James E Anderson from HSS Webteam on Vimeo.

James E. Anderson is a Professor of Economics at Boston College. He is a research associate at the distinguished National Bureau of Economic Research in the United States, and serves on the editorial board of the Review of International Economics. Among other topics, his research explores the relationship between trade within and across country borders

The Political Economy of National Borders

Enrico Spolaore from HSS Webteam on Vimeo.

Enrico Spolaore is a Professor of Economics at Tufts University. He is a research associate at the National Bureau of Economic Research, and editor of a forthcoming book on Culture and Economic Growth. Among other topics, his research explores the economic determinants of country size.

Brad MacKay, University of Edinburgh

The University of Edinburgh’s Brad MacKay examines the potential impact that Chancellor George Osborne’s speech may have on the business community. This post was originally published by The Future of the UK and Scotland. 

Today’s announcement by the Chancellor of the Exchequer that there will not be monetary union between an independent Scotland and the rump UK (rUK) post-independence is a game changer. It comes one day after researchers, including myself, working in the ESRC programme into the Future of the United Kingdom and Scotland gave a briefing in Brussels on our research findings so far. In it Professor David Bell and I argued that the major uncertainties facing business are the EU, Corporate Taxation, Income Taxation and the Currency.

In my own research, I have so far conducted 52 in-depth interviews with business leaders in medium and large firms. The industries that we have focused on so far are energy (including oil and gas), financial services, engineering and industrial manufacturing, electronics and technology, and life sciences. In a clear majority of these interviews, business leaders have indicated that it is uncertainty around the currency that poses the most significant risk for their businesses.

So what are the implications of today’s announcement for a post-independence Scottish currency, and what does this mean in practice? Under EU rules for a country to join the Euro, they must first demonstrate that they can run their own currency and central bank within the deficit and debt restrictions placed on them by the EU before they can join the European monetary union. In other words, the Euro in the short-term is not an option for Scotland. Consequently, an independent Scotland will have to have its own currency, either pegged to the pound, which brings with it its own set of challenges, or a freely floating currency on international markets, which almost certainly would be a devalued, and more volatile currency. There is also the possibility that there could be some form of informal currency union, or sterlingization, which may have some attractions for business, but will still bring with it numerous challenges.

If the pound sterling is, or looks to be, unavailable to a post-independent Scotland, it will result in a number of businesses having to make tough decisions on whether they can continue to domicile themselves in Scotland, and the degree to which they maintain the same level of economic activity in Scotland. Why? Because for a significant number of medium and large businesses in Scotland, most of their trade in the UK, often as much as 90%, is not in Scotland, but the rUK. This makes sense when you consider that the population of Scotland is 5 million, but the population of the rUK is 58 million. Businesses will, therefore, have to consider very carefully a range of different factors driving their businesses, but primary among them will be three things: (1) how separate currency jurisdictions will impact on their ability sell products and services to their customers; (2) whether it makes recruitment and retention of high value, skilled labour more or less difficult; and (3), whether it creates or destroys shareholder value by decreasing or increasing costs and profitability. Global businesses whose customer base is also primarily global, however, may be less impacted.

Small businesses in Scotland will not be immune to the implications of having separate currencies in Scotland and the rUK either. For small businesses that do any trading in the rUK, they would have to deal in two currencies, and there would be costs and time involved in exchanging currencies, translating different prices from one currency to another and so on.  Economic theory suggests that the existence of a border can reduce trade, and some of these ‘transaction’ costs associated with dealing in different currencies and jurisdictions help to explain why.

Economic fundamentals suggest that for countries to share a currency there needs to be agreements over deficits, debts and taxation, which may not be sustainable for economies driven by different factors, as a Scottish resource-led economy, and a UK non-resource-led economy almost certainly would be. This at the very least necessitates close coordination, if not integration. The Euro crisis of recent years is evidence of this. So, far from being an act of bullying or intimidation, as Nicola Sturgeon suggests, George Osborne’s announcement is underpinned by what is increasingly becoming a position supported by economic orthodoxy. That’s not to say that if the political will exists for a monetary union one can’t be made to work, for a time. There are few examples, if any, where one has been made to work over extended periods of time, even with political will, without political integration.

