Scottish Referendum Precipitates UK Exit

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Wikistrat recently concluded a geostrategic simulation titled “Britain Exits the European Union.” This crowdsourced simulation explored scenario pathways and drivers for Britain exiting the European Union.

One entry, named “Scottish Referendum Precipitates UK Exit,” projected Scottish independence as both the trigger and the driver to UK separation from Brussels.

Here’s how this plays out: Until the early 2010s, nobody really believed that the Scottish movement for independence would succeed. Although a majority of the representatives elected to the devolve Scottish Parliament in 2011 belonged to pro-independence parties (the SNP mostly), about a third of the population actually supported independence.

However, a strong political campaign by pro-independence parties, a lack of clarity on what the consequences of a rupture might be, a weak response from the U.K. government and Conservative Party who underestimated the threat, and complacency on the part of weakened Scottish traditional party membership led to a poor turn-out among anti-independence voters on September 18. With barely 65% of the voters showing up at the polls, but with a fantastic turn-out of the pro-independence parties who want to “send London a message,” the “yeas” have it.

Behind the superior political campaigning trigger, there is a growing rift between Scotland and England over policy choices and the EU in particular. Scots have become convinced that they can, in fact, do better without England. The fact that 80% of England’s oil production lies in Scottish waters is one of the major sources of comfort and reassurance. They are also increasingly tired and wary of the U.K.’s anti-European zeal which they believe is counterproductive.

The Scottish referendum inflames UKIP. The Scottish exercise in self-determination emboldens the UKIP in England on the grounds that if Scotland can withdraw from the U.K. and the U.K. government can peacefully accommodate such a vote, then surely, the U.K. is entitled to exercise the same right with regard to the EU and the EU better be ready to accept the verdict. Their slogan: “What is good enough for them is good enough for us.” In that context, David Cameron cannot backpedal on his promised in-or-out referendum. The rest is mechanical: without the four million Scottish voters, a majority of whom are pro-EU, those favoring leaving the EU win in a landslide.

The dual votes in Scotland and the U.K. present the EU with unprecedented and tough challenges. There is no historical precedent for how a state would make a transition from current inclusion in the EU as province to EU membership in its own right. Jose Manual Barroso, president of the Commission, has previously stated that there is no “inheritance” principle here and that Scotland would have to (re)apply for membership. But there are still plenty of uncertainties. Scotland dreams of a streamlined process that will mean no interruption/disruption to its businesses. European bureaucrats are not so sure. They fear that adjudicating the Scottish case without taking into consideration the U.K. situation may cause unforeseen negative consequences. First of all, they want to proceed cautiously.

As soon after the U.K. no-vote of September 2015, David Cameron sends the U.K.’s notification to secede to the European Council. In January 2016, negotiations for a withdrawal agreement begin. Meanwhile, Scotland officially becomes independent in March 2016.

Withdrawal negotiations between the U.K. and the EU are painful and complicated by Scotland’s separation from the U.K. and request for admission into the EU. The U.K. wanted Scotland to pre-negotiate the terms of its accession to independence ahead of the referendum, a demand Scotland refused. As a result, London is in the position to negotiate both deals at the same time. London’s first market is the EU and its starting negotiating position is to secure access to the single economic market. But Brussels is not so keen on granting it. It has long resented the English EU-bashing and continental leaders in Germany and France see an opportunity to set the conditions for diminishing the global power of the City and empowering European competitors such as Frankfurt and Paris. Moreover, the EU is worried that granting too good a deal to the U.K. will set a bad precedent for other nations who might find the burden of belonging to the body too high.

Meanwhile, the Scots arrive at the negotiating table with a more accommodating mood, a belief that they have control of serious assets (oil and gas), and a desire to have the EU as an ally in its negotiations over the division of U.K. assets and liabilities. The EU takes Scotland’s side, further complicating the U.K.’s ongoing negotiations with the EU and with Scotland. Negotiations for the integration of Scotland into the EU progress swiftly, while the negotiations with the U.K. seem to hinge on seemingly intractable disagreements over the right of access of U.K. financial institutions in continental Europe, access rules to the single common market, particularly for U.K. manufacturers, and the applicability of EU regulations on agriculture, manufacturing, and U.K. exports toward the EU.

Nonetheless, both camps recognize that they have to accommodate each other somewhat. The U.K. wants to retain access to the EU market and the EU wants to remain in good terms with the U.K.. On that basis, both camps manage to negotiate a minimalist withdrawal agreement that protects, at first examination, the core interests of both parties.

At first, EU leaders are dumbfounded by the results of the U.K. referendum. Second, they are worried that the U.K. referendum will set a precedent leading other nations to withdraw from the EU when things don’t go one’s way. In particular, the EU does not want to see the largest contributors to the Union leave. Third, the EU is built on compromises where no one really gets everything they want. If the U.K.’s decision is a prelude of things to come, long-time European diplomats fear a hardening of positions and a lesser willingness to compromise, making it even more difficult to govern the union. For the EU, the primary interest is protecting the body by instituting some disincentives so others don’t follow suit.

