The EU and an independent Scotland

The EU and an independent Scotland

The EU and an independent Scotland

Written by John Kerr, 23 July 2014

Scots living in Scotland vote on September 18th on whether to end their 300-year union with England. If they win, the nationalists aim for actual independence, and full EU membership, in March 2016. Opinion polls currently show a lead for the pro-Union side, but 15 or 20 per cent remain undecided. The debate is becoming heated, with arguments concentrating on the economic risks and opportunities of independence. The EU dimension has attracted less attention, with each side brusquely dismissing the other's assertions. Most Scots want to stay in the EU: the nationalists assert that this would be quick and easy; their opponents predict problems; impartial voices go largely unheard. Here are eight points which Scots might like to consider.

1. Beware those who say all is clear

 … it isn't. Anyone who says that it's certain the Scots could, or could not, have their own seat at the Council table from 2016 is driven more by advocacy than analysis. The fact is that the EU would be in uncharted waters. There is neither precedent nor treaty provision for a member-state splitting, with both parts wishing to stay in. Greenland chose to leave in 1985, with metropolitan Denmark negotiating its exit. The Czechs and Slovaks had split long before they joined in 2004. The EU is treaty-based: only independent states can negotiate and sign treaties. There would be concern in Brussels not to deprive EU citizens of EU rights because they live in Scotland; but the treaties are clear that EU citizenship is the corollary of citizenship of a member-state. And Scotland could not become a member-state until the relevant new treaty provisions came into force. Whether this circle can be squared is as yet uncertain. Don't believe anyone who says it definitely can or can't be.

2. Remember it isn't just up to the Scots

… or London, or even Brussels. All existing member-states would have to agree that Scotland could join, with their governments agreeing the terms, and their parliaments (or referendums) ratifying their decision. National governments have a natural aversion to secession: several EU countries that were ready to fight to stop Serbian ethnic cleansing in Kosovo can't yet bring themselves to recognise the fact of Kosovar independence from Belgrade. The oft-drawn parallel between Scottish and Catalan separatism is not exact: the Scots and English have always had different legal systems, and Scottish nationalists want to keep the Crown. Of course, the arguments for respecting the democratic will of the Scots would be strong; but so, in some EU capitals, might be the desire to demonstrate to domestic secessionists that the road to independent EU membership could be long and winding. Other countries could have other preoccupations; and nothing happens unless everyone signs up to everything.

3. Aim to settle the divorce terms first

… because the EU will adamantly refuse to mediate between London and Edinburgh. Getting involved in a domestic dispute between constituent parts of a member-state is off-limits for the Brussels institutions and would be anathema to other member-states. So full prior London/Edinburgh agreement on, for example, the division of UK assets and liabilities, and future currency and regulatory arrangements, would be a certain Brussels pre-condition for membership. Continuing disputes over an issue unrelated to EU membership could also cause knock-on delays if it meant that full UK government co-operation in Brussels was for a time withheld: the Trident nuclear submarines might be one such issue (the nationalists say they would insist on the Royal Navy vacating the Scottish bases that are essential for its strategic nuclear force). Unravelling the skein of the union would in any case take time, even with goodwill on both sides.

4. Negotiations should be easier

… with the EU than with London, provided Scottish negotiating aims are realistic. The Scots already respect all current EU laws, though discrimination against their English, Welsh and Northern Irish neighbours, for example on student fees, would become a breach of EU law when the two countries became separate member-states, and would have to cease. Those who argue that the Scots would be required to adopt the euro haven't noticed that Scotland would fail all the economic tests for candidates for eurozone membership: a declaration of intent to join at an appropriate unspecified future date would probably suffice. Equally implausible is the suggestion that the Scots would be obliged to join the Schengen area of passport-free travel, leaving the current UK/Ireland common travel area. Common sense would prevail, making it probably enough for Edinburgh to express a willingness to join Schengen whenever Dublin and London do. Voting weight in the Council is now determined automatically, by reference to population, and Scotland could expect to keep its six seats in the European Parliament (and might indeed be able to mount a case for an extra three, on grounds of parity with Denmark, whose population is also 5 million.) But on the price of membership, Scotland's net contribution to the EU budget, the nationalists would need to drop their current breezy claim that they would be due a rebate similar to that secured for the UK by Margaret Thatcher in 1984. Existing member-states, many much poorer in per capita terms than Scotland, would not agree to pay more to let the Scots pay less. Mrs Thatcher's success was the product of a long campaign, fought from inside: the chutzpah of simultaneously seeking to join the club and pay a reduced subscription would be an obvious deal-breaker. And, in EU legal terms, Scotland would be outside, knocking at the accession door, because Brussels is clear that…