Ethical considerations aside, if the Scottish government were to use this as an excuse to walk away from its share of the UK debt, the reaction from international markets would almost certainly be swift and brutal, and result in a poor credit rating for Scotland. This could then translate into uncertainty and volatility within the Scottish economy, which would in turn most likely reduce business investment in Scotland, economic growth and jobs. The UK government’s position on currency will undoubtedly be unwelcomed news for the Scottish government, but they would be unwise not to recalculate what this means for the independence project, and more importantly, for average Scots, and to build their case for independence from there.

So while the stated position of the Scottish government in their White Paper launched on November 26th 2013 is to continue to use the pound sterling, some uncertainty has existed about whether the UK government would agree to such a pledge. With the Governor of the Bank of England, Mark Carney’s recent speech in Edinburgh, where he outlined the economic difficulties of monetary union without political union, there has been uncertainty over whether the UK government would agree to such arrangements. It is now clear that this would not be the case, and it is now incumbent on the Scottish government to outline its plan B, whatever it may be. But even with a plan B, adopting a separate currency in a post-independent Scotland, our research suggests, is likely to be problematic for a significant number of Scotland’s small, medium and large businesses.

The implications are, of course, that independence may well result, at least in the short and medium term, in a drop of economic output as cross border trade is diminished, and some medium and large businesses (who while fewer in number compared to small businesses, are responsible for the largest proportion of jobs and national income in Scotland), choose to reduce their exposure to Scotland by migrating some of their activities to either the rUK or the EU. In the long-term, of course, anything is possible.

Professor Christine Bell, University of Edinburgh

Writing at the Future of the UK and Scotland blog, Christine Bell reflects on whether the Chancellor’s speech represents pre-negotiation and what that might mean for the campaign.

The UK government up until now has clearly stated that it is not going to ‘pre-negotiate’ the break up of the Union.  Yet to-day apparently the UK Chancellor George Osborne, along with support from the Labour party, is to rule out in advance a currency union.

In response the Scottish government has raised that they have a card to play: a possible refusal to take on a share of the UK’s national debt.

So what is going on?  Well it would seem a few polls are showing that support for independence may be on the rise.  As a consequence it looks as if the no campaign that had adopted a tactical posture of a relaxed ‘let Scotland decide’, is shifting towards playing hard-ball – corporate chiefs, the Head of the Bank of England and now the Chancellor and all future UK Chancellors are all being sent to Edinburgh, and the Prime Minister has instructed the rest of the UK to face north and feel loving feelings.  The Scottish government is wheeling out its best cannons in response.

There are several reasons why the new turn towards pre-negotiation is unfortunate and should be publicly resisted.

Read the rest at The Future of the UK and Scotland.

Video from the Scottish Social Attitudes event

Rt Hon Carwyn Jones, First Minister for Wales

Cera Murtagh reports from a major speech by First Minister of Wales the Rt Hon Carwyn Jones AM, hosted by the Academy of Government, on the implications of the Scottish independence referendum for Scotland, Wales and the UK as a whole

In the wake of his landmark speech at the University of Edinburgh last week, the Welsh First Minister’s warning that Wales would want a say on an independent Scotland joining a currency union with the rest of the UK has dominated the headlines. Provoking nationalist-unionist claim and counter-claim however, this focus distracted from what was perhaps the First Minister’s more substantive point: that the UK is in need of fundamental constitutional reform.

Delivering a speech entitled ‘Wales, Scotland and the United Kingdom’, in advance of the Scottish Government’s publication of the White Paper on Scotland’s Future, the Right Honourable Carwyn Jones approached his topic with a mixture of caution and determination. Aware that wading into the Scottish independence debate is a risky business, the First Minister stressed his respect for Scotland alone to determine the outcome of the referendum, and insisted he was not here to preach. Nevertheless, given the stakes – not only for Scotland but for the UK as a whole – he felt it necessary to present the “wider perspective”.

The Welsh premier owned that an independent Scotland could, of course, survive. The question, he argued, was whether it would be better off as an independent country or, as he believed, within a renewed Union of devolved nations.

Constitutional reform to embed devolution is the route to this new and improved United Kingdom, according to the First Minister. It is now the time to establish a “stable territorial constitution”, he urged; “a proper and durable long-term settlement for the whole of the UK”, in which the place of the devolved nations would be cemented.

