Scotland's Place in Europe

Chapter Two: What Is the European Single Market and Why Does It Matter?

Scotland and the European Single Market

17. Today, Scotland is a fully integrated part of the European family of nations and of the European economy. In large measure this is a direct consequence of our membership of the European Single Market - the centrepiece of the EU. Leaving the EU will change our place in Europe. Leaving the European Single Market and the EU Customs Union will damage our economy and undermine our wider social interests.

18. In this chapter we first set out why Brexit in general, and exiting the European Single Market in particular, threatens to fundamentally damage Scotland's economic prospects. We then turn to the wider social implications of Brexit and demonstrate why we believe our ambition to remain an open, inclusive and responsible society is at risk.

19. It is this analysis that forms the basis of the Scottish Government's insistence that if the UK Government is not prepared to protect Scotland's - and we believe the UK's - economic and social interests by remaining inside the European Single Market, then it must enter into discussions with the Scottish Government to explore the possibilities of securing a differentiated outcome for Scotland. That is, an outcome that permits Scotland to remain inside the European Single Market.

20. In the context of Brexit it is important to distinguish between membership of the EU and membership of the European Single Market. As we make clear throughout this paper, the Scottish Government recognises that a majority of voters in England and Wales voted in favour of leaving the EU. But, as we note at various points in this paper, we do not accept this requires any part of the UK to exit the European Single Market. This is because, since 1994, it is possible for some countries outside the EU to be in the European Single Market. This is the course of action we urge the UK Government to pursue.

21. As a result of the European Economic Area ( EEA) Agreement, three of the four countries of the European Free Trade Association ( EFTA) - Norway, Iceland and Liechtenstein - became members of the European Single Market even though they were not, and are not, members of the EU. In essence, the European Single Market was extended to include these three countries. As a result, these countries participate in the European Single Market and are compliant with the obligations of membership of that single market. However, the obligations under EEA membership do not cover the Common Agricultural Policy ( CAP) or Common Fisheries Policy ( CFP); or trade in all agricultural or fisheries products. However, as we note in the final section of this chapter, EEA membership does not preclude co-operation with EU Member States across a number of issues we regard as vital to Scotland's economic and social interests.

22. As we discuss in greater detail in Chapter Three, it is therefore possible, and perfectly feasible, for the UK to leave the EU but to be in the EEA and thereby protect Scotland's membership of the European Single Market. Assuming that the decision to exit the EU is irreversible for the UK Government - politically, if not legally - EEA membership is the outcome the Scottish Government considers to be the least damaging to Scotland's interests. EEA membership is what is widely referred to as a "soft Brexit". Any alternative to EEA membership will result in the UK being outside the European Single Market - in other words, it will represent a "hard Brexit".

23. It is also highly desirable that the UK remains part of the EU Customs Union such that goods entering the UK from outside the EU would continue to be subject to EU rules of origin and the Common External Tariff. This would then mean that goods exported from the UK to the EU would not incur the additional costs that will arise if the UK is outside the EU Customs Union. This would not only avoid disruption to the complex global supply chains in which many Scottish companies are involved, it would also ensure that businesses (especially small and medium-sized enterprises) are not subject to the administrative and compliance costs necessary to satisfy EU rules of origin stipulations - costs that might exceed the external tariff that otherwise would be applied ^[6] .

24. We conclude that retaining membership of the European Single Market and EU Customs Union would be the least bad outcome for the UK as a whole. But if the UK Government decides to leave the single market, we would still argue that the UK should remain inside the EU customs union.

25. It is difficult to overstate the importance of Scotland's continuing membership of the European Single Market ( i.e. a "soft Brexit") as opposed to Scotland's producers accessing that market as non-members, or "third countries". Any country in the world is able to access the European Single Market as long as it is not subject to trade sanctions, but it will be subject to tariffs on goods and encounter regulatory barriers ^[7] . As matters stand, the UK's exit from the EU is likely to be subject to similar third country treatment. This would see the imposition of tariffs on Scottish exports to the European Single Market, damaging the competitiveness of our goods and driving down exports. However, perhaps more significant would be the non-tariff barriers, such as divergent regulatory standards, which would restrict the extent to which companies could access the European Single Market ^[8] .

26. The European Single Market is an area presently comprising 31 countries, representing in excess of 500 million consumers, within which impediments to the free movement of goods, services, capital and persons have been, or are being, progressively eliminated. Adhering to these "four freedoms" therefore defines the core obligation of membership of the European Single Market, and it is only through membership that comprehensive access can be secured. The EU has been clear that these four freedoms are indivisible, which is in conflict with the UK Government's aspiration to secure a bespoke agreement with free trade with the EU and control over UK borders ^[9] .

