The Bear’s Lair: Say No to Scottish and Catalonian independence!

In general I am in favor of self-determination for small nations. I would have been on South Carolina’s side in 1861 (though not on the issue of slavery, obviously), and in 1991 I was on the side of Slovenia, Croatia, Macedonia and the other dissolving parts of the former Yugoslavia. However, in today’s world it has become more difficult for small nations to be economically self-sustaining, so they need to be a member of a larger grouping. The problem is to find a grouping that is large enough, crosses no cultural fault lines, yet offers an adequate measure of influence over the central bureaucracy to preserve rights, freedoms and local culture. The United Kingdom, Spain and the former Austria-Hungary pass these tests; the former Yugoslavia and the European Union fail them.

Scotland’s First Minister Nicola Sturgeon’s proclamation on March 13 that yet another independence referendum would be needed for Scotland was an example of a self-determination movement that may have gone too far. If a referendum is held in the first half of 2019 (when the terms for the British Brexit are known) the chances are that Scotland will vote for separation from Britain and reunion with the EU.

From the viewpoint of the ordinary Scots’ living standards, that will be a major mistake. Scotland’s oil, which appeared to be a major money-spinner at the time of the 2014 referendum, today yields very little in revenues to the government, because the relatively high production costs of the old fields in the North Sea are close to today’s oil price. In consequence, the Scottish budget, considered on a stand-alone basis, is in deficit to the tune of about 9.5% of GDP. Even if Scotland were allowed to break away from the UK without assuming a proportionate share of UK debt, it would run into budgetary and debt problems very quickly.

There are two further problems that would make an independent EU-member Scotland’s future a grim one. First, it would have an appalling quality of government. The Scottish nationalists have shown a tendency to overspend and award themselves social programs that would be unchecked in the EU. Second, since Scotland would enter the EU as a relatively rich member, it would benefit from only modest subsidies from the EU’s various slush funds – and the other poorer members of Eastern and Southern Europe would unite to make sure that its budget and subsidy position would remain inferior. (The EU would itself be suffering severe budgetary problems following Brexit, since it would have the same amount of bureaucracy and regulation, with one less major paymaster to write checks for it, England and Wales having departed.)

Given those problems, an independent Scotland within the EU would be Greece without the handouts; its living standards would rapidly descend below those of Portugal and Malta to those of Romania and Bulgaria. Indeed, badly run and largely agricultural, without much in the way of world-scale industries, a corrupt, overspending government, and a national language (Gaelic) spoken by nobody else, it would bear a considerable resemblance to Romania. With all those castles and the Loch Ness monster, it could like Romania make a nice little income from the seekers of paranormal pleasure.

Small countries can usefully join free trade areas of any size, provided all the economies in the FTA are of relatively equal capabilities and living standards. That is probably their best destiny. If the EU had remained a simple free trade area, as British voters were assured in the 1970s it was, small countries like Scotland could prosper within it. Indeed, membership of a substantial free trade area would provide a competitive goad to the Scottish economy, preventing its governments from wasting too much of the national wealth on social programs and boondoggles.

However, once an association of nations is more than a free trade area, its governance becomes critical to the economic health of countries within it. The Act of Union in 1707 was in the long run helpful to Scotland, because it subjected it to the more economically sophisticated government of Great Britain (even if much of the sophistication was provided by Scotsmen like Adam Smith.) Initially however, the benefits from better government were modest, the rip-offs by better connected English institutions were considerable, and the resentments were ferocious.

Daniel Defoe, who had been an active supporter of Union in 1707, was surprised when he toured Scotland in 1724-25 that many previously prosperous areas such as Galloway had fallen on hard times, while the Highlanders were so resentful of the English that he was forced to pretend to be a Frenchman, a much more acceptable variety of foreigner. Only in Glasgow were there signs of increased prosperity; the Glasgow merchants were making a very good business with the American colonial market, which the Act of Union had opened up. Nevertheless, after the spasm of the ’45, Scotland became steadily richer and more important within the British political system, with the Earl of Bute (1762-63) being only the first of several successful Scottish Prime Ministers.

No such success is likely for Scotland within the European Union. Scotland is far too small to have any significant effect on EU decisions, which will be taken without regard to its interests. The EU bureaucracy has no free market tradition as did the 18th Century London government, and so will reinforce the economically feckless tendencies of the existing Scottish authorities. The ambitious and capable will leave, as do those from Romania and Bulgaria currently, to make a life either in wealthy Germany or in familiar and welcoming Britain. Just as for other small countries without special influence at the center (Belgium and Luxembourg are special cases) the EU will be a vast disappointment, bringing economic sclerosis and massive corruption and disillusionment.

The same considerations have applied to other small countries that have been members of larger unions. Slovenia, Croatia, Hungary, the Czech Republic and Slovakia on the whole did quite well out of Austria-Hungary, and suffered badly when it was broken up. Their main grievance, which would have been soluble under a reforming Emperor such as the unfortunate Franz Ferdinand or the young Karl I, was that the minority nationalities did not play a sufficient role in the government of the Empire as a whole. Too many of the top jobs were taken by Austrian Germans; there were not enough equivalents of the Earl of Bute – this problem was solved for Hungarians in 1867, but not for the Empire’s Slavic peoples. Nevertheless, Austria-Hungary was large enough to be a successful economy, with a global cultural and intellectual footprint considerably larger than its economic one.

The former Yugoslavia, conversely, did little good for its constituent states. It was itself not large enough to secure a solid position in the world economy, and its governments were strongly anti-free-market, either nationalist before 1941 or Communist after 1945. Its constituent states had little economically in common and were culturally separated by the fault-line between Catholic and Orthodox Europe, as well as by a mélange of languages. Consequently, it oppressed and impoverished its member states rather than uplifting them. It was established by the vengeful victors at the Versailles Peace Conference, breaking up previous well-established links, and no proper referendum was held in the Austro-Hungarian territories subjected to Belgrade. At least after 1945 its top management was adequately representative, Marshal Josip Tito being of mixed Slovene-Croat ancestry.

Catalonia and Belgium are the other EU countries where separatism is a live issue. Belgium is probably the one country that could split and prosper within the EU; its capital, Brussels, is also the capital of the EU while its Walloon people are closely tied to France, a major EU power. Moreover, the wealthy EU bureaucracy is itself a major source of income for the country.

Catalonia would seem to suffer similar disadvantages to Scotland from a separation. Like Scotland, it has been a substantial and active part of a larger polity for a very long time – in its case, since 1469. While its larger polity was badly run for centuries, it is now rather better managed than the EU as a whole, so there is no advantage in exchanging a close-by, influenceable bureaucracy for a distant one over which Catalonia would have no sway. Economically, Catalonia is the most vibrant part of Spain; it would gain nothing by reorienting itself to Brussels, although it might cause substantial damage to the rest of Spain, more so than Scotland would cause in separating from Britain. As with other small countries, it might make sense for Catalonia to be an independent country within a European free trade area, but that is not what is on offer.

In the pre-industrial world, where trade was mostly carried out in commodities and over short distances, there was no particular advantage other than military security in a small country engulfing itself in a larger one. Thus, the Italian and German city states remained independent until the middle 19th century. Today, there is an economic advantage in being a member of a substantial trading bloc, but Britain and Spain are amply large enough to compete globally, as was the former Austria-Hungary. Separatist movements should thus beware lest they make their peoples worse off.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)