“Can we see a future for the UK which is built on a fundamental acceptance that we are a territorial Union with a devolved constitution? Can we have confidence that our constitutional arrangements will be respected and transcend party politics?,” he asked.

“I believe the answer is yes. I believe it is possible to work out a full future for Wales, Scotland and Northern Ireland, through devolution, within the wider framework of a strong UK bound together by common threads of shared history, culture and values.”

A new UK constitution must enshrine three key principles, the First Minister advanced: it should guarantee the devolved legislatures of Scotland, Wales and Northern Ireland as permanent features of the Union; it should ensure a presumption towards devolution, wherever practical; and it should provide a consistent method for devolving powers across all parts of the UK.

Outlining a positive vision of the Union, Jones drew upon Wales’s experience of devolution and recent negotiations with the UK Government over the transfer of further powers to the Welsh Assembly in response to the Silk Commission, to demonstrate what can be achieved when the Westminster Government and devolved administrations work together constructively and respectfully.

While making the case for constitutional change, the First Minister was nevertheless forthright on the merits of maintaining the Union. He staked this argument first and foremost on trade and currency. On the Scottish National Party’s plan to remain in a currency union with the remainder of the UK post-independence, Jones raised significant doubts, and warned that, as First Minister of a devolved administration, he would “want the right to have a say” on Scotland joining such a pact.

In setting out his stall for reform, the Welsh premier demonstrated that developments north of the border can generate debates over much wider constitutional reform.

Hosted by the Academy of Government in the University’s Old College on 20 November 2013, the lecture by First Minister of Wales the Rt Hon Carwyn Jones AM was chaired by Academy Director Professor Charlie Jeffery and attended by staff, students, members of the public, as well as a host of media outlets.

Cera Murtagh is a PhD candidate in Politics & International Relations at the University of Edinburgh

Royal College of Surgeons, Nicolson Street, Edinburgh, EH8 9DW

This event, organised by the Institute of Fiscal Studies, will see the launch of the first long term fiscal projections for an independent Scotland. This new research, which is part of a project funded by the Economic and Social Research Council on the Future of the UK and Scotland, will use information on demographic trends, tax revenues and spending patterns to look at fiscal scenarios for Scotland and the UK over the next fifty years and their sensitivity of the projections to key assumptions over long-term growth, the cost of government borrowing and the level of net migration. The event will provide a clear illustration of the fiscal pressures facing an independent Scotland, how these are similar to, and different from, those facing the rest of the UK, and the options available to an independent Scotland to achieve fiscal sustainability.

Other presentations will focus on tax and spending as we aim to clarify some of the fiscal opportunities and constraints that would face Scotland were it to become independent.

This event will take place in Symposium Hall (King Khalid Building), the Royal College of Surgeons, Edinburgh. Registration will take place between 09:30 and 10:00 and the event is expected to conclude by 12:30. A sandwich lunch will follow and delegates will have the opportunity to meet the research team.

Further information and booking details can be found on the IFS website

Colin Fleming, University of Edinburgh

In this article, first published in The Sunday Herald , Colin Fleming challenges the argument presented in a recent UK Government report that an independent Scotland would be unable to deliver the same defence and security provisions as currently enjoyed by the UK

On Tuesday morning [8 October] the Secretary of State for Defence, Philip Hammond, launched the UK Government’s Defence report on Scottish Independence.

This is the latest of its Scotland analysis papers, which the UK Government has produced to put forward its case for maintaining the political status quo, but it is an increasingly salient issue in the referendum debate.

The matter of defence is especially important, being traditionally understood as the cornerstone of state responsibility.

Drawing on the UK’s global role, the main theme of the report is that an independent Scotland would not be able to deliver the same spectrum of defence provision as enjoyed by the UK and thus be unable to fully participate in global affairs.

In fact, it goes as far as to argue that following independence Scotland would not have the same influence on international affairs as it does as part of the UK. It also explicitly states that Scotland’s security would be diminished by independence, and makes the case that Scotland enjoys the safeguards provided by the “integrated” spectrum of forces currently provided as part of the Union.

Boiled down, the report offers an absolutist perspective on military power as a way of delimiting that outlined so far by the SNP and Scottish Government.

Of course, the Scottish Government will have to articulate how it will ensure Scotland’s security in the event of independence, but voters might ask why Scotland would be unable to provide defence and security at least as well as the UK.