27. The European Single Market is much more than a "free trade area". Free trade areas, and free trade agreements, typically involve the removal of formal barriers to trade - namely customs duties (tariffs) and quotas. What they do not generally provide for is the elimination of non-tariff, or technical, barriers to trade; that is, barriers to trade that result from the vast array of national regulations and laws that govern the production, distribution, marketing and sale of goods. In practice, these remain very significant obstacles to trade between the EU and third countries. Moreover, free trade agreements tend to cover only industrial goods. They do not typically include agricultural and food products, although more recently many cover market access for services. Outside the European Single Market, the international trade of basic agricultural and fish products is subject to bilateral agreements between individual EFTA or World Trade Organisation ( WTO) member states and the EU. Such agreements set out the tariff and non-tariff (including technical measures) barriers that apply to trade.

28. By contrast, the European Single Market continues to eliminate these technical barriers to trade. This is achieved by a combination of "mutual recognition", whereby national governments recognise the regulations in force in EU partner countries as equivalent to their own regulations, and harmonisation of standards in cases where they do not accept equivalence.

29. Trade in goods and services tends to be highly sensitive to technical barriers to trade resulting from different national regulatory regimes. A substantial part of EU legislation is designed to ensure that goods and, especially, services meet a minimum standard of performance, safety and reliability, and therefore may circulate freely within the European Single Market. Countries outside that market have no automatic access to the EU market, even where the necessary standards are met. The National Institute of Economic and Social Research recently estimated that the losses in bilateral trade with other EEA countries from leaving the European Single Market could be as much as 60% ^[10] .

30. If the UK does exit the European Single Market, then it will become a third country for the purposes of EU trade policy, and negotiations will be necessary to determine UK access to that single market. It is likely that the UK and the EU may at some point reach a future trade deal, although reports have suggested this could take as long as 10 years ^[11] . This deal could include, in line with many modern free trade agreements, elements of both industrial products and secure some market access for services which may avoid the imposition of tariffs and quotas. Products will be included only if they conform to EU standards and regulatory requirements, and can demonstrate this. However, whatever the scope and scale of any such deal, it will be unable to replicate the current level of market integration which we enjoy through membership of the European Single Market. This will consequently create costs for business throughout the UK and will mean service providers have a much lower level of market access than is currently the case. A trading relationship of this nature will also disadvantage UK producers who will not be able to meet "just in time" delivery requirements as goods will be subject to administration as they cross borders into the single market.

31. The European Single Market is more than a single market for goods and services. It is also an area within which persons and capital move freely - once again an arrangement that is unique, in global terms, to the EU. These freedoms allow workers and their families to move across the EU to work and live, and to contribute to other countries' economies and societies. They allow businesses to invest anywhere in the European Single Market and to bring with them new jobs and new technologies that can boost productivity and raise living standards.

32. It is important to recognise that "free movement of people and services" is far wider than free movement of labour. It implies the right of companies to set up branches in other Member States and to move directors, managers, sales personnel and technical support staff as required. It also allows independent professionals (lawyers, doctors, architects and others) as well as self-employed artists and craftsmen of all types to establish themselves and their products and services throughout the whole area of the single market.

33. As we show in this chapter, Scotland has benefited just as much from the free movement of people and of capital as a member of the European Single Market as it has from the free movement of goods and services. It is these considerable benefits that are now at risk from Brexit in general, and from exiting the European Single Market in particular. Moreover, in many respects the European Single Market remains "work in progress". It is a market in which considerable potential remains to be unlocked. New opportunities to increase our trade and co-operation within the single market will emerge as new market opportunities arise - opportunities in the digital economy, services sector, energy sector, retail sector, green economy and the knowledge economy in general. These are opportunities that will not be available to Scotland's businesses or workforce if we exit the European Single Market. They are opportunities that are highly unlikely to arise in any other trade agreement that the UK may negotiate anywhere in the world, especially in a global trading environment in which there are real fears of growing protectionism.

34. Significant as they are, the risks to Scotland of exiting the European Single Market are not purely economic. Membership of the European Single Market also involves implementing a range of measures designed to further the rights and interests of working people, protect and advance social and environmental interests and address wider societal challenges, such as climate change, through collaborative research and collective action. These aspects of the European Single Market are vital elements in pursuit of the wider agenda of social justice and an inclusive society to which the Scottish Government is firmly committed.

35. Brexit places at risk the continuation of social and societal protections, and the aspirations that they represent. Given that many of these sit within reserved areas, their continued effect would be subject to the will of the UK Parliament and UK Government, which would no longer be bound by the obligations of EU membership. The Scottish Government is committed to ensuring that Brexit does not lead to a regression from the high standards we have attained in these areas, largely through the implementation of EU law. Remaining a member of the European Single Market will guarantee that no such regression can occur or otherwise jeopardise the progress we have made, nor should Scotland be left behind our European partners in the area of social protection. We discuss these issues in greater detail later in this chapter.

