An independent Scotland, the EU and the UK opt-outs

The UK Opt-Outs

I think one of the biggest shocks an independent Scotland would get is when it (re)joins the EU and loses the UK's opt-outs. I don't know if the EU would allow an independant Scotland a quick sideways move or would require it to apply as a new state.

Either way, I think it's totally reasonable to expect that the  EU will accept Scotland's membership request to (re)join the EU as an independent state.

However given the EU hostility to the UK's opt-outs I expect that losing them will be part of the price Scotland will be required to pay.

What are the UK opt-outs? From the Wikipedia page, they are:

• Schengen Area - the UK and Ireland are not part of the free movement area so there are no border controls within the UK and Ireland but there are border controls between the UK and Ireland and the Schengen Area.
• The Euro - the UK is not part of the Euro zone.
• Area of freedom, security and justice - this is a flexible opt out for legislation covering justice and home affairs where the UK government can pick and choose which EU legislation in this area they implement.
• The UK has an opt out on all EU police and criminal justice legislation adopted prior to the Treaty of Lisbon.

Of these, I think losing the two covering the Schengen Area and the Euro would have the biggest impact.

Simplistically, joining the Schengen Area would result in border controls between England and Scotland while joining the Euro would end any possibility of a Pound based currency union.

(Note, I'm using the terms 'UK' (obvious), 'independent Scotland' (obvious) and rUK (rest of UK post Scottish independance.)

Schengen Area Opt-Out

If an independent Scotland joined the Schengen Area (which covers most of western Europe, including Norway and Iceland) then illegal migrants in the Schengen Area wishing to enter England could freely move to Scotland before making their attempt. The migrants in Calais could swap a contested 20 mile sea crossing (Calais to Dover) for an uncontested journey from Calais to, say, Coldstream or Gretna and then cross over to England. The result would be the erecting by rUK of a land border with controls.

If an independent Scotland has a materially different immigration policy to that of the rUK then depending on the movement of migrants to Scotland subsequently moving to the rUK, the rUK might have to erect a land border with controls.

An independent Scotland could force the rUKs hand - a pyrrhic victory.

Euro Opt-Out

The Westminster government and opposition parties have consistently that stated they would not enter into a Sterling currency union with an independent Scotland. While there may be some politicking in this position there is also the basic problem that a currency union between truly independent states is hard to manage. The Euro shows what can happen when independent states (and not even truly independent at that) enter into a currency union without a single political and fiscal system.

A currency union implies a single interest rate (or there would be instant arbitrage between different interest rates in different areas) and a single lender of last resort. A lender of last resort underpins the security of the currency system but can, if it behaves irresponsibly, destroy a currency; it also carries the liability of any financial organisations it backs (such as governments and banks). Having two (one English, one Scottish) lenders of last resort for the same currency means that there would, in practice, be two currencies - the Pound Sterling with the Bank of England with the lender of last resort and a Pound Sterling with the Back of Scotland with the lender of last resort. These two Pounds would be treated by the financial markers as different depending on how strong the markets thought the two lenders of last resort are. One lender of last resort would not be happy with financial organisations re-denominating their liabilities between it and the other depending on the best deal or backing available.

For there to be one shared currency there would have to be one lender of last resort (even the SNP agree on this being the Bank of England) but this in turn would require one political and fiscal system. For there to be one political and fiscal system there needs to be one set of controls in the hands of one political body. If an independent Scotland wanted to join with the rUK to create such a body both Scotland and the rUK then both Scotland and the rUK would need to ceed financial independence to this body. Control of this body would need to be organised democratically based of the relative sizes of the populations of Scotland and the rUK. As John Major said, we already have one of these and it's called the United Kingdom Government! I  really don't seen an independent Scotland ceeding so much fiscal control to such a body.

All of this becomes moot if Scotland loses the Euro opt-out as it will be required to join the Euro. when joining the EU. I don't think Scotland would keep the UK Euro opt-out or the Danish one. Scotland could try to do what Sweden, Poland, Czech republic and Hungry have done which is to agree to the Euro but not do the necessary preparation. This would leave Scotland outside the Euro.

So, Scotland would end up either with it's own Pound outside of any currency union with the rUK or the Euro or in the Euro.