As an instinctive opponent of Scottish independence but supporter of Britain leaving the EU I have to face an epistemological reality: the two positions are at first sight inconsistent with each other. As a rational man, I find that disquieting, so I thought I’d look at the economic effects of both moves and determine whether, economically at least, my instincts were right or whether ethnic sentimentality had overwhelmed me.
Of course I could just rationalize my divergent philosophical positions by claiming nostalgia, perhaps for the early 1950s, the last period when popular music was pleasant to listen to (How much DID the Two Little Men in Flying Saucers pay for that Doggie in the Window, anyway?) with Winston Churchill as Prime Minister, a Tory government back in office after the post-war gloom, rationing finally going, cricket’s Ashes recovered after 19 years and the glorious all-British, non-European reality of Her Majesty’s coronation.
But there’s just one thing wrong with that nostalgia: in 1953 Britain was still the center of a vast Empire and by 1963, when the Empire was dissipating, Britain was already desperately clamoring to join the precursor of the EU. Since Britain already had substantial colonial possessions in 1707, when the Act of Union with Scotland was passed, the status quo I am searching for, with England (and Wales and possibly Northern Ireland) united with Scotland but otherwise alone in the world, has never existed.
To a large extent, that explains why dreams of Scottish independence began to flourish only in the 1960s. Before that, the economic advantages of Empire were considerable, and not replicable by an independent Scotland, as it had found out to its cost with the Darien scheme of 1698-1700. The country enjoyed a huge economic upsurge in the eighteenth century, as living standards approached those of southern England and Scottish merchants began to enjoy the wider Imperial trading possibilities – this was also accompanied by the intellectual flowering of the Scottish Enlightenment.
The nineteenth century was almost as successful, with Scotsmen enjoying administrative supremacy within the Empire as well as continued economic prosperity. Only with the failure of shipbuilding in the depressed 1930s, and the decline in heavy industry beginning after World War I, did Scottish fortunes fall back. However, after 1960 there was no longer an Empire to run, so even though the last three British prime ministers have all been of Scottish ancestry, the opportunities within the Union have no longer seemed so glittering. Add an unpleasant myth of English oppression stoked by Hollywood, and the surge in support for independence is readily explained.
One further support for the independence faction comes from the EU. Even if a wholly independent Scotland is a somewhat frightening prospect, independence-seeking Scotsmen can comfort themselves that the EU is a collection of 28 states, several of them smaller than Scotland both geographically and in population, so in a sense Scotland would not be leaving the wider European “family.” Add in a feeling that the politics of Brussels are closer to the big-government norms of Edinburgh than are those of London (at least under a Tory government) and you have a seductive cocktail of inducements for independence.
On closer examination however, the example of other small states within the EU is less inspiring. With a population of 5.3 million and area of 79,000 square kilometers, Scotland would be smaller than all but 9 EU countries by population although it would rank fifteenth by area, just ahead of Portugal and Austria. However with the exception of Luxemburg, a banking center and something of a “teacher’s pet” for the EU, with its highest living standards and the new European Commission President, the economies of countries smaller than Scotland are mostly not a pretty sight. Croatia is in an almost permanent recession while Cyprus, Ireland and Slovenia have been subjected to forced banking bailouts.
Admittedly Malta and the Baltic states are in reasonable shape, but Estonia and Latvia, at least, have very different approaches to economic management from the Scottish model, with Estonia running a budget deficit of only 0.2% of its GDP compared to Scotland’s estimated 8.3% of GDP in 2013, even including a geographical share of North Sea oil revenue. Without oil revenue, Scotland’s budget deficit would have been 14% of GDP.
In the medium term, oil and public policy are the major weaknesses in Scotland’s position. From the oil perspective, Scotland would have done much better to vote for independence in the 1970s, in which case it could have built up a Norway-like trust fund from the proceeds of oil sales, which peaked at 2.82 million barrels/day in 1999. More recently, oil output has been declining fast, with output expected by OPEC to fall by 70,000 barrels/day to 800,000 in 2014. Admittedly Scotland has fracking potential but so, it appears, does everywhere else.
