4 Key Reasons the Scottish Referendum is Crucial to Europe
An independent Scotland will give a new momentum to Europe's pro-independence regions.

Scotland will vote in a referendum on independence from the UK this month. The referendum is a "Yes", or "No" vote on the question “Should Scotland be an independent country?”

In the event of a “Yes” vote, the Scottish government aims to complete the negotiations and transition to independence before the Scottish government elections in May 2016.

Although past and recent opinion polls suggest that the “No” vote would win and Scotland would stay in the UK, the “Yes Scotland” campaign appears to be in a win-win situation, as any credible showing (in this author’s view it would be any result above 30% support for the “Yes” vote) will likely result in further devolution of fiscal and other decision-making powers to Scotland.

This will have several crucial consequences to Europe as a whole.

Should Scotland be an Independent Country.dib

Stats on 74 polls from Feb 2013 to Aug 2014 from various polling companies. Source: whatscotlandthinks.org

1. A new wave of pro-independence movements in Europe

A potential “Yes” vote would have large geopolitical ramifications across Europe as other pro-independence regions and autonomous areas may follow the Scottish example. The Catalan region and the Catalan government in Spain are already planning to hold a referendum on independence on 9th November 2014; the Basque country in Northern Spain also has more devolved powers and can push for even further devolution; in Belgium the Dutch-speaking Flanders is pushing for greater autonomy from Wallonia; and in Italy the Northern League is demanding self-rule for a part of the North named Padania.

In addition to these semi-autonomous regions, there are many minority groups across Europe, e.g. Russians in Moldova, Ukraine, Latvia and Estonia, Hungarians in Romania and etc. All of them are keenly aware of the Scottish referendum and its outcome will influence their plans and struggles in the future. The question remains how the European Union will react to a new wave of movements for independence and greater devolution. 

2. A much more Eurosceptic UK and Brexit

A potential independence of Scotland may also raise the issue of a possible exit for the rest of UK (rUK) from the European Union. The possibility of a Brexit has already been raised in January 2013 when Prime Minister Cameron discussed an  “in/out” referendum on British membership of the EU in 2017. This idea supported by many members of the Conservative Party has recently been endorsed by the Mayor of London Boris Johnson. As Scotland is widely considered much more pro-European than England, a potential Scottish independence from the UK  will likely increase separationist pressure in the rUK.

The geopolitical ramifications are clearly the more visible, more headline-catching risks that could impact the European politics and regions. However there are other, less visible, yet very, very important economic implications and political implications and many decisions which require Europe’s attention:

3. Businesses and The Economy

An independent Scotland would lead to lower economies of scale for businesses and likely lower productivity for rUK and Scotland via increased trade/geographical barriers and impairment of economic, productive and trade ties between the two countries. 

This in turn may lead to higher production and trade costs, and impairment of productive and trade relations between the EU and the rUK, and the EU and independent Scotland. As a result we could see a more active EU policy  for faster and better engagement of the newly independent state/s. There may even be structural and cohesion funds used to reduce this adjustment period.

4. Re-Admission Into the European Union

An independent Scotland, as it would likely be in the cases of independent Catalonia, Basque country or Padania, would likely ask for EU membership, but also participation in EMU (Economic and Monetary Union), as well as the institutional (ECB) and currency (Euro) frameworks of the European Union.

Potential admission to the EU would require meeting the Acquis communautaire - the cumulative body of European Community laws, comprising the EC’s objectives, substantive rules, policies and, in particular, the primary and secondary legislation and case law – all of which form part of the legal order of the European Union. The newly independent countries would also need to meet the Maastricht criteria to qualify for EMU entry. The key questions here are, would the newly independent country be able to meet these requirements, and to what degree would the EU be offering a helping hand.

The preference for participation in the EMU would be the 1st (in the case of Catalania, Padania, etc) and 2nd (in the case of Scotland)  best options for these newly independent states. In the case of Scotland it would be 2nd best only to a Monetary Union and Institutional Union with the UK, as the Scottish economy, trade and finances are highly related to the UK’s. The transaction costs would indeed be lower for Scotland under a Monetary Union with the UK as presented in the chart below.

Monetary Arrangements for Independent Scotland.png

The reliance on an already established and stable institutional framework, and their dependence on the ECB’s functions as monetary policy setter, lender of last resort and prudential supervisor would add credibility to the economic policy making and institutional frameworks of these newly independent countries.

The Scottish referendum for independence is indeed important for Scotland, as well as for other European regions and areas, but it is also very important for the future of the EU, as well as to the Union’s geopolitical and economic policies.