5. Leaving the UK would mean leaving the EU

... in strict constitutional terms. This legal view has been spelt out by the president of the European Council and successive Commission presidents, now including president-designate Jean-Claude Juncker. The residual UK, minus Scotland, would be the ‘continuator’ state, and remain at the EU table. Scotland, as a new state, would need to ask, from outside, for a new seat: the relevant accession procedures are laid down in Article 49 of the Treaty on European Union. Nationalists in Scotland disagree, and claim that separate membership could be achieved seamlessly from within, using Article 48, which sets out how existing member-states can seek to change the treaties. It is not clear, however, how they envisage overturning established Brussels doctrine, and there are strong legal arguments against using a general article (48) for an issue (admitting a new member) that is covered by specific provisions (Article 49). The key point is that the Scots cannot make up the rules. They may claim that the referee is wrong, but it is he who runs the game. It follows that ...

6. Minimising disruption matters most

A more constructive aim for Edinburgh would be to focus on seeking transitional arrangements to maintain the EU status of Scottish citizens during the hiatus between secession from the UK and full membership of the EU. Even in the highly unlikely event that the Scots managed to persuade the referee to reverse his ruling, and turn to Article 48, facilitating pre-independence negotiations, such a gap looks unavoidable, for two reasons.
(i) Recognition. Only sovereign states can sign treaties. Scotland would not be sovereign until independent. And before the Scots could sign an EU accession treaty, all existing EU member-states would have to recognise that independence.
(ii) Ratification. EU treaties do not enter into force until ratified by all signatory states. This takes time: in Belgium, for example, seven separate legislatures have to approve. And the EU is a convoy, moving at the speed of the slowest ship.
Countries whose accession treaties have been agreed but not yet universally ratified are usually allowed an observer's seat in Council of Ministers, though the right to vote and to nominate a commissioner has to await full membership. What would be novel (though not necessarily unachievable, given that the situation itself is unprecedented) would be an agreement that, de facto while not yet de jure, Scottish enterprises, farmers, fishermen, workers and students should retain their EU rights. This is what matters most, because ...

7. It would all take longer than you think

Settling the intra-UK divorce terms, a pre-condition for any EU negotiation, won't be easy. Even when campaign tempers cool, actual secession by 2016 looks unrealistic. The 2015 UK election will supervene, and may be followed by the distraction of a UK EU renegotiation and 2017 referendum, occupying Brussels' attention, and perhaps tempting other member-states to adopt a policy of wait and see. Scotland's position in the EU would clearly be very different if the residual UK were to leave. Negotiation (or informal pre-negotiation) before independence could be obstructed by other member-states (point 2 above); or held up by intransigence in London or Edinburgh (point 3): by over-bidding by Edinburgh (point 4); or by constitutional quarrels over the rules (point 5). And even if substantive terms, and sensible transitional arrangements, had been informally agreed before Scottish secession, the twin hurdles of recognition and ratification (point 6) would still lie ahead. So don't hold your breath.

8. Anglo-Scottish teamwork would be critical

To maximise the chances of escaping from the constitutional catch-22 that Brussels institutions may negotiate only with states, pre-independence discussions with Brussels would have to be led, at least notionally, by the London government. Nationalists in Edinburgh now recoil at the idea; and so might bad losers in London if the nationalists win on September 18th. Yet co-operation would be essential to success in Brussels, and UK embassies across the EU would need to work to an agreed UK/Scottish brief. And, apart from considerations of duty and equity, it would be in London's self-interest to help the Scots: if no transitional arrangements for Scotland were in place when the UK broke up, the task of manning the EU customs union's new frontier on the England/Scotland Border would fall to those south of Hadrian's Wall.

9. Remember point 1: No-one really knows

… for sure what a Yes on 18th September would mean for Scotland and the EU. I certainly don't, though I know the EU quite well. Sir David Edward, a Scotsman who served with distinction as a judge in the European Court of Justice, is right to ask Scots to question – in an article earlier this month – the purpose of "launching ourselves on this sea of uncertainty."

Full disclosure. I admit that, as a diaspora Scot disenfranchised by David Cameron's casual concessions to Alex Salmond, I hate the idea of my countrymen being obliged to choose between being Scottish and being British. I think the dichotomy as false as that between being British and European. Wider horizons create greater opportunities; and just as EU membership has greatly benefitted the British, so the 1707 Union has hugely benefitted the Scots. Long may both last.

Lord Kerr of Kinlochard is a former permanent under-secretary in the Foreign and Commonwealth Office and is chairman of the Centre for European Reform.

