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Scottish Independence, the EU and the Rebate Debate

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Yes or no? Stay or go? #BetterTogether or #YesScotland? Either way, the #indyref showdown is fast approaching.

The white paper has come and gone. It was aesthetically pleasing, spruced up with pretty pictures and slick visualisations, but it was dangerously devoid of substance. It was full of contradictory conjecture and groundless reassurances, riddled with inconsistencies and astoundingly short on answers. Its 649 pages detailing the path to independence were ultimately lacking in, well, details.

In one chapter, it claimed that "successive Westminster governments have failed to provide effective stewardship of Scotland's oil and gas resources". Strange then, that a few paragraphs later, the phrases "through the success of the last five decades" and "international oil and gas centre of excellence" could be found.

Let's not digress into white paper bashing though, plenty of others have excoriated it already. The point is that Scotland's monumental decision is on the horizon and too many crucial questions remain unanswered. The entire independence debate is suffocated by over-simplification, romanticism and 'Braveheart' politics. The nitty-gritty details are too often overlooked and assumed to be inconsequential, particularly in discussions about an independent Scotland's EU status.

The future of a nation cannot be decided on conjecture and supposition alone. We need answers.

Admittedly, not all questions can be answered at present. Nobody, from the independence-obsessed to the EU-boffins to the politically ambivalent, can provide a legally-binding answer about Scotland's transition to the EU. Even the European Commission repeatedly affirms that it will only express an opinion on the legal consequences under EC law 'upon request from a Member State detailing a precise scenario'.

One thing that is clear is that an independent Scotland, as a member of the EU or not, would lose the 'special arrangements' that the UK has negotiated with the EU since joining in 1973. These include an opt-out from the single currency, an opt-out from the Schengen Agreement and the provision of the UK rebate. Jose Manuel Barroso, president of the European Commission, confirmed that the special arrangements would remain in place for the UK, but there is universal agreement that they would have to be renegotiated for Scotland.

If you didn't know already, this would be costly.

While the potential costs associated with the two opt-outs have already received considerable media attention, the provision of the rebate has been subject to less analysis. This is because not many people know too much about it and it isn't a 'sexy' media topic which sells papers.

The rebate was first negotiated by Margaret Thatcher in 1984. It was introduced as a redistributive mechanism to address the imbalance between the UK's high contributions to the EU budget and its relatively low economic output. The UK's rebate is the only permanent EU budgetary adjustment; Germany, the Netherlands, Austria and Sweden all have similar mechanisms but they have to constantly renegotiate them.

In practice, the rebate means that around 66% of the UK's net contribution to the EU budget is returned to the UK government. Instead of the UK simply contributing less, other EU member states, even the newest and the poorest, give money back to the UK. In 2012, the rebate totalled £3.2bn. As it is allocated to the UK Treasury as a lump sum, Scotland does not receive its own rebate. It receives a 'share' of the UK rebate. In 2012, this was around £295million.

It is a no-brainer that an independent Scotland would not inherit the UK's rebate terms. It would have to negotiate its own. Whether it could be negotiated or not is where the argument lies. Nicola Sturgeon, Deputy Leader of the SNP, claimed that she "would be confident of an independent Scottish government negotiating a good deal for Scotland" and the white paper, while admitting that it would have to be negotiated, asserts that Scotland would eventually inherit the rebate.

False.

What they conveniently forgot to tell us is that the current UK rebate is a major point of contention between the UK and other EU member states. It provokes fierce debate in Brussels. It is widely opposed outside of our borders. Understandably, other EU member states loathe giving vast sums of money to a rich and powerful member state which is increasingly intransigent and reluctant to engage constructively in EU politics. Furthermore, according to recent research, all other EU member states would gain financially from Scotland losing the rebate, with the biggest winners being France (€110m) and Italy (€85m). So why would they agree to let Scotland inherit the UK rebate?

They wouldn't and they won't. The chances that a deal beneficial to Scotland would be reached are slim to none.

If it happened today, the loss of the rebate would mean a direct loss of about £295m (€354m) per annum to Scotland. However, as the UK's rebate would not have to be renegotiated, Scotland, if accepted as a new EU member state, would also have to contribute to financing the UK's rebate. Danny Alexander, chief treasury secretary, recently confirmed that taxpayers in an independent Scotland would end up subsiding England's rebate and recent research published by New Direction showed that Scotland would likely be required to pay between £39m (€47m) and £46m (€55m) to do so.

Adding direct and indirect costs together, the suggestion is that Scotland could directly lose approximately €409m. According to New Direction, these costs would then result in reduced funds available for Scottish Government expenditure, or higher taxes. The sum costs of €409m would then result in a fall in output of €736m and 6,680 jobs foregone.

Those figures relate to the rebate alone. If Scotland had to join the Schengen area with other new member states, border controls with the rest of the UK could cost a further £105million (€126m). If Scotland was forced to join the euro (as all new member states are currently obliged to do) the total losses from higher transaction costs and changes in trade patterns could cost the Scottish economy up to £468million (€562) per annum. Combined, the £914million (€1,097m) cost of losing all three opt-outs could result in nearly £1.5billion (€1.8bn) of lost output and 17,000 jobs across the Scottish economy.

So Nicola, is this what you meant by "a good deal for Scotland"?

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