AN independent Scotland would be taking an “enormous gamble” by trying to attract financial institutions fleeing the City of London post-Brexit, senior economists from across the UK have warned.
Since Britain’s vote to leave the EU in June, a number of leading figures in the UK financial industry - including, most recently, John Nelson, chairman of banking giant Lloyd’s - have raised the prospect of companies ditching London in order to maintain their financial ‘passporting’ rights, which allow them to trade freely in the European market.
According to some analysts, Scotland - if it became an independent member of the EU - could be a major beneficiary of this exodus, soaking-up City jobs and expanding the size of its financial sector.
However, speaking to the Sunday Herald, economists north and south of the border criticised the proposal, arguing that an increase in the scale of Scotland’s financial base would pose a significant threat to the country’s economic health.
“Scotland should resist trying to attract City institutions,” Laurie MacFarlane of the New Economics Foundation, a think-tank in London, said. “The contribution of these sorts of firms to the economy is grossly exaggerated, and they would pose a severe risk to financial stability, particularly given Scotland’s size, meaning that Scottish taxpayers would be placed on the hook [if another bailout were needed].”
Dr Craig Berry, Deputy Director of the Sheffield Political Economy Research Institute at the University of Sheffield, echoed MacFarlane’s view.
“Countries overly dependent on large financial sectors tend to be far more unequal, socially and geographically,” he said. “Their economies [present] fewer incentives for capital to be directed towards productive industries, and this undermines the economy's long-term resilience, compounded by the inherent volatility of finance. For an independent Scotland to pin its economic fate on finance would be an enormous gamble.”
David Bell, Professor of Economics at Stirling University, expressed concern that an independent Scotland with a large or over-sized banking sector could face substantial bailout costs in the event of a second financial crisis.
“If Scotland is independent, then it might wish to be careful about being home to large financial enterprises which might assume that the Scottish government would stand behind [them] should [they] collapse, in the manner of the Royal Bank of Scotland,” he said.
“It might wish to avoid such risks and therefore be less than welcoming to certain kinds of financial institution.”
In July, Hugh Chater, director of banking at Virgin Money, told Holyrood’s European and External Relations committee that Scotland could act as a financial “safe harbour” for City firms worried about losing access to Europe, while Daniel Broby of Strathclyde University’s Business School has suggested that, if Scotland can secure its place in the single market, the Scottish economy could benefit from an explosion of new financial jobs.
“Scotland’s financial sector could either be one of the biggest winners or the biggest losers as a result of Brexit,” Broby claimed.
“A break from the United Kingdom, if managed properly whilst maintaining Scotland’s access to the single market, could see 50,000 financial jobs finding their way to Edinburgh and Glasgow.”
The SNP - which, during the 2014 independence referendum, proposed maintaining Britain’s current system of financial regulation as part of a post-UK currency deal - has broadly welcomed these developments.
“It is no surprise that financial institutions and banks are nervously weighing up their presence in London, and looking to locations where they will be able to access the EU market effectively,” SNP Treasury spokesperson Stewart Hosie MP told the Sunday Herald.
“Being part of the single market is good for Scotland’s economy and key to our future growth and prosperity. Scotland is very much open for business, and we will continue to work hard to create a fair and diverse economy that benefits all.”
But Ann Pettifor, Director of Policy Research at the London-based think-tank Prime Economics, said Scotland should avoid repeating the mistakes of the UK’s “tinderbox” economy.
“Moving the UK financial sector to Edinburgh would be to ask Scotland to emulate the weaknesses and characteristics of the London-centred British economy,” she said.
“These include high and rising levels of private debt created by a finance sector that drags down investment and weakens economic activity across the board. It would seem unwise for the Scottish government to mimic the UK's ‘tinderbox’ approach.”
Pettifor’s analysis was supported by Professor Andrew Cumbers of the Adam Smith Business School at Glasgow University, who said that Scottish financial services should be geared towards responsible long-term investment.
“It wouldn’t be wise to try and poach the kind of speculative financial activities - hedge funds, property speculation, derivatives, currency trading etc - that have become one of London’s competitive advantages, precisely because of the deregulated and low-tax environment that Scotland would probably be forced to pursue,” he said.
“[Scotland should develop] a very different kind of banking sector focused on funding longer-term investment in industrial renewal and diversification.”
The Scottish financial sector currently accounts for around seven per cent of Scottish GDP and employs up to 100,000 people.
Since the 2008 financial crash, UK taxpayers have provided more than £70bn in bailout funds to the Royal Bank of Scotland, which is headquartered at Gogarburn just outside Edinburgh.
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