By Ian Wooton, Professor of Economics and Vice-Dean (Research), Strathclyde Business School, University of Strathclyde. This column first appeared as a chapter in the VoxEU ebook, Brexit Beckons: Thinking ahead by leading economists, available to download free of charge. Cross-posted from VoxEU.
Full disclosure: I am a Scottish, international economist with a career-long interest in preferential trading agreements (PTAs). As the Brexit vote has thrown up a PTA conundrum of unprecedented complexity for both the UK and Scotland, I feel duty bound to weigh in on what should come next.
The result of the referendum seems to have little to do with the economic benefits or otherwise of EU membership. They seem to have been driven more by issues of sovereignty and a negative reaction to the Westminster ‘establishment’. Nonetheless, the implications of the UK’s trading relationships post-Brexit are important. A central issue is whether ideology or pragmatism will emerge triumphant from the negotiations that will soon begin between the UK Government and the EU.
The vote
The result of the overall vote was clear, with a majority (51.9%) of those who voted choosing to ‘Leave’ the EU. But north of the borders in the British Isles there was a very different outcome – voters both in Scotland and in Northern Ireland expressed a strong wish to ‘Remain’ in the EU, with majorities of 62% and over 55%, respectively.
Finding an outcome that simultaneously respects the collective wishes of the British people, while addressing the concerns of the citizens in Scotland and Northern Ireland in order to preserve the United Kingdom, will be difficult. A dialogue has already been opened between the new prime minister of the UK and Scotland’s first minister. Prime Minister May has indicated that she does not intend to trigger Article 50 until she believes that there is a UK-wide approach and objectives for negotiation. On her part, Ms Sturgeon has established a commission to investigate Scotland’s options in light of the vote to Leave.
The border issues are critical
I shall argue that resolving border issues will be central to finding a Brexit outcome that preserves the UK in its present form. As it turns out, the economic issue is not whether the UK is or is not a member of the EU. It is whether it remains part of the Single Market as a member of the European Economic Area (the so-called Norway option) or otherwise.
While the EU has evolved in non-economic dimensions, at its heart remain the four freedoms enshrined in the Treaty of Rome ensuring free movement of goods, capital, services, and people. The Single Market encompasses all four of these elements and I would be very surprised if European negotiators would be willing to give the UK free access to some markets (e.g. goods and services) and not others (e.g. workers). Therefore, for the remainder of this chapter, I shall assume that for any agreement with the EU over these freedoms, the UK will have to accept all four or get none.
In my opinion, the best outcome for the UK (short of ignoring the outcome of the referendum and remaining in the EU) is what is frequently referred to as the ‘Norway option’. This would involve an application to re-join the EFTA, of which the UK was one of the founding members before leaving to join the European Economic Community in 1973.
Why do I argue in favour of this? Quite simply, any other form of trading relationship with Europe would be costly economically and create political problems that would put further pressure on the integrity of the UK. Labour migration is a major element of this and is the reason why I cannot envision a free trade agreement in goods and services as being a satisfactory solution (even when we ignore the enormous costs of negotiating and implementing free-trade agreements).
Were the UK to apply and be accepted as a member of EEA, it would retain full access to it largest trading market. In many respects, from an economic perspective, it would be business as usual. There would also be some repatriation of powers from the EU, the most significant of which might be with respect to agriculture and fisheries where the UK would no longer be part of the Common Agricultural Policy and would also regain control over its 200-mile fishing limit. Indeed, the Norwegian people narrowly rejected membership of the EU over concerns regarding their sovereignty over agriculture and fisheries. However, from the UK’s perspective, Westminster might not be the beneficiary of this greater autonomy. As these are not reserved powers, the default position will be that responsibility for these aspects of the economy falls to the devolved governments.
Would Britain exiting to the EEA satisfy Brexiteers? If, in the words of the prime minister, “Brexit means Brexit”, would this perceived increase in autonomy would be enough to satisfy those opposed to the EU? I don’t know, especially as membership of the EEA would involve both direct financial costs and continued acceptance of free migration. In addition, as a non-member of the EU, the UK would be unable to vote on issues of the Single Market, including many of the rules and regulations that drew the ire of those in favour of Brexit. Leave campaigners argued that the UK had little influence on the evolution of the Single Market, so little would change if the UK were not in the room to vote. Fundamentally, the UK Government (with its sole Scottish Member of Parliament) has to weigh up the benefits of continued free trade with Europe and the desire to regulate immigration of Europeans.