Scotland's economy and the European Single Market

Free movement of goods and services

36. Scotland is a strong and resilient open economy with a skilled labour force, and the performance of the Scottish economy has improved across a range of indicators. GDP per head is higher than in the UK as a whole and higher than 20 of the 28 EU Member States ^[12] . Scottish Government analysis ^[13] , drawing on research by a range of external organisations, suggests that under a "hard Brexit" Scottish GDP could be up around £11 billion per year lower by 2030 than it would be if Brexit does not occur. Such an adverse shock to our economic performance would reduce tax revenues, and in turn the funding available for public services. The Scottish Government analysis estimates that resources for public spending could be up to £3.7 billion a year lower under a "hard Brexit" ^[14] , more than double the annual budget for Scotland's universities and colleges ^[15] . Independent research by the Fraser of Allander Institute highlights similar risks ^[16] . It estimates that after 10 years it could result in wages being £2,000 lower, and the Scottish economy supporting 80,000 fewer jobs, than would otherwise be the case. We are undertaking further analysis to assess the impact on specific sectors under different Brexit scenarios.

37. The impact of a changed relationship with the EU will be variable across sectors and regions. Higher impacts will potentially be felt in sectors where tariffs are reintroduced, regulatory barriers are prominent, which are dependent on workers from other parts of the EU, or where we rely on EU structural funds, for example, for infrastructure projects. Sectors like financial services have significant spillovers into other parts of the economy and, therefore, any slowdown here will impact more widely on people and businesses.

38. Rural Scotland may face particular issues from a changed relationship with the EU. The European Single Market and EU funding help to support investment in superfast broadband, business development, housing investment and measures to address fuel poverty along with other regional initiatives to support inclusive growth. The food and drink sector, which includes agriculture, fishing, and food and drink manufacturing, is heavily reliant on EU funding and the single market. The sector is vital to the Scottish economy, with an annual turnover of around £14.4 billion, contributing £5.3 billion in gross value added ( GVA) and employing just over 116,000 people. It is estimated that around 8,000 people employed in the food and drink sector are non- UK EU nationals and up to 15,000 non- UK seasonal migrant workers are employed in the soft fruit and vegetable sectors for harvest in summer and autumn. The EU is Scotland's most important regional market for food and drink exports, worth £2 billion and accounting for 39% of Scotland's total overseas food and drink exports.

39. Membership of the European Single Market is therefore central both to the health of our economy and our prosperity as a nation. It:

a) enables Scottish exporters to be inside the world's largest single market and allows our citizens to buy goods and services from any other part of the single market free from import taxes or other barriers;

b) ensures that our component manufacturers can prosper in the complex supply chains that characterise contemporary production systems;

c) ensures a level playing field for our exporters, and protection for our consumers, by setting common product and trading rules (including production rules) across the EU that must be met before a product can be sold - rules governing weight, size, packaging, ingredients, labelling, shelf-life conditions, and testing and certification procedures;

d) means that companies engaged in selling services such as financial products have so-called "passporting" rights, allowing them to sell directly to consumers across the EU; and

e) allows people and companies - architects, engineers, students, tourists, haulage companies to name only a few - to move around the EU and establish businesses, build careers and live their lives free from discrimination.

40. Removing Scotland (and the UK) from the European Single Market would undermine these and many other aspects of our lives and livelihoods that we now take for granted. It will:

a) reduce the ability for Scottish companies to export to the EU;

b) make Scotland a less attractive location for foreign direct investment;

c) reduce the supply of skilled labour and EU migration to Scotland impacting on our sustainable population levels;

d) ultimately reduce economic prosperity, wages and the funding available for public services; and

e) make it more difficult for Scottish people to travel, live, work and study in other European countries.

41. The EU is the main destination market for Scotland's international exports, accounting for 42% of the total in 2014. In 2014 companies in Scotland sold £11.6 billion of goods and services to firms and consumers in the EU ^[17] . The Centre for Economic and Business Research estimates that Scotland's exports to the EU ultimately support over 300,000 jobs across Scotland ^[18] . Such trade also has a number of wider benefits. Small and medium-sized firms who export are more likely to innovate and grow faster ^[19] . Continued membership of the European Single Market also provides for growth opportunities for Scotland - for example Norway's combined goods and services exports to the EU totalled €77.9 billion in 2014 ^[20] .