The question: How does this affect the EU in an institutional sense?

First, a U.K. departure prompts a new round of negotiations in the EU over who gets what in terms of posts and responsibilities. Initially, Scotland indicates that it is willing and ready to take whatever posts the U.K. held, prompting some scoffing on the continent. The jockeying is intense. Ultimately, it will reward Germany, France and Poland, the first two increasing their relative influence within European institutions, while Poland becoming the third leg of the stool.

Second, the departure of the U.K. will prompt a revision of the 2014-2020 European budget which settled the contributions at 960 billion euros and the expenses at 908 billions. The U.K., along with Germany and the European Commission’s president, pressed for less spending against the wishes of France and Italy. As the U.K. exists and Scotland gets in (although its contribution is a mere fraction of the U.K.’s contribution), a difficult renegotiation of the 2014-2020 budget is looming under a budget amputated by almost 12% of its resources (U.K.’s contribution). Ultimately, because the U.K. contribution is fairly large, the union is forced to renegotiate the formula to determine each country’s contribution – to the chagrin of countries that already pay more than they take out.

Third, in an effort to avoid a repeat scenario of the Scotland-U.K. drama, which has taken a toll on the EU’s reputation and organization, the European Commission sets out on an effort to address the question of sub-national entities’ independence movements. Most of all, it would like to avoid a splintering of large (like the Catalonia region in Spain) and small (Flanders versus Wallonia in Belgium) countries that only serve, in its eyes, to distract Europeans from confronting more pressing challenges.

Britain loses big on two fronts. Its separation from Scotland means that it loses 80% of the old U.K.’s gas and oil production, forcing it to significantly increase its imports. Moreover, it also loses some large financial assets (RBS for example). Exiting from the EU leaves the U.K. in a complex situation. The U.K. no longer has automatic access to the European single market. Instead, the EU and Cameron negotiated access for a select few productions. Overall, the U.K.’s commercial deficit with the EU (which amounted to 44b euros in 2011) increases significantly and unemployment rises as many businesses have to contend with a shrinking market. Financial institutions fare a bit better because the Cameron government and the EU have agreed to maintain access to the single market for the next five years. Everybody knows, however, that this is no panacea. In Paris, Frankfurt, and Zurich, appetites grow to replace London as the financial hub of Europe. Meanwhile, Glasgow would not mind a piece of that pie.

Uncertainty would have an immediate and continuing chilling effect on investment throughout the U.K. (and the EU and Scotland as well). A monetary union with Scotland (as proposed by the Scottish Government) would require robust and credible limits on borrowing and indebtedness by both the U.K. and Scotland; but the Eurozone has so far found this to be impossible. While this could be negotiated bilaterally with Scotland, the U.K. will need to be mindful on the multilateral implications for the U.K. in its negotiations to exit the EU under conditions which will maintain the traditional dominance of its financial services industry within Europe.

Attempts to alleviate uncertainty will create incentives for the U.K. to press for early resolution of EU issues involving of monetary, financial, tax, and commercial agreements – but these will be complicated by fierce negotiations with Scotland over the division of oil and gas resources, currency, and public sector debt, making it difficult for the EU to negotiate in a vacuum. This will further diminish the U.K.’s standing in Europe.

Major cooperation treaties and organizations with the EU on crime and terrorism remain intact as both sides know all too well the devastation that disruptions in that arena can cause. However, the U.K. continues its negotiations to withdraw from the European Court of Human Rights.

Britain gains a land frontier on the English/Scottish border for the first time since 1707. There is every prospect of a Scotland in the EU and the Schengen zone, with the requirement to stiffly police the border as an EU frontier.

The other question: How can Britain reinvent its role in global affairs after such a divorce?

Having lost Scotland and removed itself from the EU, Britain’s position on the world stage is inevitably and severely weakened. The U.K. can no longer weigh in on the direction of the EU.

The U.K. calculated that it would seek to re-balance toward the West by reinvigorating its “special relationship” with the United States, but the U.K. finds that the United States has little incentive to move from the status quo and the fragmentation of the U.K. and exit from the EU only serve to complicate its efforts to negotiate a Free Trade Agreement with the EU.

Britain tries to maintain its influence in global affairs by attempting to deepen its defense ties with France. Since 1998, both countries have deepened their ties, harmonized their agenda, developed common capabilities, and agreed to co-develop weapons programs. Britain sees a deepening of such endeavors as key to retaining some significant influence on the world stage. France, to an extent, concurs. However, a French objective of this cooperation was deeply linked to the European project – notably strengthening and rationalizing the European industrial base. Can this objective still be fulfilled if the U.K. is out of the EU?

Wikistrat Analysts Douglas Olin, Daniel Kaszeta and Pascale Siegel contributed to this scenario.

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