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Publication - Publication

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

Published: 15 Jan 2018
Part of:
Brexit, Economy, International
ISBN:
9781788515467

This paper presents the latest analysis by the Scottish Government of the implications for Scotland’s economy if the UK exits the European Union.

58 page PDF

3.6MB

58 page PDF

3.6MB

Contents
Scotland's place in Europe: people, jobs and investment
Chapter 3: The case for the European Single Market, Now and in Future

58 page PDF

3.6MB

Chapter 3: The case for the European Single Market, Now and in Future

66. As we have demonstrated in the preceding chapter, exiting the EU will have significant, unavoidable and adverse consequences for our economy, our society and, indeed, our way of life. However the costs of Brexit are not just the immediate costs to the economy. Consideration also has to be given to the wider range of benefits EU membership has provided us with and the future opportunities that will be lost to our economy, our environment, our workers and citizens as a result of the UK’s withdrawal from the EU. These opportunities will arise not only from the continual evolution and deepening of the Single Market, but also from the further development of common EU policies to which we currently contribute and from which we benefit. These are the long term consequences of Brexit - the opportunity costs - that we do not believe can be offset as the UK seeks new trading relationships outside the EU.

67. In this chapter we highlight some of the key Single Market and associated policy areas where the evidence indicates significant opportunities will continue to arise and from which Scotland could benefit. These are a mixture of the so-called ‘flanking’ and ‘horizontal’ policies in which the UK could continue to participate through both the European Single Market or in associated bi-lateral agreements, such as in justice and security. It should also be noted, that the modelling presented in the previous chapter is based on the Single Market as it stands, and does not reflect any future economic benefits from the developments set out in this chapter, although we present some estimates in this chapter of the potential future economic benefits.

68. Alongside the development of the European Single Market this chapter also presents, at a high-level, some of the opportunities for collaboration on key areas of security, environmental and social policy. It does not provide a comprehensive analysis of all of these areas, but the Scottish Government will publish further material in due course on individual policy areas.

The European Single Market: the untapped potential

69. Creating an environment where businesses are encouraged to develop, compete and grow nationally and internationally is a central priority for the Scottish Government. We believe remaining within the European Single Market is an essential component of maintaining that growth-friendly environment. Moreover, it is clear that the benefits we have derived from almost 45 years of membership of the Single Market are far from exhausted. Although substantial progress has been achieved in the years since the European Single Market programme was launched in 1992, it remains incomplete in key areas. Removing the remaining barriers to trade in goods and services will unlock further gains for commerce, consumers and workers across the EU. This is particularly true as the EU moves to complete an Energy Union, a Capital Markets Union, a Banking Union and a Digital Single Market. Furthermore, considerable potential remains untapped due to remaining barriers to cross-border trade in goods and services.

70. A study conducted by the European Parliamentary Research Service estimated the untapped potential from completing the existing Single Market to be in the order of €651 billion to €1.1 trillion per year, equivalent to an additional 5% to 8.6% of EU GDP, that could be realised from the phasing in of reforms designed to further ease the cross-border movement of goods and services, completing the EU digital Single Market and increasing cross-border public procurement. [33]

Completing the internal market for goods and services

71. The largest part of the untapped potential of the Single Market are expected to flow from completing the Single Market in services - an area of particular significance to the UK, and Scottish, economy. This would result from both the consistent implementation of the 2006 Services Directive and new initiatives aimed at increasing cross-border competition in network services, professional services and the retail sector.

72. Today services contribute approximately three quarters of Scotland’s GDP compared to less than half when we joined the EU. Over the same period the contribution of manufacturing has fallen from 36% to around 10% of GDP. The increasing importance of non-manufactured sectors to our economic wellbeing is also evident in the pattern of international trade. Exports from the service sector have increased as a share of total international exports in recent years, accounting for 38% of all exports in 2015 compared with 24% in 2002 and now also account for around 32% of Scotland’s EU exports, compared to only 22% in 2002. [34]

73. The long-term potential gain from completing the Single Market in services, where Scotland and the UK have a comparative advantage, is estimated to be of the order of 2.4% of EU GDP. [35] To put this into context, a 2.4% boost to Scottish GDP in 2016 would be equivalent to £3.6 billion, or £668 per person.

