UK – breakaways on the back of Brexit

The exit of the United Kingdom of Great Britain and Northern Ireland from the EU has fanned the flames of independence in both Scotland and N. Ireland, leaving the otherwise united realm increasingly riven.

By: Jeppe Skårhøj, Senior Analyst, EKF Denmark’s Export Credit Agency

Since Brexit on 31 January this year, advocates of independence for Scotland and Northern Ireland have gained even more wind in their sails. In both countries, the majority of the population voted to remain in the EU and according to the latest opinion polls more than half of them now want to leave the UK and re-join the EU.

For Scotland, breaking away from the United Kingdom would, however, seem well-nigh impossible to achieve. The Scottish economy is closely bound up with Great Britain's, and Scotland is bolstered by subsidies from the union.

Major fiscal deficit

Considered in isolation, Scotland has for several years been running a fiscal deficit of 4-8 percent of Scottish GDP. The deficit is covered by the rest of the UK, which means that Scotland is dependent on union subventions. Were Scotland to gain independence, the government would immediately have to raise taxes or cut public spending drastically, at the expense of welfare and perhaps also investments in renewable energy.

Scotland has set itself an ambitious goal of a 75 percent reduction in its carbon emissions by 2030, which it will scarcely achieve with dampened investment in renewables. For comparison, Denmark is targeting a 70 percent reduction in emissions by 2030.

For years, Scotland reaped high revenues from oil extraction, but production is now falling, and since oil production accounts for a large share of the Scottish economy, Scotland is forced to diversify into other sources of revenue. The plan now is to invest in other, more future-proof sectors such as tourism, service, IT, manufacturing and financial services.

Scots to foot an extra bill

In Scotland, advocates and opponents of the British union are battling it out to win the 5-10 percent of as yet undecided voters. Many of these voters are focusing specifically on the economic consequences of breaking away from Great Britain. Scotland's trade with the other nations that make up the UK is worth three times that of its trade with the EU, and post-Brexit it is uncertain whether Scotland could re-accede to the European Union, and if so, on what terms.

In the debate on Scottish independence from Britain, more or less well-documented calculations abound of how much each Scottish family stands to lose from leaving the union. Amounts of as much as 4,000 pounds have been mentioned, which equates to a decent monthly salary for an average family.

A united Ireland

In Northern Ireland, the independence movement has even more wind in its sails, with Irish nationalists seeking to break away from Great Britain (England, Scotland and Wales) to unite the Republic and make the entire island of Ireland a sovereign state. At the Irish general elections on 8 February, to everyone's surprise, one in four voted for Sinn Féin, making it the largest party in the Dáil (Irish parliament).

Sinn Féinn went to the polls with a manifesto to improve welfare, provide more housing and unify Ireland, since it is already a force to be reckoned with in Northern Ireland as the second-largest party. The shock of the Sinn Féin success is due to its close ties to the IRA, the Northern dissidents responsible for bombings and shootings in the 1970s, 1980s and 1990s to force the British out of Northern Ireland.

This recent development lends credence to the movement to realise a united Ireland within the next decade. Unlike an independent Scotland, a united Ireland would be fairly well placed for economic success. The Irish economy is more independent of Great Britain and Ireland has for some years attracted international IT companies and financial businesses by offering favourable tax terms and low wages.

Increased nationalism

In any event, nationalism has grown in all parts of the United Kingdom, and there are fears that referendums on leaving this union might be influenced more by sentiment than a rational balancing of the pros and cons of the union. Which is essentially the same situation that caused the British majority vote in favour of Brexit.

For Danish exports, the effect of breaking up the United Kingdom would be to compound uncertainty on top of the challenges of Brexit. A positive effect would be that the break-away nations would re-join the European market, which would facilitate trade in goods and services for Danish exporters.