The EEA/Norway option is the least bad outcome for Scotland and Northern Ireland
My contribution to this discussion focuses on the impact of this decision on the people in the devolved administrations of the UK who voted strongly to remain in the EU. My argument is that the Norway option of EFTA membership is the least-bad outcome for Scotland and Northern Ireland and is the UK government’s best hope to retain a United Kingdom.
First of all, continued membership of the EEA would resolve the potentially explosive issue of a re-introduction of border controls between the Irish Republic and Northern Ireland.
An outcome that restricted trade or factor movements would require border controls with passport checks, in order to prevent the Irish border being an open door to immigration from the EU into the UK. Any form of trade relationship short of continued membership of the Single Market could jeopardise the relationship between Northern Ireland, the Republic of Ireland, and the rest of the UK.
Similar concerns arise with respect to the border between Scotland and England, although issues are less-potentially catastrophic in their consequences.
Scotland’s first minister has indicated that the Scottish Government will explore every option to retain Scotland’s status in the EU, including a further referendum on Scottish independence early in 2017, if necessary. Given the strength of support in Scotland for the EU revealed in the Brexit referendum and taking into account that the franchise for an independence referendum includes younger voters (16 and 17 year olds) who seem to be more pro-European, the outcome of the last independence referendum may be reversed. Indeed, a series of opinion polls since the Brexit vote have put the ‘Yes’ side in the lead.
Scottish independence would pose its own set of problems
Independence would however, throw up its own complex issues of trade and border arrangements. Whether an independent Scotland achieved immediate membership of the EU or initially joined EFTA, it would still be part of the Single Market. If the rest of the UK’s response to Brexit was anything less than being part of the EEA, a border would have to be established between North and South Britain both to monitor the flow of goods and to restrict the movement of workers between the two countries.
It might be argued that fear of a future border with England might convince Scottish voters to remain with the union, particularly given the deep economic linkages between Scotland and the UK. However, fear over the loss of membership in the EU seems to have been a decisive factor for some voters in the last independence referendum. This has now been turned on its head. A future independence referendum might now give Scottish voters the option of either Europe or the UK. As many of us in Scotland identify as being ‘European’ ahead of being ‘British’, it would be a risky strategy for anyone in favour of the union to give voters such a stark choice.
Concluding remarks
In light of this, a Brexit agreement ensuring continued membership of the EEA would give the UK the best outcome, regardless of whether Scotland remains part of the same country or becomes a fellow, independent member of the Single Market.
All of this suggests that the negotiations with the EU on post-Brexit trading arrangements will not be straightforward. Unfortunately, as was the case in the Brexit referendum itself, the final outcome is more likely to be determined by politics than economics. However, it will be the economic details of the deal that will have the biggest impact on standards of living in the UK. Resolving the complex issues around trade agreements will not only determine the future economic performance of these islands, but will have a major bearing on the prospects for the continued survival of the UK itself.
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Good summary David.
Over here in Cairns, very far removed from the issues mostly commented on in NC, I was perturbed that a majority of the Scottish people listened to the scare tactics and voted to remain with the UK, rather than be your own country – during your own referendum of course. I believe many voted as such because they believed, rightly or wrongly, that living conditions would be worse under a split. Perhaps those closer might comment on my understanding.
A lot of people north of the border must feel helpless with the latest vote. Perhaps they are now regretting their decision to stay with the UK? I mean how many centuries have passed when Scotland and its people dreamed of setting their own destiny free from London and the ruling classes??
I believe that Scottish independence referendum was being missold. For example, the claim that Scotland would retain pound but have independent economic policy was in the same category as part-of-single-market but no immigration. Oil was bet on heavily, which would have had disastrous consequences (especially if tied to pound).
That said, Scottish referendum when depending on oil and keeping pound are clearly out now, the referendum can be much more clear eyed. It would still have massive impact, especially if England/Wales was out of single market (the border issue mentioned above would have very large impact on trading of most of Scottish SMEs for who England is a super important market) – but it would be much more visible. And, ultimately, similarly as English may have decided the short/medium term economic price is worth paying for the (perceived) extra sovreignty, Scots may decide that sharing sovreignty with EU is better than doing it with the rUK.
Yes mate, although the Euro is still to be avoided. If the Scottish are to go it alone, they will need to have taxes and issue their own currency. They have plenty of history to see that giving away your ability to tax and spend their own currency is by far the better choice.
The Scottish referendum was missold on both sides.
The rise in support for independence was pretty much a grass roots affair and I believe the SNP were actually pretty alarmed at the prospect of winning.
