Scotland's place in Europe: people, jobs and investment

Introduction

1. As we demonstrated in Scotland’s Place in Europe, published in December 2016, Brexit represents a significant threat to the UK’s and, in particular, to Scotland’s future economic and social prosperity. In the intervening 12 months since the publication of that paper, the scale and specific nature of this threat has become even more evident. It is now even more clear that any kind of future relationship short of EU membership will be damaging to Scotland’s future economic and social prosperity. The extent of this damage, will be more significant the further away the future relationship is from membership of the European Union ( EU).

2. As a government it falls to us to ensure our voice - representing as it does the interests of our people, our society, our environment and our economy is heard and acted upon by the UK Government as it takes forward the most crucial set of negotiations in our recent history.

3. The Scottish Government has been clear that we have a hierarchy of preferred outcomes following the referendum. We continue to believe that Scotland’s future is best served by continued EU membership. If this is not possible, within the context of the outcome of the EU referendum, then we have been clear that the UK should remain within both the European Single Market and a Customs Union. ^[1] We also put forward options to allow Scotland to maintain this status in the event that the rest of the UK should choose a different outcome. These differentiated options remain valid within the current context and, if the UK opts to leave the Single Market, we believe they should form part of the considerations within negotiations on our future relationship now that phase is getting underway.

4. As the Brexit negotiations enter the second stage from January 2018, it is essential that the UK Government places at the forefront of its strategy the fundamental economic, environmental and social interests of the country as a whole. We are disappointed that it has taken almost nine months to make progress in the first phase of the Brexit negotiations which, as the EU has made clear, has delayed the beginning of vital negotiations on the framework for the UK’s future relationship with the EU. The pressure on the negotiations has been exacerbated by the time it has taken the UK Government to get to a position to begin detailed negotiation with the EU, some nine months after Article 50 was triggered. It is now of critical importance that a credible position on transition is reached within the first few months of 2018, ahead of talks on the future relationship which will be significantly more complex than the first phase of negotiations.

5. At present, considerable, and damaging, uncertainty continues to characterise the negotiations and the UK Government’s ultimate objectives with regard to the future relationship with the EU. We welcomed the commitment the Prime Minister offered in her speech in Florence that the UK would seek to continue to trade on current terms, implying that we will remain within the European Single Market and a Customs Union for a transition period beyond March 2019. However, inconsistencies and a lack of clarity in what form that transition will take - and most critically what will follow it once the transition period expires - remain. While the EU has been clear that a so called ‘steady state’ transition could be agreed, the UK Government has defined the parameters of this increasingly selectively, risking an incoherent sectoral approach which will not meet the needs of businesses and individuals.

6. Not withstanding this, it is vital that agreement on transition is reached early in 2018 and that it is credible. While recognising the UK will not be a member of the EU during this transition, nonetheless pragmatic arrangements must be found to ensure Scotland’s continued participation in specific EU decisions, such as annual fishing quotas, during this period. However, complete certainty on what the UK Government will secure will only be clear once the withdrawal treaty is agreed.

7. As a government, we firmly believe that Scotland’s future economic, environmental and social prospects will best be served as a member of the European Union as an independent state. The First Minister has made clear that we will scrutinise the detail of any final Brexit deal negotiated by the UK Government before deciding any further steps in terms of giving people a choice on Scotland’s future. However, that position does not interfere with our duty, or compromise our responsibility, to vigorously protect Scotland’s interests under the current constitutional arrangement. Accordingly, it is essential that Scotland’s position is fully represented as the UK Government negotiates on issues that will determine the UK’s future relationship with the EU.

8. In the period since the publication of Scotland’s Place in Europe, we have sought to engage with the UK Government on the approach it is taking to the Brexit negotiations. To date we have been disappointed with the results of these endeavors. As we begin on the second and most crucial part of the Brexit negotiations, it is essential that the UK Government fully involves the Scottish Government - and the Welsh and Northern Irish devolved administrations - in these negotiations. Discussions about how that will take place are now underway, though have yet to reach any meaningful conclusion.

9. We have also continued to consider the implications of the differentiated approach which we set out in Scotland’s Place in Europe should the UK as a whole not remain part of the European Single Market and Customs Union. These proposals are particularly relevant given the nature of the commitments that the UK Government has made regarding the island of Ireland. Here, in the absence of a comprehensive trade deal between the UK and EU, Northern Ireland could have a different relationship with the EU from Scotland, England and Wales. This is set out in paragraph 49 of the joint report as follows - “The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU- UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.” ^[2]

This raises profound questions about the validity of the UK Government’s summary dismissal of the elements of the Scottish Government’s proposals for a differentiated relationship as unworkable. It also has implications for the relative competitive positions of the Northern Irish and Scottish economies in the event of each having a different level of access to the European Single Market.

10. In this period we have also engaged with Scotland’s businesses, workforces and citizens to understand their concerns about Brexit, and how these concerns might be allayed. We reported some of the key concerns raised by businesses in our recent publication, Brexit: what’s at stake for businesses. ^[3]

11. We have also been undertaking further analytical work examining the broader implications of the different scenarios that will define our future relationship with the EU on our economy and society. The conclusions are stark and unambiguous: in the context of Brexit, Scotland’s future economic prospects are best protected by the UK remaining within the European Single Market ^[4] and a Customs Union which replicates the terms of the current EU Customs Union. ^[5] This outcome is achievable and should be coupled with a transitional period beyond March 2019 during which the UK remains dynamically compliant with all EU law and policy under the current terms of membership.

12. This paper sets out, in detail, the evidence and arguments that underpin our objective of remaining within the European Single Market and a Customs Union - the enhanced European Economic Area ( EEA) option. In doing so we build upon the analysis presented in Scotland’s Place in Europe. ^[6] In particular, here we extend the work reported in Scotland’s Place in Europe by:

a. demonstrating the costs to Scotland of exiting the EU by a comparative analysis of the macro-economic impact under the only realistic three alternative scenarios - (i) continued European Single Market membership, (ii) a preferential UK- EU (free) trade agreement (the UK Government’s apparent preferred option), and (iii) non-preferential access to the European Single Market under WTO provisions;

b. considering the future economic opportunities that will accrue to Scotland if we remain inside the European Single Market, and therefore able to share in the economic gains that will come from the further consolidation of that Single Market, notably in trade in services and completion of the digital Single Market;

c. examining the consequences of a hard Brexit for a range of policy objectives and aspirations we share with our EU partners, and which we have contributed to, and benefited from, for many years. This includes EU environmental policy, social policy, research and innovation and policies in the area of consumer protection and safety;

d. assessing the substantial benefits to our economy and society that have been secured through the freedom of movement of persons, one of the four ‘freedoms’ at the heart of the European Single Market; and

e. proposing a solution for the UK’s long term relationship with the EU which mitigates - though does not offset - the costs of Brexit, and ensures our economy and society remain within the European Single Market and a Customs Union from which we derive considerable economic and social benefits.

13. Although our primary aim in this paper is to highlight likely impacts of a hard Brexit that will result in Scotland being outside the European Single Market and a Customs Union, we also hope the propositions set out in this paper will find broad support across the political spectrum in Scotland, and beyond and help ensure that the UK Government position can be fully representative. We will seek to build the necessary consensus to ensure the UK negotiating position reflects Scotland’s interests, and we will seek to ensure the legislative competences of the Scottish Parliament are protected as the negotiations proceed.