The Scots will earn their freedom in the pockets of their financial services industry, writes Olenka Hamilton
You only have to peep over the garden walls of Merchiston and Morningside at the high Georgian windows and grand interiors within to realise that Edinburgh is a repository of some seriously old money.
But these citizens of ‘Auld Reekie’ will be among the first to feel the chill wind of independence, if the SNP gets their second ‘once in a generation’ referendum in 2019 – and were it to go the way that Nicola Sturgeon and her followers would want.
For if the Scots vote for independence, it could spell doom for their vibrant financial services industry in Edinburgh and beyond, one which boasts the Royal Bank of Scotland Group, AEGON UK, Scottish Widows, Baillie Gifford, Tesco Bank and Sainsbury's Bank, as well as the distinguished private bank Adam and Co – all headquartered in Edinburgh.
The Scots trade four times more with the UK than with any other partner (in 2015, exports to the UK were valued at £49.8 billion compared to just £12.3 billion to the EU), and this is true for their financial services, too – which employ some 156,700 people and comprises 7 per cent of their GDP. ‘A lot of financial services businesses in Scotland are more focused on the UK market than the global or EU market,’ explains Charles Livingstone, a partner in the public law and regulatory team of Edinburgh law firm Brodies. ‘Given the choice, they would probably savour closer links or more harmonised regulation with the UK. The UK is much more integrated than the EU is if only in terms of its institutions and government.’
And independence might not just be bad news for Scotland’s financial services: it’s often pointed out that had Scotland been independent in 2008, when its flagship bank RBS collapsed, the losses would have taken the government at Holyrood, Iceland-style, with it. The required £76 billion bail-out was beyond the pockets of Edinburgh. Given the relative size of Scotland’s economy, which is more than ten times smaller than its banking sector, an independent Scotland would be acutely vulnerable to banking shocks. Today, a whopping 73 per cent of RBS Group is still owned by UK Financial Investments. How this would be divvied up in the event of a ‘Scexit’ is still unclear.
In addition, there’s the alternative question of what happens to Scotland after it leaves the UK – rejoining the EU, Sturgeon’s intention, would mean adopting the euro and swallowing a whole raft of other Brussels regulations. These include the proposed and controversial EU financial transaction tax (FTT) – which has been categorically opposed by the UK government for being anti-competitive in a global market, yet a declared ‘political priority’ for the European Commission. The FTT would not do much good for the denizens of Morningside, Merchiston and beyond.
‘For the financial services sector, Scotland would want to stay with sterling and UK regulation,’ says David Bell, professor of economics at the University of Stirling. With an estimated £300 billion worth of assets being either serviced or managed in its territory, Scotland is one of the world’s biggest fund management centres – as is made evident by the pending £11 billion merger of Standard Life and Aberdeen Asset Management which, once complete, will create the UK’s largest and Europe’s second largest asset manager.
Unsurprisingly, there is another view: step forward Alan Barr, Head of Personal Tax Planning and Brodies, who reckons that the Scots would muddle through happily enough: ‘My personal view is that it may be that in the short term, economics are not what they might be, but we’re talking about a relatively rich western economy in all circumstances so I find it hard to be terribly pessimistic,’ he says. ‘Some might regard it as a threat to their economic wellbeing, while others would be regarding it as an opportunity.’
And he might well be right: but the systemic facts can’t be ignored, and while the Scots would undoubtedly make the best of it if independence came there way, it’s clear that it would come at a cost – greater European regulation and the euro (what favours that’s done for the Greeks and the Spanish) and FTT or its ilk.
In the meantime, independence or not, Scotland’s economy is showing signs of referendum fatigue. Last year, Scotland’s GDP expanded by a mere 0.7 per cent, compared to the rest of the country which grew by 2.4 per cent. And its employment rate has stagnated too – at 73.7 per cent, it is below most UK regions and a whole 5 per cent behind the South East. All the more reason to look after its most profitable sector, you would think.
Olenka Hamilton is a Researcher at Spear's Research Unit
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