Sharp fall looms among top ranks of UK officials in EU Commission

Sharp fall looms among top ranks of UK officials in EU Commission

Sharp fall looms among top ranks of UK officials in EU Commission

By Charles Grant, 20 July 2014
From Financial Times

Jonathan Hill, UK's low-key 'fixer' sent to Brussels

Jonathan Hill, UK's low-key 'fixer' sent to Brussels

Jonathan Hill, UK's low-key 'fixer' sent to Brussels

By Charles Grant, 15 July 2014
From Agence France Presse

Link to press quote:
http://www.globalpost.com/dispatch/news/afp/140715/jonathan-hill-uks-low-key-fixer-sent-brussels

Time for Labour to lead on clean air

Time for Labour to lead on clean air

Time for Labour to lead on clean air

Written by Stephen Tindale, 11 July 2014
From Fabian Society

Agata Gostyńska

Agata Gostyńska

Agata Gostyńska

Research fellow

Biography

Job title: 
Research fellow
Profile image: 
Agata Gostyńska

Agata Gostyńska is a research fellow at the Centre for European Reform. Agata works on the EU institutional architecture, EU decision making process, institutional dimension of the EU economic governance, differentiated integration and on Polish European policy.

Extras
Areas of expertise: 

European Parliament, European Council, European Commission, rotating presidency of the EU Council, inter-institutional relations, Lisbon Treaty, Economic and Monetary Union, differentiated integration, Polish European Policy.

Areas of expertise

European Parliament, European Council, European Commission, rotating presidency of the EU Council, inter-institutional relations, Lisbon Treaty, Economic and Monetary Union, differentiated integration, Polish European Policy.

Languages spoken

English, German, Polish

Will the eurozone gang up on Britain?

Will the eurozone gang up on Britain?

Will the eurozone gang up on Britain?

Written by John Springford, 14 July 2014

Both British eurosceptics and Britain’s continental critics believe some or all of the following: that the eurozone will have to integrate further; that the priorities of the eurozone will predominate over those of the euro ‘outs’; and that David Cameron will win nothing but minor reforms in any negotation.

In this view, the “remorseless logic” of eurozone integration will marginalise Britain to such an extent that it will be forced to leave the EU, since it will not join the euro. This argument has some merits – there is little reason to believe that the British have enough political capital to lead a push for major EU reform, for example. But the economic interests of the ‘ins’ and ‘outs’ are aligned to a greater degree than they are opposed. If these interests are managed with care, there is no reason why Britain should leave the EU.

The eurozone needs to integrate in two ways to become more stable. It needs a more integrated market for capital and labour, so that workers and capital can move easily to the places where they can be most productively employed. This would help it to respond to shocks more rapidly, and requires a deeper single market – one of Britain’s reform priorities. The eurozone also needs a way to share risk – a common budget, a common backstop for the banking sector, and further debt mutualisation – to help stabilise demand in countries in recession. There is little appetite in the eurozone for such a system at present, but the next downturn may force it to reconsider. Greater integration would make its economy less fragile – and would in turn help Britain. The eurozone is Britain’s largest trading partner, and its crisis has badly hit British exports, putting paid to hopes of an export-led recovery.

British fears that a eurozone ‘caucus’ will materialise, particularly on single market regulation, are overblown. The Germans, Finnish and Dutch have little interest in, say, extending ‘social Europe’ – and align themselves more with the British on social and employment rules. Western Europeans in general are as concerned about immigration from Central and Eastern Europe as the British, even if the tone of their newspapers and mainstream politicians is less hostile. Italian prime minister Matteo Renzi has made a deeper single market for services one of his priorities.

On extending the single market and free trade agreements, it is an exaggeration to say that eurozone member-states constitute a protectionist bloc, and are opposed to market liberalisation. To understand why, consider the Organisation for Economic Co-operation and Development’s (OECD) product market regulation indicators, which show how keen different EU member-states are to regulate their economies. Between 1998 and 2013, the eurozone and other EU member-states converged on the UK, as their levels of product market regulation were reduced more quickly than Britain’s (see Chart 1). Their overall level of product market regulation is now only marginally above that of the UK (the index ranks countries’ level of regulation between 0 and 6).

Chart 1. OECD index of product market regulation



Chart 2 shows the OECD’s measure of the willingness of countries to open their markets to foreign competition. It shows the same pattern of convergence as the overall index, and offers little evidence that the eurozone will club together to block free trade deals or the European Commission’s initiatives to extend the single market.

Chart 2. OECD barriers to trade and investment index



If the eurozone ‘caucus’ is going to be a problem, it will be in decisions on financial regulation. The City of London’s position as the EU’s dominant wholesale financial centre – and one that is outside the eurozone – would seem to suggest a major clash of interests. Many Britons fear that the the rest of the eurozone will gang up on the City in an attempt to shift activity to Frankfurt and Paris. However, the situation is more complex than City of London banks, the British media and eurosceptic think tanks suggest.