42. Retaining membership of the European Single Market and the EU Customs Union, as proposed by the Scottish Government, is essential to facilitating this trade. It ensures that Scottish companies selling into the EU do not face tariffs or non-tariff barriers on their exports as they would under WTO or bi-lateral trading arrangements. Such tariffs would either force companies in Scotland to raise their prices, thereby reducing their competitiveness, or reduce their profit margins, which would reduce the resources available for future investment. Ensuring that companies exporting from Scotland do not face tariff barriers also maintains the country's attractiveness as a location for inward investor companies seeking to export into the EU, helping to both maintain existing jobs and attract new investment. It would appear that, at least implicitly, the UK Government acknowledges this argument, at least insofar as the reports about a "deal" being struck with Nissan are accurate.

43. Foreign direct investment ( FDI) is an important source of investment in the Scottish economy. It has a direct impact on the economy through the jobs it creates. In addition, the new technologies, management practices and innovations which FDI introduces can feed through to the wider economy and in turn boost a country's overall productivity and prosperity ^[21] . Remaining in the European Single Market is critical to our continued success in this area, where we are already realising significant economic benefits.

44. Ernst and Young estimates that since 2006, FDI in Scotland has created 40,000 jobs. In 2015, Scotland attracted a record 119 FDI projects, a 51% increase on the previous year, compared with a 20% increase UK-wide ^[22] . Almost 80% of such investors say that being within the European Single Market was an important factor in their decision ^[23] . That presence within the European Single Market anchors businesses involved in complex integrated supply chains, which are a significant feature of our modern economy, it provides assurances over recognition of standards, and access to all the benefits which flow from the four freedoms.

45. There are 1,000 EU-owned companies in Scotland employing 127,110 people ^[24] . There have been reports that a number of companies are re-evaluating their investments in the UK. For others, a "hard Brexit", by raising the cost of trade with the EU, would reduce the return which could be achieved by continuing to invest in their Scottish operations. By retaining membership of the European Single Market, Scotland would continue to offer a highly attractive location for inward investors seeking to export to the wider EU market. While we are not suggesting Brexit will result in an immediate relocation of FDI in Scotland, there are genuine concerns that Scotland will lose out on future inward investment as companies re-orientate their foreign investment activities. A survey by KPMG ^[25] has suggested that 76% of UK CEOs are considering relocation and the Japanese Government ^[26] has also warned about the risks to FDI following Brexit.

46. Particular concerns arise with respect to the consequences of single market exit for Scotland's services sector. Exports from the service sector have had increasing importance in terms of their share of international exports in recent years, accounting for 38% of all exports in 2014 compared with 24% in 2002. The service sector now accounts for around 34% of Scotland's EU exports compared to 18% of total exports to the EU in 2002 ^[27] .

47. Trading in services is fundamentally different to trading in goods. Service providers are not generally affected by tariffs and rules of origin requirements. Instead they depend broadly on access to markets through:

• rights to establish operations in foreign countries;
• harmonisation and mutual recognition of rules, regulations and standards; and
• consistent application and enforcement of these rules.

48. Over time, the elimination of these sorts of highly complex non-tariff barriers has become considerably more important to trade than tariffs, and especially so for services ^[28] . Our increasingly important services sector is extremely vulnerable to the negative effects that are likely to arise if Scotland is required to exit the European Single Market. It is a simple fact that no trading arrangement in the world offers the degree of access for providers of services that is in any way comparable to that available to members of the European Single Market.

49. Within Scotland's growing services sector there is little doubt that financial services providers are particularly vulnerable to Brexit. Presently our financial services providers enjoy so-called "passporting" rights whereby they are able to sell financial services products directly across the European Single Market because the UK regime of financial market regulation conforms to agreed EU standards - standards that the UK Government has been pivotal in setting. When the UK exits the EU it is probable that these "passporting" rights will be lost, with consequential adverse effects on Scotland's financial services sector. Retaining membership of the European Single Market would ensure this problem did not arise and "passporting" rights would be retained, opening up potential new business for Scottish companies.

50. As noted earlier, the European Single Market is not yet complete. As work continues to eliminate the remaining technical barriers to trade, very significant economic opportunities will open up in the years ahead. For example, digital technologies are transforming the European Single Market from manufacturing processes and automation to the way in which we make, purchase and consume creative content and other services like transport and accommodation. The EU is currently taking steps to ensure that the benefits of these exciting new developments are available to businesses and consumers across the European Single Market through the Digital Single Market Strategy. The Commission estimates that a fully functioning single market in digital services could add €415 billion to the EU economy ^[29] . Additional growth would result from increased trade in cross-border services in a huge range of sectors, from cloud computing to engineering and accounting. Similarly, it is estimated that full implementation of the Services Directive could add a further 1.8% to EU GDP ^[30] . It is vital that Scotland does not miss out on these significant future opportunities which will lead to new trade, new investment and new employment.

