No matter the political situation, it's always the economics that triumphs in the end. Photo: Getty
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The best currency for an independent Scotland would be Norway’s kronor

If Scotland votes for independence, it will create a completely different economic context for the two new countries that emerge.

Scotland’s referendum debate has so far centred mainly on practical issues and medium-term choices like currency, new entities' share of public debt, and membership of the EU.

Far less has been said about how the different players influenced by the outcome will be affected in the longer term. It is well worth considering how independence would eventually affect the Scottish and UK economies, particularly in relation to North Sea oil. The reality is that this constitutional change could alter the macroeconomic foundations of the political map of Europe.

Aside from the UK, Norway and Denmark are the two other countries which now explore the North Sea. In 2013 the total proportions of North Sea oil produced by these three countries were 27%, 66% and 7% of the total respectively. By my estimates, Denmark’s oil sector provided around 5% of the country’s GDP, once you include petroleum production and dependent industries such as petroleum services, pipelines, refineries and so forth. For the UK it was somewhere approaching 20%, while for Norway it was 23%.

Oil and European integration

There is a strong correlation between these oil sector figures and each country’s economic and political choices. Norway stays out of both the EU and European monetary union. It has its own independent currency, whose rate of exchange is determined by the market.

At the other end of the spectrum Denmark is a member of the EU and is part of European Exchange Mechanism II (ERM II). The Danish krone’s exchange rate is tied to the euro, making it practically another form of euro. The UK is in the middle: a member of the EU but not in ERM II or the euro.

If Scotland votes for independence, it will create a completely different economic context for the two new countries that emerge. This new macroeconomic framework will work against the currently declared goals of both countries' governments.

The economy of an independent Scotland would of course be much smaller than the economy of the new UK. This means that with the same absolute oil extraction, you can estimate that the sector would contribute more than one-third of Scotland’s GDP. In the new smaller UK, on the other hand, it would only contribute something like 1% (coming from the mainly gas fields off east England).

Future choices for Scotland and the UK

This suggests that it would suit the two countries to make completely different economic and political choices. If North Sea oil dominates the Scottish economy to an even greater degree than in the case of Norway, it would suggest that it would be even less inclined towards the EU and euro than the latter country.

The logic behind this point is that oil changes the economic cycle of a country. The easiest way to think about this is to reflect on the effect of the oil price. If the oil price is high, a country that heavily relies on oil production does well and non-producers tend to do less well, because they are paying higher prices for their fuel. When oil prices are low, this reverses.

Anyone who had a passing interest in the eurozone crisis will know that the problems between the Mediterranean periphery countries and their northern neighbours were partly caused by the fact that they needed different levels of interest rates to suit their economies. An independent Scotland would suffer a similar fate, albeit for different reasons. The more that oil dominates an economy, the less well suited it is to European integration.

For the same reason, the rest of the UK would be inclined much more towards these European institutions than beforehand. The Danish experience suggests that it might lead not only to membership of ERM II but also even to adoption of the euro.

In turn, this would also lead to changes in the EU. The sheer size of the new UK would enhance the core of EU international member states, greatly increasing GDP for example. At the same time, the relative strength of socialist-inclined France would be reduced, raising the prospect of a more Atlanticist free-market approach to European unification.

On the other hand, Scotland and Norway would be naturally pushed closer to each other. They might be joined by Sweden and Iceland – Iceland and Norway share fishing interests, while Sweden and Norway’s economies are closely aligned. This could lead to much closer political co-operation between these countries, plus a kind of monetary co-ordination, if not monetary union.

Some might dismiss these arguments, pointing out that Scotland has aspirations towards the EU and that England is increasingly eurosceptic. But such people should remember the example of the UK’s brief membership in the first European Exchange Mechanism in 1990-91. The lesson was that no matter the political will, the economics will be fundamental in determining how situation evolves.

In view of these observations, it is hard not to reach several final conclusions. The Scots are not making a choice in September that is fully informed in economic terms. And the UK and EU do not seem to be fully aware of the possible long-term consequences either.

The ConversationPiotr Marek Jaworski does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published on The Conversation. Read the original article.

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Sir Ivan Rogers: UK may wait until mid 2020s for an EU trade deal

The former ambassador to the EU had previously warned his colleagues about Brexit negotiatiors' "muddled thinking". 

Brits may have to wait until the mid 2020s for a free trade deal with the EU, UK's former ambassador to Brussels has warned.

Sir Ivan Rogers, who quit abruptly in January after warning of "muddled thinking", gave evidence to the Brexit select committee. 

He told MPs that his Brussels counterparts estimated a free-trade agreement might be negotiated by late 2020, and then it would take two more years to ratify it.

He said: "It may take until the mid 2020s until there is a ratified deep and fully comprehensive free-trade agreement."

The negotiations could be disrupted by the "rogue" European Parliament, he cautioned, as well as individual member states.

"Canada [the EU-Canada trade deal] not only nearly fell apart on Wallonia, it nearly fell apart on Romania and Bulgaria and visas," he said. 

Member states were calculating what the loss of the UK will mean to their budgets, he added - although many were celebrating the end of Britain's much-resented budget rebate. 

He also thought it unlikely the EU member states would agree to sectoral deals, such as one for financial services, if it meant jeopardising the unity of the EU negotiating position. 

In his resignation letter, which was leaked to the press, Rogers told his staff that "contrary to the beliefs of some, free trade does not just happen when it is not thwarted by authorities"and that he hoped they would continue "to challenge ill-founded arguments and muddled thinking".

Rogers said the comment was about "a generic argument on muddled thinking", which applied to "the system". He described how the small organisation he initially headed had been swamped by new arrivals from the newly-created Department for Exiting the EU.

The new recruits were enthusiastic, he said, but "they don't know an awful lot about the other end".

The UK needed to understand "we're up against a class act with the European Commission on negotiating", he warned. 

He said that if the UK reverted to World Trade Organisation rules - the option if it cannot agree a trade deal - it would enter a "legal void".

"No other major player trades with the EU on pure WTO terms," he said. "It's not true that the Americans do, or the Australians, or the Israelis or the Swiss."

The US has struck agreements "all the time" with the EU, he explained: "A very significant proportion of EU-US trade is actually governed by technical agreements."

Once the UK leaves the EU, it will be treated as a "third country", he added. This meant that the UK would need to get on a list to be allowed to export into the EU. Then individual firms would have to be listed, and their products scrutinised.

Rogers revealed he had debated "endlessly" with colleagues about the UK's relationship with the EU. "The core of the problem is not day one," he said. "The problem is day two, or day two thousand. What have you just captured your sovereignty and autonomy for?" Simply getting access to the single market would not mean a level playing field with EU companies, he explained.

He said: "The European Union is not a common sense agreement. It's a legal order."

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.