The UK has already won a double majority voting system on the European Banking Authority – the agency that writes EU ‘prudential’ financial rules, which seek to prevent the financial system from blowing up. Under the system, both eurozone and non-eurozone members must find a majority in favour of a financial rule. Eventually, if other member-states join the single currency, this system will have to be revisited, as it would end up giving Britain disproportionate power over regulation. But this is likely to be a long time coming: Poland, the Czech Republic, Sweden, Hungary, Croatia, Romania and Bulgaria do not look likely to join the single currency any time soon. Denmark has a opt-out from the euro, like the UK.

Moreover, British and eurozone member-states do not have serious differences over prudential regulation. The UK has gone further than most other EU member-states to force their banks to raise capital and liquidity, to reduce leverage, and to try to ringfence retail and investment banking. Before the crisis, the UK was rightly accused of running a light-touch regime. This charge no longer holds: now the problem lies in the difficulty of creating a eurozone banking union that is capable of preventing banking crises and limiting their effects when they do occur.

There are areas where the UK is losing its battles, but it is far from clear that a eurozone ‘caucus’ is to blame. The financial transactions tax is likely to be a lower tax on a smaller number of financial instruments than the original proposal, because the member-states that have signed up to it – several eurozone members have not – cannot agree on how much activity it should catch in its net. It may end up covering only shares and some derivatives. If so, the financial transactions tax would be similar to the UK’s stamp duty on shares, which also has extraterritorial reach: an investor from another EU member-state that sells a share in a British company must pay UK stamp duty. And the European Court of Justice has yet to rule on the final proposal. It may find that the extraterritorial scope of the tax means that it is illegal under the EU treaties (as the European Council's legal service has found).

But is not the European Central Bank’s (ECB) ‘location policy’ a sign of increasing regulatory protectionism on the part of the eurozone? Last week, the European Court of Justice started hearing evidence on the British government’s case against the policy, and if it rules in favour of the ECJ, City clearing houses specialising in euro-denominated trading will relocate across the Channel. The British media has turned the case into a test of the EU institutions’ willingness to balance British interests against those of the eurozone. The ECB’s rationale for the policy is not without justification: it argues that it should supervise clearing houses, since they will need emergency central bank lending in euros – ‘liquidity’ – if they get into trouble. Clearing houses are increasingly important bearers of risk, because complex derivatives – financial contracts that were at the centre of the 2008 crash – are being standardised and investors forced to trade them on exchanges. Regulators hope that this will make the risks in the financial system more transparent. If a clearing house gets into trouble, derivatives markets will freeze, unless the central bank keeps it going with liquidity. And in trades denominated in euros, most participants are large eurozone-based banks: the ECB has a legitimate interest in the supervision of this activity. The British should not blame eurozone protectionism for the ECJ’s ruling, if it concurs with the ECB.

There are a few other areas where it is possible to envisage conflict in coming years. The resolution of a eurozone headquartered bank with large operations in the City of London is one. The eurozone and the UK government may have opposing interests when it comes to resolution: eurozone authorities will seek control of the bank’s assets, even if a part of its balance sheet is under the Bank of England’s jurisdiction. There are unresolved questions about how banks that get into trouble in London will access ECB liquidity.

But the City of London’s position as the EU’s largest wholesale centre does not appear to be severely imperilled by the eurozone. And even where conflicts do arise, as a member of the EU, it can form alliances with other member-states to make changes to proposals and defend its single market rights at the ECJ. Rather, the potential for serious conflict lies more in the EU’s institutions and priorities than its rules. The solution lies in diplomacy.

The British government will have to get used to the fact that the top jobs in the next European Commission will mostly go to eurozone member-states, as the UK is the only rich and large EU country that is not in the euro. There is some sympathy in Northern Europe for the UK’s position. But the British are squandering this sympathy, by pursuing a strategy of threats, vetoes, and red lines. The source of the trouble is the Conservative demand for a renegotiated settlement as the price of the UK’s continued membership of the EU. This strategy was intended to appease English euroscepticism while securing policy changes at the EU level, but it has stoked anti-British sentiment to the degree that other member-states fear making common cause with the UK. And the strategy makes it harder to create the conditions for compromise between the interests of the eurozone, the UK government and the City of London that is needed to make Britain’s position – in the EU, but not in the eurozone – legitimate on both sides of the Channel.

The route to a new EU settlement will be slow and tortuous. The eurozone will probably have to integrate further to flourish, and, over time, some member-states who have committed to joining will do so. But there are few reasons why a political settlement between members of the single market and of the eurozone cannot be reached, if politicians will only try.

John Springford is senior research fellow at the Centre for European Reform.

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