They are a very cautious bunch, preferring a gradual accretion of powers to sudden independence.
The independence within the EU was an odd position (why would a small new nation trying to find its feet want them nailed to the floor by the EU?), as was the sterling peg.
(Not an exact comparison,Czechoslovakia took that route and, parted amicably and dropped its peg after about a week, the two parts are still there as far as I can see).
That their main efforts were producing a 670 page document which nobody read and a newsletter giving away a few ipads was indicative.
On the unionist side, most of their dire predictions actually came true, but all in the context of the union. The oil industry is fucked (by commodity prices and UK tax policy) and we have ended up facing the prospect of exiting the EU. There are no indications here that we are better together.
Yes were right when they said, vote no – get nothing.
As for UK brexit, it is really hard to see how the the circle of the problems in the article can be squared.
The EU referendum was not expected or welcome by either side (maybe UKIP, but it leaves them an existential crisis as well, thank god) and it came from people whose plight has been of no concern to anyone in power over the last 30 odd years.
A new way to ignore them is the problem at hand.
The process will be spun out (remember it took 7 years for the chilcott inquiry to find out that the government hadn’t been absolutely scrupulous in its case for invasion, 26 years to find the hillsborough disaster and cover up lay at the feet of bent coppers) and fudged into something or other.
Reports are coming in that article 50 invocation will be pushed back to 2019. I’m sure that’s is the first of many delays.
Another wrinkle is that the establishment might throw their weight behind a pro europe party in 2020, something on the minds of the Corbyn plotters, no doubt.
Don’t get me wrong – I thought in the the last Scottish referendum stay was the right answer (given the uncertainties of the politicians who would have to implement it, and that stay now wasn’t precluding leave later), but if there was a new one, leave (UK) would be the right answer – as there are many more uncertainties in staying than leaving, and the leaving ones are better defined (i.e. a goal to stay/join EU is a much better defined than what the hell Brexit means even if Brexit means Brexit).
Ha, I thought it was the wrong one.
The only certainty we have in life is the malevolence of our out of control ruling classes.
Everything else we are told to worry about (in the european west) is just a change in circumstances.
As an American, I didn’t have a say in the matter, but because most of my family were Yes, I went with No on the principle that I am a curmudgeon.
However, the framing, as has been noted already, is key here. If the sovereignty package were a complete one (i.e. with a sovereign currency and taxing powers) rather than the partial one on offer in 2014, then it would make more overall sense and at least provide the solid footing needed to work out all the particulars, including, but not limited to immigration (which the SNP wants to increase), those pesky Trident boats (which the UK parliament voted for but are incredibly unpopular north of the border), new trade relations, etc. Trident provides the Scots with some leverage in negotiating with a reduced UK, though they might find themselves with something of a Venezuela problem, what with the tanked price of oil, especially if the Tories to the south decide to get vindictive when it comes to importing necessary goods and raw materials.
Also, a stalled economy in the North has put a degree of pressure on Sturgeon’s government that wasn’t there in 2014. A new Yes campaign would have to fight the possibility that leaving the UK would cause real economic harm, as Brexit now seems to be doing.
“The rise in support for independence was pretty much a grass roots affair and I believe the SNP were actually pretty alarmed at the prospect of winning. ”
Please provide some verification for this statement.
I have no chicken in this race, so I really don’t care long term.
However, everyone I spoke with who supported independence, including time-hardened SNP volunteers who were at the Scottish Assembly buildings on the day of the referendum along with theSNP politicians, talked about the “electric atmosphere” on the day.
They all wanted to win. They want independence – that is what the SNP is about.
I often think that they’ve learnt to govern almost as by-product of their independence stance, and the current budget kind of supports that observation. Having said that, the SNP has produced some very eloquent politicians who are well able to articulate various social and political positions, and they have long term plans according to the local activists with whom I come into contact periodically.
That was my impression as a voter.
I do have skin in the game and I wanted us to win.
As I said, there was a strong popular surge from the YES groups, and it was an extremely uplifting campaign for anyone present, but the official SNP efforts did not not match up, Blair Jenkins was pretty ineffective, they seemed to walk into too many unnecessary traps (esp the pound) and I thought Jim Sillars actually made the best case in the media and he’s hardly persona grata with the party.
They started out at about 30% Yes hoping for a good showing and I think they were surprised at the surge.
Maybe I’m wrong, but that was the feeling ,together with disappointment,I was left with.