74. If, post-Brexit, the UK is not in the European Single Market through membership of the EEA, it is highly unlikely that Scotland’s economy, including in the key services sector, will be able fully to share in these additional benefits as the European Single Market is completed. Even the most sophisticated international trade agreements the EU has concluded with third countries does not provide for comprehensive access for third country producers and (in particular) service providers - including those providing financial services - to the Single Market. The EU’s chief negotiator Michel Barnier has been clear, that if the UK chooses a model outside of the European Single Market, financial services companies cannot expect to trade freely on the same terms as they currently do. [36]

75. However, it is not only in further liberalisation of intra- EEA trade in goods and services that significant economic opportunities will arise in the European Single Market in the future. Further benefits will flow from on-going developments in key economic sectors, and from participation in the policies through which the Single Market is regulated.

The Digital Single Market

76. The digital Single Market allows EU citizens and companies to more easily, and more securely, access and sell online goods and services across national boundaries. The potential gains of a digital Single Market could be in the range of €415 to €500 billion per year (3.0 to 3.6% of EU GDP) [37] as a result of higher productivity due to faster flow of information, greater efficiency in traditional economic sectors and higher levels of e-commerce. The European Commission estimates the benefits of reinforcing the integration of the digital Single Market to be 1.9% of EU GDP. [38] For Scotland, a 1.9% boost to GDP in 2016 would be equivalent to £2.9 billion, or £529 per person.

77. The UK digital economy will face increasing trade costs if UK and EU legislation diverge. EU legislation regulating the free movement of personal data and data localisation facilitates cross-border data flows within the EU. Outside the Single Market, UK businesses and particularly data intensive service industries such as accounting, banking, telecommunication or gambling, will lose competitiveness.

Integrated Energy Markets

78. Integrating electricity energy markets across the EU would save money for consumers. EU policies such as the Clean Energy Package [39] rationalise reserves and procurement activities, incentivising investment and the common management of cross-border energy infrastructure. This will bring tangible benefits to citizens through lower energy bills, with a study for the European Commission estimating that integrating electricity energy markets could bring benefits of at least €12.5 billion per year. [40] This energy market is of particular importance for the Scottish renewables sector.

Commercial, Environmental and Labour Policies

79. The European Single Market also seeks to safeguard the broader public interest through a range of common policies that underpin a shared approach to the regulation of markets and market participants. These common, Single Market policies are driven by a number of factors - namely changes in technology, advances in scientific knowledge, the emergence of new types of company and new patterns of working, the intensification of globalisation, the emergence of new societal challenges to name a few. In the face of these developments the public rightly expects adaptation of public policies to ensure that the public interest continues to be protected. It is these developments and these concerns that underpin many of the common policies that have been implemented at EU level.

80. At the same time EU public policy must continue to safeguard a competitive business environment that stimulates investment, jobs and growth, and in which businesses across the Single Market compete, nationally and internationally, on a level playing field. These are the aims of EU competition policy, research and development policies - policies geared to support the development of small and medium sized enterprises and the drive to encourage EU businesses to innovate.

81. Consumer and environmental protections are also key aspects of Single Market policy. The interests of our businesses, and our citizens, are also supported by the setting of high environmental standards and robust environmental regulations to which goods and services must conform in order to be sold within the Single Market. As well as removing non-tariff barriers to trade, environmental standards and regulations help protect and enhance our stock of natural capital, including our air, land, water, soil and biodiversity and geological resources, which are fundamental to a healthy and resilient economy.

82. Similarly, barriers to trade are avoided and healthy environments for business supported by progressive EU employment laws, rights of citizens who settle in other member states, and to the development of a broader social agenda that seeks to improve the quality of jobs and working conditions, combat discrimination, promote equal opportunities, and tackle poverty and social exclusion.

