Belfast Telegraph

Friday 24 October 2014

If Scotland gains its independence, adopting euro may present problems

Decision time: Questions must be answered to help governments handle the economic challenges of Scottish independence

On September 18 the Scottish electorate will be making an important decision for all the people who live in the UK and Ireland.

A simple question: will we know whether an independent Scotland would remain as a member state of the European Union? This is neither automatic nor guaranteed. Without that assurance, the Scottish argument is still couched in terms of 'common sense' that the EU will wish to maintain the existing arrangements. Then hypothetically only an operational plan is needed to adjust the decision-making in Brussels to accommodate a divided UK.

Is this fanciful thinking? It is anticipating the outcome of official negotiations that are still to take place.

Even this single issue carries implications for Northern Ireland. If Scotland does remain in the EU, the other Scottish aspirations point to a more competitive approach to attracting investment. Corporation tax rates and allowances will become more complex unless the EU moves to harmonise tax rates within the EU. Even that idea will be contentious as the Irish Government can be expected to try to veto a change in the Irish position.

If the goodwill exists, following a vote for Scottish independence, the current degree of European economic integration on trade, payments, standards, labour mobility and movement of capital should not be threatened. However, there is the complication that the UK Government has initiated suggested renegotiations on the relationships of the UK with the EU.

Will the Scottish Government take part in a UK-EU referendum held before any separation becomes official? Alternatively will Scotland offer a referendum on Scotland's links with the EU? If Scotland is negotiating at the same time the terms for its admission as an EU member state how will that interact with the possible changes in the UK position?

One of the most damaging possibilities is that the UK might vote to leave the EU whilst Scotland remained a member. The implications of a severance of the joined up economic systems between Scotland and the remaining UK would be an unexpected nightmare, not yet in contemplation.

These questions then lead into others. The Scots are voting to decide on whether to become independent but there are major uncertainties on decisions about Scottish currency, monetary policy and the possible adoption of the euro. How will the main commercial banks adjust to a political split in the UK?

There are several layers of assumed answers to these questions but there is also some doubt about how the details will be finalised where Brussels and London have, at the least, begun to make statements that are inconsistent with the ambitions of the Scottish advocates of independence.

Although there will need to be extensive negotiations with the EU and the UK Government on the implementation arrangements for an independent Scotland, the Scots are being asked to vote for a concept where the full implications have not been agreed with other important parties.

Business and commerce in Scotland will want to have greater certainty on business decisions: so also will business and commerce in Northern Ireland and England. The pro-independence advocates would wish to continue to use sterling as the main currency. However, if EU rules are followed, Scotland should adopt the euro.

Whichever holds sway, how much risk and disruption for business in Scotland and Northern Ireland would be caused by an exchange rate difference between Northern Ireland (and England) and Scotland? The Scots and the Irish may have a stable euro currency rate and Northern Ireland could face exchange rate fluctuations in trading with both its neighbours.

The rules of the game for managing the economies after a successful independence referendum are so unclear that Governments seem to be allowing an irresponsible hiatus to develop. This logically should lead to a halt, until final agreed decisions are reached.

Who said that logic was playing any part?

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