mhp

The Athens of the North?

Amongst unsustainable Spanish bond yields and a perhaps unsustainable Greek government, an introspective thought on Scottish independence this week. Though distant, there is much to discuss about the axe hanging over the Act of Union that echoes the problems amongst the olive groves. Independence will, of course, be exhaustively considered from social, political, economic and military angles amongst others. But there is a strong current of patriotism running through the arguments, and patriotism is a powerful emotion. As with the iceberg ahead that an MHP compatriot noted south of Emperor Hadrian’s wall, there are difficult waters for Scotland to navigate.

A major source of contention should Scotland cede from the Union is ownership of North Sea Oil. This currently accounts for 1.8% of UK GDP; with independence it is expected to provide 18% of Scotland’s national income. Scotland would accordingly become much more exposed to shifts in global commodity prices. Many oil nations have prospered fantastically in the past 3 decades, and Scotland may do likewise should the price of oil gain a constant, upward trajectory. However, the Gulf States, to take the most apparent example, are awash with liquid hydrocarbons. Scotland is not. Production has fallen at 6% per annum for a decade and reserves are fast depleting. Extraction technology will improve, but unless it does so dramatically the gains will be marginal, the reliance unsustainable.  Hidden costs of such major cap-ex lurk at the bottom of drill bits and must also be considered. Decommissioning of unviable wells is likely to cost £30bn by 2040: whilst majors and sub majors responded to Westminster’s siren song of significant tax relief, this lure would be lost with independence. Without this attraction, the technological investment needed to keep the donkeys nodding would shy away; an independent Scots government would lack the fiscal clout to encourage it. Catch 22.

The problems of an unbalanced economy are regularly highlighted by those who believe the UK’s financial sector has weighed too heavily on the structural see saw. Unfortunately for Scotland, the opposite is true: an independent Scotland will have a weak financial service sector incapable of countering the importance of oil. Edinburgh has dropped from 15th to 37th amongst global financial centres; RBS and HBOS have been bailed out and would most likely be broken up following settlement. Though several institutions are based in Edinburgh, they lack the clout of meaningful counterweight. Moreover, if, as seems likely, Scotland retains the pound, it will cower before the dangers evident in the Europe of a monetary union uncoupled from fiscal union. Shorn of the UK’s strong credit rating, the spectre of exorbitant bond yields would also stalk the new nation. The threat of these problems to the Eurozone’s economic minnows is real; it would be to Scotland too.

Such prosaic thoughts may be hushed by patriotic fervour, and if Scots truly want independence for political or cultural reasons it should be pursued. National pride is impossible to price. But a vote for independence must be made in the knowledge the country could end up as one of Europe’s vulnerable, marginal economies.

In the 18th century, Edinburgh’s fine architecture and its Enlightenment role earned it the nickname “Athens of the North”. It would be a shame if that name became apt again for less positive reasons.