83. And while further progress in all of these policy areas is required, we believe that the rights and interests of consumers and workers, and their families, are best protected within the framework of EU policies and legal entitlements. Therefore while we agree the EU’s social and environmental agenda is far from complete, we believe it offers the appropriate framework to continue to develop programmes and policies that deliver the form of inclusive growth the Scottish Government regards as a vital component of our future prosperity.

84. In leaving the European Single Market, the UK would lose any ability to influence the further development of these policies and standards. However, as they are increasingly being adopted as global standards in the context of international trade, the UK would nonetheless still remain subject to them.

85. Remaining part of that European Single Market will ensure Scotland’s producers - of goods and services - continue to adhere to the highest standards, and that our consumers and workers will continue to enjoy the protection these standards afford us. It will also ensure we retain some opportunity to influence the future development of these policies to meet our needs, albeit with greatly reduced leverage than that which comes with being a member state.

Beyond the Single Market: Social, Environmental, Justice and Security Co-operation

86. As the European Single Market develops, in particular as the EU signs new comprehensive trade deals, Single Market members will also be increasingly affected by a range of policies of the EU, including those sometimes referred to as flanking policies as well as those covering areas such as state aid, regional policy, structural funds and fair work. Participation in the development and implementation of these policies as a member state has helped to support Scotland’s economic and social development over the last 40 years, something which will be jeopardised by Brexit.

87. The flanking policies straddle a range of objectives that have enhanced the collective well-being of our citizens: policies which protect our environment, increase our security, and boost the competitiveness of our businesses and our industries. These policies reflect a shared approach to managing the common challenges and the resources we share with our partners in the EU.

88. We have seen the benefits of collective action through the establishment of common environmental ambitions building on the standards and regulations that underpin the Single Market. These ambitions are increasingly reflected in the standards we expect of products entering our markets under the most recent generation of EU trade deals. Developing and enforcing a common approach to environmental policies and using the Single Market as a key tool for delivering those policies, ensures that shared challenges such as addressing pollution or ensuring the protection of natural habitats are collectively managed and ensuring that no single nation can escape their share of responsibility and action. Scotland has developed an expertise in environmental management and regulation that is valued across Europe.

89. As we continue to face growing, complex environmental and climate challenges, with serious implications for economic and social wellbeing, we believe we must continue to actively participate with our EU partners in finding common solutions. The continued ability to collaborate, innovate and bring this expertise to bear across the Single Market must be retained.

90. Similarly, in relation to the agriculture and forestry sectors, Brexit represents a hugely significant challenge. Food and drink alone accounts for Scotland’s biggest non-energy export, with over two-thirds of exports worth £1.2 billion in the first three quarters of 2017 going to EU countries. By food category, fish and seafood accounted for the majority (58%) of Scotland’s overseas food exports and was valued at approximately £694 million, up 32% on the same period in 2016. [41] Forestry comprises 18% of Scotland’s land area, contributing almost £1 billion per year to the Scottish economy and supporting more than 25,000 full-time equivalent jobs. Brexit will create challenges in trade, labour, plant health and environmental standards.

91. Withdrawal from the EU will result in the departure from the Common Agriculture Policy ( CAP) impacting significantly not only on farming and food production, but also forestry, environmental protection and wider rural sustainability. Membership of CAP results in nearly half a billion pounds annually of EU and Scottish funds being invested all across rural communities. Subsidies underpin our farming sector - in 2015-16, farm business income ( FBI) was £12,600; without support grants, FBI would have been a loss of £25,500 [2]. Currently Scotland receives 16% of the UK’s CAP funding, indicating the greater importance of agriculture to our land use and economy - loss of this funding is therefore a significantly greater issue for Scotland than for other parts of the UK.