I could just about accept the result, but I remain sceptical about the margin. There was an awful lot of postal votes and that’s how we do fraud in the UK.
The postal vote results were seemingly available to tory leader Ruth Davidson ahead of time, who found them ‘encouraging’.
The vote management was handled by IDOX, one of whose directors is Peter Lilley, former Tory minister.
The lack of exit polling in the a very important contest was,for me, very curious.
Fair enough.
The biggest problem for the Scots wanting to stay in the EU is that the unelected rulers of said body have already said no, you’ll have to re-apply and your case isn’t strong. That kind of means there would be a period in the international wilderness which I’m not sure would work too well, especially with all that non-existent oil revenue.
While I agree that joining EFTA would be the ‘least worst’ (or to be precise, the ‘least disruptive’) option, and there is no doubt that many in London will try to do a deal on that basis, it is entirely dependent on the co-operation of the EU and other EFTA members. I don’t actually see that happening – Norway has already said its unhappy with that possibility and the EU will want to extract a higher price for Brexit.
One area that really needs exploring is how the legal status of Scotland, N.Ire and Wales ties up with EU membership. Its already been speculated in Ireland that there may be a possibility of a deal of some sort whereby the Republic shares sovereignty with England of Scotland and N.Ire, with the latter coming under Irelands EU membership for the purposes of EU law. There is already a ‘sort of’ joint sovereignty arrangement with N.Ire. It would be a unique legal arrangement, but its not impossible someone could work out a deal.
Another possibility is that Scotland breaks away from the EU and simply inherits the UK’s EU membership, with the possibility of N.Ire joining it. Again, there is a possibility of some sort of Celtic nations alignment, although I would guess the Spanish would fight to block that because of its domestic issues.
I think much depends on whether the EU (i.e. Merkel) decides on a policy of forcing the UK out quickly, and then picks up the pieces later, or if there is a willingness to sit down and work out some novel legal arrangements. I suspect that given the complexities in getting everyone to agree, the former will be the favoured option. But Ireland in particular will fight within the EU to slow things down, the open border is very important politically and economically to Ireland.
The open border for Ireland is pretty much a question of wanting to renew the NI civil war (or whatever you want to call it), as it’s an explicit part of the accord that quietned the area down. Would Merkel (or anyone, for the matter) really want to take that on, if NI say decided that NI/Scotland pact, and being in EU, is the way to go? Politically that would be really bad intra-EU (not that this consideration stopped other things form happening).
I don’t believe there’s any solution that would allow NI/Scotland to be in EU while also being part of the UK which is not in EU (or at least EFTA, but even that may prove problematics). You absolutely must have hard borders between EU/RotW on trade, otherwise you just dumped pretty much any and all trading (and immigration) treaties.
Given all the complications, competing insterests and resource requirements there’s absolutely no good solution, because any solution is subject to so many path dependancies that a fuck-up is inevitable.
In the latest, Fox and Johnson are already coming to blows over who’s running foreign policy.
http://www.telegraph.co.uk/news/2016/08/14/theresa-may-tells-feuding-ministers-to-stop-playing-games-and-ge/
To me, putting Fox and Johnson in charge just shows they aren’t taking things seriously. Neither has any ability,interest or experience in these matters.
Johnson is most at home with Johnson issues, Fox organising neocon dinner parties with his close personal friend Adam.
Yes, which is why the answer to “who’s running foreign policy” is May, neither Johnson nor Fox – as they are very likely to find pretty quick.
Putting Johnson, Fox and Davies where May put them was IMO brilliant domestic move (and she had to do it, or keep fighting the fanatic brexiters tory wing). How brilliant (or not )it will show in practice where not only domestic considerations come to play is a different question.
I’m not sure many outside Ireland really appreciate how potentially dangerous the border issue is. I think there is a growing feeling within Loyalist circles that they have come out badly from the peace agreements and may try to wind things up. And May and her immediate circle are known to be hostile to the Belfast Agreement. There is a potential for things to get very nasty, very quickly. But I suspect Merkel, etc., just don’t see this as a big issue on the horizon for the moment. There may even be an unspoken view in certain EU circles that rising violence in Northern Ireland could be seen as ‘punishment’ to the UK for Brexit.
Historically, N. Ire. Unionists have always had an affinity with Scotland. So its not impossible that they might seek some sort of formal alliance with Scotland if the UK breaks up. It makes sense for them not to join the Euro but they also suffer badly from being in what is for them, an overvalued sterling zone.
With the west coast perhaps, you don’t get many orange marches outside that corner.