51. Exiting the European Single Market will also jeopardise Scotland's research and innovation activities. Innovation is a fundamental driver of long-term competitiveness and sustainable and inclusive growth. It encompasses the development of new processes, products, services, workforce design and business models. More innovative economies are also likely to have the capacity to be resilient to changing economic conditions and have greater ability to succeed in international markets.

52. Scotland's universities lie at the heart of Scotland's innovation system. Research and development (R&D) by higher education institutes in Scotland stood at almost £1.1 billion in 2014, representing one of the highest levels of R&D intensity in the Organisation of Economic Co-operation and Development ( OECD) ^[31] . Strong relationships with other EU countries, including the free movement of world-class researchers, is a central part of this research and innovation system.

53. Over a quarter of all research staff at Scottish universities are from the EU ^[32] . The ability for researchers to collaborate with and work at Scottish institutions is integral both to the development of new ideas and to the dissemination of innovations. By facilitating the free movement of people, Scotland's continued membership of the European Single Market within the EEA would ensure that universities faced no impediment to continuing to recruit and retain the strongest researchers from across Europe. In addition, EU students add to the diversity of our communities, enrich the learning experience and contribute to our economic prosperity. We are concerned about the level of uncertainty for current and future EU students created by the decision to leave the EU, particularly over issues such as tuition fees.

54. More broadly, membership of the EEA would allow Scottish institutions to continue to participate in the Erasmus programme and other exchange schemes. By providing opportunities for Scottish students to study at other institutions, and vice versa, such programmes facilitate the dissemination of knowledge and allow Scottish students and institutions to establish links with counterparts across Europe.

55. It is essential to recognise that the free movement of services that Scotland presently benefits from within the European Single Market is in many senses inseparable from the free movement of people. Many services exported from Scotland, including the diverse range of professional services that represent an increasing share of our total exports, are dependent on the ability of service providers - such as architects, lawyers, accountants, artists and academics - to move within the European Single Market and provide their service free from any discrimination on the basis of nationality. This is simply one example of the benefits of free movement of persons, and one reason why the Scottish Government cannot support a UK Government policy that will bring this to an end.

56. It is clear that exiting the European Single Market and the EU Customs Union would have a significant and highly adverse impact on our economy and economic prospects. These effects are likely to be felt over both the short term, as the costs of accessing the European Single Market increase, and the long term, as consequences for reduced domestic and foreign investment in the economy, and hence jobs and growth, become clear.

57. If Scotland were to be excluded from the European Single Market, the sectoral effects of Brexit will be significant. Although the severity of exclusion for each sector will depend on a host of factors, including the transitional arrangements agreed upon as the UK exits the EU and the "new relationship" that will supersede EU membership, no economic sector is likely to be immune from this shock and the complexities it would bring. Moreover it is highly unlikely the adverse investment, employment and growth effects that will occur if Scotland exits the European Single Market will be offset by new trading opportunities elsewhere in the world.

58. Therefore, while the costs of Brexit to Scotland's economy cannot be avoided in their entirety, there can be little doubt these costs will be mitigated as long as the UK, and Scotland, remains within the European Single Market and the EU customs union.

Free movement of people: Scotland's workforce

59. Scotland's economy is driven by people and by the quality of our workforce. There are currently around 181,000 non- UK EU citizens living in Scotland, bringing new skills and expertise and in turn, helping to underpin future productivity growth ^[33] . According to a HMRC report, in 2013-14, recent EEA migrants made a positive contribution to UK public finances of over £2.5 billion ^[34] .

60. A wide range of companies have been consistent and clear that it is not simply the free movement of goods and services around the EU which is vital to their business, but that the availability of labour from an EU-wide pool is absolutely essential. Skilled and unskilled labour are both important and fulfil diverse needs across our economy.

61. This need is evident right across the economy, from fish processing to cutting-edge research. In recent evidence to the Scottish Parliament's Economy, Jobs and Fair Work Committee, James Porter from Angus Soft Fruits Ltd. stated that, if he was not able to recruit from other EU countries, the company "…could scale right back and try to match production to the available labour or we could move production abroad." Both of these outcomes would be damaging to the local economy. He also noted that, "…the business has grown by 150% in the past 10 years. " Of course, the agriculture and food processing industries may face increased tariffs on their goods (for instance, the average tariff on Norwegian fish products entering the European Single Market is 5% ^[35] ) and we will do all we can in future negotiations and policy choices to mitigate those possible impacts.

62. The figures below illustrate the number of EU nationals employed in key industries in Scotland:

Chart 1 - Number of Non- UK EU Nationals in employment by Industry in Scotland in 2015 ^[36]

63. Our remote and rural communities depend on workers from the EU in a range of sectors, with tourism providing more than 200,000 jobs in total ^[37] and 21,000 of these held by non- UK EU nationals. Around 8,000 people employed in the food and drink growth sector, particularly the fish and meat processing sectors ^[38] , are non- UK EU nationals and up to 15,000 non- UK seasonal migrant workers are employed in the soft fruit and vegetable sectors for harvest in summer and autumn ^[39] .