92. External analysis on a range of post-Brexit trade scenarios, co-funded by the four UK administrations, has shown the potential for widespread negative impacts and disruption to markets in the UK agricultural sector. [42] The report shows that failure to reach a deal with the EU, combined with taking a complete free trade approach, would disrupt every single sector of agriculture, with beef production in Scotland particularly adversely affected. The study confirms what the Scottish Government has been saying all along: rural communities’ interests are served best by Scotland remaining within the EU as has been made clear by a recent interim report by the National Council of Rural Advisors. [43]

93. Scotland’s fisheries zone is the fourth largest of core European waters and makes up over 60% of the UK’s total European waters. There is significant abundance of fish in Scottish waters and numerous EU and third countries currently have access to fish quota allocations in our waters. At present the management of our waters is through the EU’s Common Fisheries Policy ( CFP). As we set out clearly in Scotland's Place in Europe, if Scotland is not part of the EU then we will not be a part of the CFP. Nor would we seek to become a part of it, the CFP is excluded from the EEA agreement and we would not wish to change that arrangement.

94. Aquaculture plays a significant role in Scotland’s economy as well as supporting fragile rural communities. Farmed salmon is Scotland’s and indeed the UK’s largest food export, with fish and seafood overall accounting for 60% of Scotland’s food exports. In the first nine months of 2017, 45% of Scotland’s salmon exports went to the EU. Scotland supplies by far the majority of the EU’s farmed salmon and we continue to see growth in EU, as well as world, markets. As well as the risk of tariffs, non-tariff barriers such as animal health requirements and delays at ports due to customs controls could have a significant impact on seafood exports.

95. Under the EU’s European Maritime and Fisheries Fund ( EMFF), between 2014 and 2020, Scottish seafood and marine sectors will receive £95m [44] in direct assistance supporting research, development and structural reform. This programme will also release further assistance from the Scottish Government and in total could be worth up to £150m support to the marine sector. EMFF, has played a key role in supporting compliance and ensuring the protection of our marine assets. In 2017-18 Marine Scotland will receive up to £3m in EMFF funding to support compliance activity.

96. Given that most agricultural and seafood products traded from EFTA EEA countries to the EU are subject to tariffs, the UK Government needs to negotiate for tariff-free access to the Single Market for these products and we will press for this.

97. Around £4m a year of European funding supports the science, data and compliance cost which is necessary to manage and support the industry, in addition to the project funding that is paid in direct support to the sector.

98. In the wider social sphere too there are real benefits to be reaped from remaining within the EU policy framework. The European Commission, in pursuing the creation of a digital Single Market, has called on EU governments to focus on finding innovative ways to offer life-long and personalised support to help people in relation to employment, skills and welfare. In parallel to this, in January 2017 the European Parliament approved recommendations for a European Pillar of Social Rights which would guarantee basic rights for workers, regardless of the form of employment and contract, and specifically including work intermediated by digital platforms. In leaving the EU policy framework Scotland would lose both the opportunity to influence this key element of the fair work and inclusive growth agenda, and also run the risk of diverging significantly from future norms in a complex and rapidly expanding area. [45]

99. The progressive development of the European Research Area ( ERA) is a key area in which we make a substantial contribution to the development and application of research and knowledge, and from which we derive significant benefits. Successive EU research framework programs have been highly effective in intensifying research collaborations between universities, research institutions and business across the EU.

100. Scotland’s universities have been at the forefront of developing these collaborations and have been highly successful in winning research funding and engaging with researchers from across the EU in pioneering collaborations. As a government we believe our universities, research institutions and businesses must continue to work within this common, and expanding, European-wide collaborative framework. The recently concluded review of the Horizon 2020 Programme recommended a doubling - to €160 billion [46] - of the total resources to be allocated to the successor EU research and innovation programme. It is not just the money: our opportunity to influence will be severely limited from outside. It is widely acknowledged that research and innovation policies make a significant difference to increasing productivity and boosting the competitiveness of EU industry.