Politically, Scotland since the 1999 devolution has persistently shown a tendency to run large budget deficits with more spending than the United Kingdom as a whole – and given the spending propensities of the Blair/Brown governments that is saying something. Currently the three parties with political leverage in Scotland all favor higher public spending, and the country’s economic philosophy is a far cry from the austere Enlightenment rigor of Adam Smith and Dugald Stewart. Declining oil revenues, little ability to resist impositions from Brussels, a huge and unstable banking sector and an overstuffed bureaucracy – those don’t look to me like the elements of a successful 21st Century economy. For the sake of the Scots themselves as well as for sentimental reasons, I hope they vote “no” in the referendum on September 18.
The British case for independence from the EU is very different. For a start, it was clearly economic madness to enter it, though such madness wasn’t surprising from a prime minister, Harold Macmillan, who was on record as wanting to abolish the Stock Exchange and nationalize the banks. In 1960 Britain had close and special trading relationships with a group of countries, the Commonwealth, with cheap labor and cheap resources, precisely the right complements for Britain’s highly skilled but under-resourced economy. Building a closer relationship with the Commonwealth would have made far more sense than entering into a restrictive arrangement with a group of countries with the same economic weaknesses as Britain, and with a philosophical tendency to worsen those weaknesses through over-expanding government.
There was no structural backing for such a closer Commonwealth relationship, because the country had foolishly allowed Maynard Keynes to negotiate away the admirable if limited 1932 Imperial Preference scheme at the Bretton Woods conference in 1944. Still Imperial Preference could have been re-created, though a British government doing so would have had to float or devalue sterling first, to prevent the United States blackmailing British policymakers by creating an exchange rate crisis at it had during the 1956 Suez affair.
But as we know, the Churchill government had looked seriously at floating the pound through the ROBOT scheme of 1952 and only the economic illiteracy of Churchill himself, Anthony Eden and Macmillan had prevented it from doing so. A revival of Imperial Preference might well have gained support from some of the newly independent Commonwealth governments, whose economies would have been strengthened thereby, and would surely have been supported by the Australia of Robert Menzies (1949-66) and the Canada of John Diefenbaker (1957-63).
A Britain leaving the EU today would not be able to revive Imperial Preference; too much water has flowed under the bridge for that to be possible, so the scale is more balanced than in 1960. However its relative strengths and weaknesses remain the same and alliance with resource-rich emerging markets would fit better with Britain’s priorities and capabilities than membership of the sclerotic EU. There probably isn’t a deal to be done whereby British administrators assumed the management of say Argentina and Congo on a contract basis, bringing them the benefits of competent free-market government in return for access to resources and capital, but it would be highly beneficial to the Argentine and Congolese people (in Argentina’s case, reviving the arrangement that made the country the world’s tenth richest in 1914.)
If Britain could source both food and raw materials at the lowest prices on world markets, its people’s living standards would benefit far more than from EU protectionism. Even without preferential deals, in a world closer to full free trade than in 1960 Britain can compete successfully, provided sterling’s exchange rate is allowed to fall to a level at which its exports are competitive. To achieve this, costs must be cut out of government and restrictive practices ended, but leaving the EU would allow Britain to do this (doubtless over loud Scottish objections) as well as weakening sterling. Most important, the City of London must be allowed to return to its pre-1986 format, with smaller, largely independent participants and a focus on serving financial needs of the world as a whole.
A successful Britain independent of existing economic power blocs would look much more like the 1660-1832 Britain that reached the apogee of its economic predominance and invented the Industrial Revolution than it would resemble the bloated-state Britain of the late twentieth century. There would be losers from the transition but for most, it would be well worth it.
Sentimentally, there are reasons for Scotland to leave Britain and for Britain to remain in the EU. But economically, both countries would benefit immensely in the long run by the contrary choices.
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(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.)