64. Free movement of people is also vital for essential public services. Approximately 3% of health and social care staff in Scotland are from other EU countries ^[40] . More broadly, figures from the General Medical Council show that there are 6% of doctors working in the UK whose primary qualification is from another EU or EEA country ^[41] .

65. In the UK as a whole, the growth in the population has been driven in equal measure by those born in the UK, EU and non- EU countries. By contrast, in Scotland, the population growth has been driven more strongly by EU net migration, with 50% of the net population growth accounted for by EU-born individuals. This is a higher proportion than in the UK as a whole, where those born in the EU accounted for only a third (32%) of the net increase over this period ^[42] .

66. National Records of Scotland ( NRS) published new population projections for Scotland to 2039, based on varying potential levels of European Union migration. These projections were commissioned and created for illustrative purposes only. Scotland's population is projected to increase by 7% between 2014 and 2039. However, in a situation where EU migration to Scotland falls to half of current levels, population is projected to rise by 5% over the same period. If there is no EU migration, the projected population growth is only 3%. In the scenario with no EU migration, the number of people aged 16-64 in Scotland is projected to fall by 9% between 2014 and 2039 compared to a rise of 53% in those aged 65 and over - indicating a likely significant reduction in the size of the workforce and likely increase in the dependency ratio.

67. Over the next 10 years, 90% of our population growth is projected to come from migration. Any move which limits migration ^[43] , whether from within or beyond the EU, has the potential to seriously harm Scotland's economy ^[44] .

68. As an economy we need the inward flow of people not just to support the growth of our businesses and services, but to provide diversity and vibrancy to our communities. These benefits are mutual. Over the years many Scottish and UK employees have enjoyed the opportunity to work in other EU countries, develop skills and often bring back much needed expertise and ideas.

69. Local government in Scotland has a significant stake in future options. Local government delivers a whole range of policies with a European dimension. Social and environmental protection, health and consumer protection, working time directives, the transfer of undertakings, procurement and state aid, transport policies, and rural and maritime policies are among areas connected to the EU. Local Government has also benefited from funding and networking in support of economic and social regeneration. There are several studies of local economies, such as that a partnership in theCity of Glasgow Council ^[45] , which demonstrate the scale of this impact.

Beyond the marketplace: social inclusion, societal challenges and the European Single Market

70. As we noted at the beginning of this chapter, the European Single Market is more than a purely economic arrangement. In addition to the considerable economic benefits we derive from membership, it has also become a framework that is capable of protecting and advancing individual and collective rights, as well as a range of broader societal interests. European Single Market legislation embraces and promotes a wide range of measures that protect, and advance, the rights and interests of workers. These include employment rights, social protection, equality rights, social inclusion and disability rights. Moreover, as consumers we have benefited from EU rules and as a society we have achieved a high level of environmental protection and measures to combat climate change. This owes much to the EU legislative framework and the EU's international standing.

71. There are understandable and real concerns that Brexit will place at risk a number of these protections and achievements which represent a "floor" or "baseline" beneath which national rules cannot fall (this does not prevent any Member State aspiring to higher levels of social protection). The Scottish Government is determined this cannot be permitted to happen. Brexit must not be an opportunity for any regression in the advances in social protection that have been secured through EU legislation. These rights are most easily protected, and the principle of "no regression" upheld, by Scotland remaining within the European Single Market. That is yet another key reason the Scottish Government places such a high premium on continued membership of the European Single Market.

72. However, as we make clear later in this paper, if that proves not to be possible and Scotland finds it is no longer a member of the European Single Market, then it is imperative that the necessary powers to protect the rights our workers and citizens presently enjoy are devolved to the Scottish Parliament. That will ensure it is the people of Scotland who will determine the social protection and social inclusion framework within which they work and live.

73. There are legitimate concerns that if Scotland is outside the European Single Market and its legislative framework there will be less pressure on the UK Government to maintain the high standards of protection we enjoy under European Single Market rules. The body of European Single Market law which has developed in these policy areas, constituting some of the rights and protections we value highly, ensures a level playing field in which participating countries meet the same fundamental standards. In other words, it prevents members of the European Single Market engaging in a "race to the bottom" in the rights and interests afforded to us as workers, consumers and as members of society.

74. That is why the Scottish Government is determined to secure the further devolution of the powers necessary to protect these interests and continue to promote social protection and social inclusion under any post-Brexit scenario. However, we would wish to do so as a member of the European Single Market - this is a well-established framework for mutual co-operation and collaboration which has a proven record in delivering the benefits of collective action.