101. The Scottish culture sector received at least £59 million in funding from the EU over 2007-16, supporting around 650 projects. This provides vital finance for the sector, but at least as important is the cultural collaboration and professional development that the EU’s funding programs support. Scottish organisations are keen and prominent participants in the Creative Europe programme which actively promotes and facilitates cultural organisations to work in international partnerships, learning from their peers and sharing knowledge and experience.

102. Free movement of people within the EU allows artists from around the EU to bring their work to Scotland and Scotland’s cultural and creative industries companies are able to recruit the talent and skills that they need from as wide a pool as possible.

103. EU citizens can travel freely to Scotland to experience our unique culture and world leading festivals. In 2016, spending by tourists in Scotland generated around £11 billion of economic activity in the wider Scottish supply chain and contributed around £6 billion to Scottish GDP (in basic prices). This represents about 5% of total Scottish GDP. Leaving the European Union will pose significant difficulties for Scotland’s tourism industry: seven of our top 10 markets are in Europe and around 10% of those employed in the sector are from the EU.

104. Tourism in particular is a sector that contributes to the rural economy; with the sustainable tourism sector in 2015 being relatively more important for remote rural areas, followed by rural areas and cities. LEADER is a unique scheme which supports the wider rural economy to increase support to local rural community and business networks, including tourism and hospitality, to build knowledge and skills, and encourage innovation and cooperation in order to tackle local development objectives.

105. In addition to these funding streams, the flanking policies and opportunities to collaborate also have a significant impact on local government, colleges and the third sector in Scotland. Continued access both to structural and framework programme funding is essential. Beyond the financial implications, shared approaches to social policy have allowed for partnerships to be developed across Europe. These approaches range from environmental issues to employability, and from fair work and social inclusion to access to further education. They have enhanced the ability of the third sector, local government and colleges to deliver positive programmes and outcomes to communities throughout Scotland. Good examples of this include work on the skills development agenda and promoting social mobility.

106. The Erasmus+ programme has played a significant role in broadening the educational experience, developing cultural awareness and increasing employment prospects for Scottish students. Since 2014 more than 15,000 people have been involved in nearly 500 Erasmus+ projects across Scotland. The programme is evolving to include vocational education and training, adult education, schools education and youth work. This significantly increases the number of people who can benefit. This flow of people to and from Scotland supports the development of the skills, experience and global outlook necessary for Scotland’s society and economy to thrive.

107. In addition, some of the issues explored in chapter four in relation to the free movement of people and Scotland’s attractiveness as a nation have a very direct bearing on the ability of Universities and research institutions to attract and retain the very best international talent to support research and innovation. A diverse student population is also highly valued for its social, cultural and educational impact. Recognised benefits of EU and international students include an enriched learning experience and international outlook among home students and graduates, and the development of an international network of alumni. Latest UCAS figures show a reduction in applications from EU students to Scottish universities, raising major concerns about the longer term impact of Brexit on the diversity of our student population.

108. Scotland and the UK have also benefited significantly from participation in EU civil judicial and security, law enforcement and criminal justice co-operation. We face threats from new forms of criminal activity, including terrorism and cybercrime, and continued close and direct collaboration with our European partners is vital and helps Scottish law enforcement agencies to act quickly to meet those threats, keep pace with the latest developments and influence policy and operational choices to develop the most efficient practices and tools which help keep people in Scotland safe. In 2014 the UK chose to opt into a suite of justice, security and law enforcement measures, which enable the police and prosecutors of EU Member States to rapidly share information and work closely together to investigate and prosecute serious and organised crime across European borders.

109. Scotland’s distinct legal and judicial system, which is separate from other parts of the UK, and the role of the Lord Advocate in overseeing the investigation and prosecution of crime in Scotland, means there is direct co-operation between Scottish law enforcement agencies and their European partners. For example, Police Scotland benefits from the UK’s participation in Europol; and Scottish prosecutors benefit from participation in Eurojust. These organisations share intelligence and other data, in accordance with EU standards, which are vital to the investigation and prosecution of crime. That practical co-operation also enables the enforcement of EU legal measures, such as the European Arrest Warrant and the European Investigation Order, which are crucial tools in helping police and prosecutors deal rapidly with serious and organised crime across European borders.