The report’s identification of the UK global role and integrated defence is at least questionable. On the question of whether Scotland has international influence as part of the UK, it is correct that devolution has allowed Scotland to take on an international role (not least in Malawi). However, Scotland’s ability to act independently is limited and the idea that an independent Scottish state would somehow have less influence than presently seems particularly specious.

Regardless of whether one supports independence or not, most Scots are likely to feel uncomfortable with the idea that the wars in Iraq and Afghanistan are good examples of Scotland’s international influence, with the obvious riposte being that only with independence would Scotland have the powers to decide whether it takes part in these types of military operations.

Building on this argument, the report goes on to explain the integrated nature of defence across the UK, to the extent that Scotland could not expect to inherit Scots regiments and military assets. Like other aspects of the paper the rationale is clear, yet again, as the idea that Scotland would somehow not be entitled to its fair share of defence assets is unrealistic at best.

As the report makes clear, there are substantial assets existing in Scotland and it would not be unreasonable that an independent Scottish Government would expect to inherit its fair share. Indeed, the suggestion that the UK forces are so integrated that Scottish assets could not be disentangled begs the question as to how it has been possible for the MoD to restructure the armed forces, resulting in major redundancies in the process.

The report provides no information on possible defence co-operation between the UK and Scotland should there be a Yes vote, despite being asked to consider this issue in a recent Defence Committee report.

The issues regarding recruitment and defence jobs are as equally problematic for the UK as they would necessarily be for a new Scottish state. Yes, Scotland would need to ensure that it is able to recruit and retain personnel, but the argument that it would not be able to provide opportunities to new recruits is overplayed. Involved in constant, major, military operations for more than 10 years, the MoD’s own performance reports demonstrate the difficulty it has retaining service personnel.

The consequence of such poor retention rates has resulted in further pressure on personnel, with more time spent on operation than military guidelines stipulate.

Exacerbated recently by changes to military pensions, there has been an erosion in the Military Covenant that the paper is so keen to highlight. The paper’s use of a 2007 Rand publication may not paint the most accurate picture of whether a career in the forces is as appealing. Indeed, if the Scottish Government can provide assurances on pay and conditions, the UK’s argument that Scotland will have a fatal recruitment shortfall could be proven wrong. In terms of defence jobs, Scotland might not enjoy the economies of scale as that of the UK, but the internationalisation of defence industries has become normal and it is probable that Scotland would be able to maintain jobs in that sector. Omitting to explain its recent defence cuts in Scotland, and how these have impacted on communities, like other areas of the report the UK Government glosses over a great many issues. Whether the long-awaited Scottish Government White Paper is able to better answer the defence question is yet to be seen.

This article was originally published in The Sunday Herald on 13 October 2013

Dr Colin Fleming is Research Fellow at the Scottish Centre for Constitutional Change at the University of Edinburgh

Winter School on Federalism and Governance

The Winter School is a cross-border postgraduate programme located in the heart of the Alps under the auspices of the Secretary General of the Council of Europe. The 2014 edition will focus on “Federalism and Multilevel Constitutionalism”.

Dates and venues: 3-14 February 2014

The first week (3-8 February) takes place at the Faculty of Law and School of Political Science and Sociology, Leopold-Franzens-Universität Innsbruck, Austria; the second week (10-15 February) takes place at the Institute for Studies on Federalism and Regionalism, European Academy Bolzano/Bozen (EURAC), Italy.

Deadline for applications (accepted online only): 25 October 2013

The Winter School on Federalism and Governance is designed for participants from all nationalities who wish to deepen their knowledge on federalism and multilevel constitutionalism via an interdisciplinary and comparative approach. We welcome applications from doctoral, postgraduate and undergraduate students, researchers, officials, employees of national/international organizations or NGOs, as well as interested citizens.

The Winter School on Federalism and Governance 2014 explores how federalism contributes to the understanding of multilevel, integrated decision-making. It is a unique opportunity to be trained on theoretical and practical aspects of federalism and multilevel constitutionalism.

The Winter School offers a broad range of lessons on federalism and governance providing in-depth analyses and practical knowledge. Lectures focus mainly on Europe but include also Asia, Africa and the Americas. During the 10-day-full time programme several case-studies will be presented by experts and key actors who manage these issues on a daily basis.

To apply and for further information, please visit: www.eurac.edu/winterschool