75. While safeguarding the rights and interests of workers and citizens, and protecting the environment, is central to our case for continued membership of the European Single Market, we cannot ignore the wider ramifications of bringing to an end the ability of EU citizens to freely work and live in Scotland, and of our citizens to freely work and live in other countries that are members of the European Single Market.

76. As members of the European Single Market we have rights to travel and work in any of the 30 other countries that make up the European Single Market, just as workers from these countries can settle in Scotland and contribute to our economy and society. The current arrangements facilitate free movement across the Single Market for all EU and EEA citizens with an initial right of residence in a host State for up to three months. Beyond then an individual, and their family members, have rights to reside if they are a worker, self-employed, economically self-sufficient (for example, retirees), a student with sufficient resources to support themselves ^[46] , or a jobseeker who has a genuine chance of gaining employment.

77. Our citizens who currently work abroad, and those who may wish to in the future, benefit from rules on social security co-ordination, formed around the principle of equal treatment or non-discrimination within the EU and the EFTA states (Iceland, Lichtenstein, Norway and Switzerland). Nationals of States which are part of the European Single Market, and their families, are protected by three core principles - preventing double coverage, guaranteeing equality of access to migrants and nationals, and ensuring that previous periods of insurance, work or residence in other countries within the European Single Market are taken into account.

78. They also benefit from a system of reciprocity across the EU Member States in relation to private law (including commercial law, family and procedural matters in relation to litigation). There can be no doubt that the life each individual in our country is enriched by the cultural diversity and vibrancy that people from other EU countries bring to our neighbourhoods, our sporting teams, to the arts and our cultural life, and to our workplaces.

79. A key feature of free movement of goods and services has been the prohibition of discrimination and unfair treatment, so that no customer can be treated less favourably because of their race or gender. EU law also protects against discrimination on the basis of racial or ethnic origin, religion or belief, disability, age and sexual orientation. EU legislation in the field of Consumer Protection is extensive, ensuring that the provision of goods and services to the consumer meets a minimum standard.

80. EU law provides a far-reaching suite of protections and standards in relation to the environment, whether that is how we control pollution of our air, water and land or how we promote and protect our biodiversity in all its forms. Some of these areas are closely aligned to the European Single Market, for example legislation in the field of resource efficiency and waste management cannot be disentangled from the design, production, sale and use of products which are traded.

81. As a single market with free movement of people a core freedom, the EU has driven forward minimum standards for all on a wide range of work place protections, from safety at work to ensuring equal pay for men and women.

82. The examples illustrated here describe only a small number of the protections guaranteed under EU law. This concern about social protections goes to the heart of our values as a nation. Our relationship with the EU, and in particular with the European Single Market in all its manifestations, is about more than the impact on our economy and our society. It is ultimately about the country we want to be, standing by our neighbours and benefiting from the collective approach to a range of global challenges.

83. We want to continue to be a vibrant, diverse country that faces outwards and is a confident and responsible global citizen. That means welcoming the free movement of people because it reflects the welcoming place we want to be - and we want our own citizens to experience in return. We want to continue to implement progressive social policies and environmental measures and play our part to make the world a safer, fairer and cleaner place, bringing to bear our world-class expertise on, for example, marine energy, fair work, fisheries management or climate change. The foundation stone for this rich and productive future relationship with the EU needs to be membership of the European Single Market.

84. For all the reasons set out in this chapter we strongly believe that in the current circumstances the UK Government should argue energetically for the UK as a whole to remain a full member of the European Single Market in all its aspects.

Single Market Membership and policy Cconvergence

85. Assuming Scotland remains inside the European Single Market, it will fall to the Scottish Parliament and the Scottish Government to ensure our domestic laws and regulations comply with the obligations of membership. This is reflected in the EEA Agreement to which, directly or indirectly, Scotland would seek to become a contracting party, and is addressed later in this paper. Of course, none of these obligations are new. As a member of the EU we are currently fully compliant with the rules which would apply if we remained within the single market under the EEA Agreement.

86. However, in addition to the policies we would be required to retain - and to which we are presently subject in any event - the EEA Agreement would also provide the strongest foundation for Scotland to continue to co-operate with our EU partners across a range of activities outside the strict scope of the European Single Market that are of vital interest to Scotland. These are areas in which Scotland already is a fully participating partner, and from which we derive considerable benefits.

87. It is not our intention here to set out an exhaustive list of these policy areas; rather we provide illustrations of the broad range of policy and operational interests at stake. Once again we would emphasise that our preference, in all the examples we explore here, would be for the UK as a whole to remain a participant in these policy areas. If that proves not to be possible, Scotland must have the opportunity to continue to participate directly in these policy areas through membership of the EEA.