I remember the first time I saw one and thinking ‘this is what passes for a fiesta?’.
There aren’t that many affinities within Scotland, all 5 million of us, in my experience.
Borders/Central belt (west v east split),highlands/islands.
Its a miracle we can even agree on the idea of scotland.
Back to your main point, NI was generally seen as a special case by people who could appreciate complexity and complications.
There are none of these left in Westminster, our brilliant leaders of just a few month ago, found their trousers around their ankles and became incompetents holding a sack race towards a remunerative exit.
Yet there is still talk about leadership,and its prime importance.
Completely incorrect, there has been an open border in Ireland since 1925 and it has nothing to do with either the EU or the Good Friday Agreement!
The article completely ignored the problem of the Eurozone for those wishing to join the EU who weren’t members before, like Scotland. The Eurozone is to avoided like the plague, which may be a problem for Scotland if they secede from the UK and wish to join the EU. They may be forced to take on the Euro. Schaeuble has indicated that this will be the case, though he might change his mind. Norway has said that they will veto any extension of their membership group. So, don’t expect this to be on the table. The EU has their two best negotiators in place already while the UK has Johnson, Fox, and Davies, none of whom appear to be a match for them. Neither Merkel nor anyone else in the EU can force the UK to invoke Article 50 — this is entirely in the hands of the UK ministers. They can succumb to pressure or not. I would expect them to resist any such pressure.
I wouldn’t worry about the strength or aptitude of the UK’s negotiators as it is May pulling the strings, not the sock puppets.
There has been a tremendous amount of verbiage produced about an Exit that is never going to happen. This was evident within a day of the so called democratic referendum when Cameron refused to invoke Article 50 effectively declaring the referendum null and void. The People had spoken but the Elites aren’t required to listen and they have shown who is in control and who is not.
There is only one way for a Scot to escape the entanglements with the Brits and that is to do what my ancestor did in 1807, get on a ship in Glasgow and leave for bonnier climes.
The US was founded on “life, liberty, and pursuit of happiness”
The EU is founded on “goods, capital, services, and people”
Is anyone surprised that the EU fails to inspire?
The Scots want not to be part of the UK, because they believe themselves not represented properly in Westminster, and they want to be a part of the EU, where the British believe themselves not represented properly.
Makes perfect sense, and is perfectly consistent.
Invocation of Article 50 would, one would imagine, now be a bigger shock than the vote – there being an enormous difference in foreign capitals and ‘markets’ between an evenly split internal vote that had no legal standing even internally, until given life by Arch Con Cameron, and the considered actions of a State the size of the UK – unless what ‘Brexit’ really meant all along was a spectacularly over-hyped relative nothing. Will the ‘Brexit’ proponents now just blow away on the next wind with the author’s proposed Trojan bauble in tow – nothing inside or outside?
Perhaps, faced with potential Greek like conditions and treatment, the Italians pull the pin whilst the UK is still thinking about it. They already have some banking issues and plenty of debt kicking around and they aren’t exactly renowned for accepting being told what they should do by someone else.
I don’t believe that the EEA is either the “least worse option” or acceptable to those who voted to leave. Firstly, to be in the EEA you need to be either in the EU or a member of the Efta; and it is unlikely that the UK would be allowed to join the Efta as the existing members would veto it. It is possible that this could be fudged with an agreement between the EU and UK but I don’t think that is desirable for either party. Please let me explain.
Being in the EEA would mean that the UK would continue to contribute to the budget and accept the majority of EU regulations with little say in their drafting. It would mean accepting freedom of movement, the existing tax and excise agreements and importantly EU restrictions on trade and investment. Outside of the EU and the Euro the UK will need direct control over monetary and fiscal policy to be able to defend domestic industry and balance the economy. EU state aid and trade rules would make this impossible leading to a structural imbalance between the EU and UK similar to the current Eurozone imbalance between Germany and the rest.
This structural imbalance would ultimately undermine the EEA and the EU while ruining the UK economy. This is not desirable for either remain or leave voters. Furthermore, the restrictions required by membership of the EEA would be unacceptable, in particular unrestricted freedom of movement, to a majority of leave voters, who would cry foul with some authority.
The UK would be much better off signing a new agreement to participate in the European single internal market without full membership. This would be more complex in practice – involving a completely new deal – but would be in the best interests of both parties. For example, Germany currently exports €30bn net to the UK each year. This agreement would sufficiently decouple the UK so that it can have independent monetary and fiscal policy without introducing a structural imbalance.