a unilateral regional open access policy on a case-by-case basis129. International Connectivity The UK Government has established an Aviation Commission to maintain the UK’s status as a leading global aviation hub. This will take “a UK-wide perspective, taking appropriate account of the national, regional and local implications of any proposals”. An interim report will be published this year, with a final report in summer 2015. The Calman Commission and the Scottish Government have supported devolution of APD. The Scottish Government has indicated that it could vary rates of APD in order to maintain and attract economically important long-haul flights. Devolution was not in the Scotland Bill. The UK Government has said that it is still being considered130.

126 BBC News, 18 October 2012 127 Scottish Government, ‘Scotland’s Future: from the Referendum to Independence and a Written Constitution’, 2013 128 Scotland Office, ‘Scotland analysis: Devolution and the implication of Scottish independence’, HM Government, 2013 129 Department for Transport, ‘Aviation Policy Framework’, March 2013 130 Office of Angus MacNeil, MP, ‘The UK Government has failed to connect Scotland to the world’, Press Release, 5 August 2012

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SCDI Future Scotland - Europe & International