110. EU civil judicial cooperation measures underpin the operation of the Single Market and address the practical legal issues which arise from the free movement of people, goods, services and capital across European borders. Existing EU law measures in civil and commercial matters are embedded in the law in Scotland and regulate areas such as marriage, divorce, child abduction, commercial contracts and disputes. EU law has also established practical arrangements for the mutual recognition of court judgments issued across member states. All these existing cooperation measures benefit individual citizens and businesses in Scotland by providing certainty and stability about what the law is and how these measures operate across EU Member States.

111. The UK Government has published discussion papers [47] indicating that they will seek to agree with the EU “new close and comprehensive arrangements for civil judicial cooperation” and “new dynamic arrangements” for the future partnership and on security, law enforcement and criminal justice matters. However there is a lack of clarity about the detail of these arrangements or how these will take into account the separate justice system in Scotland. While the UK might be able to continue elements of these direct co-operative arrangements through future agreements, they are unlikely to be as comprehensive and effective as that which the UK currently enjoyed by the UK as a member state - particularly if the UK does not accept the jurisdiction of the Court of Justice of the European union ( CJEU). A failure to accept this jurisdiction, and not having full access to shared databases across the EU, could lead to a reduction in the
co-operation between EU member states and the UK; which will have a detrimental impact on the ability of Scottish law enforcement agencies to keep our people safe. There will undoubtedly be an adverse impact on businesses and individuals who will lose certainty on their rights and the stability which flows from that.

112. As we have demonstrated in this chapter, our membership of the Single Market and Customs Unions and participation in wider EU policies from this platform, deliver many current benefits, and support both the development of our society and our economic prosperity. However, more than that, we have shown how these benefits are evolving and increasing all the time, and that both present and future benefits will be at risk if the European Single Market and Customs Union membership is not maintained in the long term.

113. Just as the scope of the European Single Market will continue to expand and offer new opportunities to its member countries, so too will the regulatory framework governing that market continue to evolve and adapt. Therefore, as the EU’s policies continue to reflect new science and a better understanding of how to address the challenges we face, new products for sale in the European Single Market will be required to meet new regulations.

114. Anything but the softest of Brexits will detach the UK from the development of these new standards, regulations and policy responses that will characterise and shape the development of the European Single Market over the long-term. Increasingly these regulations and responses are influenced by the work of EU-level specialised agencies - agencies shaping the regulations governing the food we eat, the medicines we prescribe, the chemicals we come into contact with, the quality of our working lives, and our environment to name just a few of the functions EU agencies perform. In order to maintain the same outcomes as those delivered by current EU institutions there will need to be significant growth in capacity within the UK.

115. If the UK falls outside the framework of the European Single Market not only will it be unable to contribute to the work of these important agencies and in so doing lose all influence over their recommendations, it will almost inevitably lead to a divergence between UK standards in products and production processes and those required by the EU before goods or services can be offered for sale in the European Single Market. For that reason the damaging consequences of a hard Brexit are likely to impose on-going losses to Scotland’s economy to the extent we are no longer permitted to compete in the European Single Market.

116. The purpose of this chapter has been to set out insofar as possible the longer term implications of a hard Brexit - that is, a Brexit that results in Scotland being outside the European Single Market and Customs Union. These costs are to be measured in the opportunities that could be foregone by this eventuality. It is this consideration of the longer term implications of a hard Brexit as much as our concern of the immediate - or impact - effects this will have, that leads us to conclude that continued, membership of both the European Single Market and a Customs Union is essential. The EEA Agreement provides a framework that would allow the UK to remain an integral part of the European Single Market once the UK exits the EU. It will allow for continued collaboration on a range of policies and it is a framework which dovetails with the Prime Minister’s commitment to a post-Brexit transition phase during which “nothing will change” regarding our adherence to EU law and policy.


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