88. Energy and climate policy has domestic, regional and global implications and connections. The EU's legislative reach, market influence and climate diplomacy are extensive. The EU has led international efforts to secure a global, legally-binding agreement to address climate change, and was instrumental in two decades' worth of complex negotiations with other major economies such as the US, China and India, to deliver the landmark Paris Agreement in 2015. Through the UK's membership, Scotland has benefited from being a direct part of the EU's considerable diplomatic clout in the climate negotiations, projecting our domestic climate leadership internationally, through collective effort with our EU partners - an influence that would diminish outside the EU. At home, the EU's climate and energy objectives are also increasingly important in UK and Scottish efforts to address the energy and climate goals of ensuring secure, affordable and de-carbonised energy supplies while also ensuring that those energy supplies continue to drive competitiveness and economic growth. Companies developing clean, innovative technologies have been supported by crucial EU funding to explore ocean energy, alternative fuels, energy storage and smart grid technology.

89. Examples of recent EU awards to Scottish marine projects (not yet drawn down) include €37.4 million of NER 300 funding for MeyGen phase 1B and Sound of Islay; €10 million of Horizon 2020 funding for Scotrenewables Tidal Power; and €3.9 million to support tidal energy testing and demonstration in waters around Orkney. The European Investment Bank ( EIB) has also agreed to provide £525 million to support the construction of the Beatrice windfarm. This is the single largest support ever for investment in an offshore wind project by the EIB. Scotland needs to continue to benefit from EU programmes, co-operative projects, and access to the preferential lending of the EIB, but also has huge expertise we want to continue to offer.

90. Maintaining access to the internal energy market is also a priority for energy stakeholders in Scotland, as it is across the UK ^[47] . The internal market is vital to delivering low cost, affordable energy, and to driving de-carbonisation and investment in renewables. EU legally-binding renewable energy and energy efficiency targets have driven the huge growth in renewable energy in Scotland, giving certainty for investors and making a significant contribution to achieving our climate change targets. Internal market rules ensure fair access for suppliers, set a framework for interconnection, and protect consumers. This contributes to lower energy costs, greater security of supply, and the competitiveness of our business and the Scottish economy.

91. It will be important to ensure continuing participation in law enforcement, criminal law and civil law measures. For example, we believe Europol and Eurojust help to keep people safe and secure by allowing rapid information-sharing and effective co-operation between police and prosecutors in the prevention, investigation and prosecution of crime. These are vital in tackling serious, organised cross-border crime and the damaging impact it has on Scotland's communities and the wider economy. The European Arrest Warrant speeds up cases and ensures criminals can be brought to justice, by allowing a rapid and straightforward system of surrender between judicial authorities within the EU. Important bodies, such as the European Judicial Network (criminal and civil), which are often used more extensively by Scotland than the rest of the UK, provide effective and comparatively low-cost ways of facilitating mutual legal assistance across Europe.

92. Access to EU funding - particularly the framework programme Horizon 2020 - is important for our universities. Scotland has a highly esteemed world-class university sector, with five universities in the global top 200 of the Times Higher Education ( THE) World University Rankings in 2016-17. This is more per head of population than any other country except Luxembourg ^[48] . Since 2014, almost €296 million of funding has been secured by Scottish organisations from Horizon 2020 ^[49] . In 2014-15 alone, Scottish universities secured £94 million from various EU sources (including EU governments, charities, business and other sources), representing 9.4% of their total research income ^[50] . As important will be the world-leading, multi-disciplinary, cross-border collaborations made possible by this funding. We have a strong international reputation for constructive partnership on research and development and are determined to ensure that continues to be the case.

93. Scotland has a moral and legal obligation to protect our country's magnificent natural resources and we remain committed to maintaining, protecting and enhancing our environment. The environment has been an important EU competence, that has allowed Scotland to achieve high levels of pollution control and environmental quality in Scotland and help influence the development of those standards across Europe. A single trading market allows the imposition of high standards across a wide area, allowing better environmental outcomes that benefit society as a whole by removing the pressure to compete in tradable sectors by lowering standards. Although some aspects of EU environmental legislation, such as the Bathing Water and Birds and Habitats Directives, are not included in the EEA agreement, membership of the EEA would require on-going compliance with many existing EU environmental protections. Maintaining, protecting and enhancing Scotland's environment will be best achieved through on-going co-operation at the European and International levels, and ensuring that future trading arrangements recognise the mutual gain to nations and their citizens from requiring high environmental standards.

94. Continued partnership on migration policy, beyond the freedom of movement afforded by the four freedoms, would build on the strong foundations already developed through the Scottish Government's approach to the refugee crisis, in partnership with other European nations. We think that it is important that the UK and Scotland fulfil their role as good global citizens in line with international obligations, to engage with international partners in offering asylum to those in need.