Scotland and the rules of Euro engagement

Brexit has done nothing to improve the quality of the word soup concocted at the European Commission in Brussels:

"The Commission's orientations seek to create a more transparent, simpler and integrated architecture for macro-fiscal surveillance to better deliver on the objectives of ensuring debt sustainability and promoting sustainable growth."

That's merely the simplified bit, after nearly three years of consultation on the Commission's proposal that reform is needed to the fiscal rules for government borrowing under which EU members have to operate.

If Britain were still a member, the demands placed on governments to comply with Brussels requirements would have become a major issue.

But it's not. So why should we care? Well, the debate about Scottish independence has a lot to do with a) how fast a newly independent Scotland could join the trading bloc as a new member and b) what it would have to do to comply with the economic rules.

That debate has moved on since 2014 and the referendum. London's objections would no longer be a problem for an independent Scotland joining the EU, and the government in Madrid might be less likely to perceive worrying parallels with Catalonia.

In recent days, this debate has focused on whether Holyrood would have to commit to joining the euro. And if not a full commitment for a rapid embrace of the single currency, then how long could that be put off? Indefinitely?

No-one knows for sure. No country has been in the position of an independent Scotland, applying to re-join a union of which its people were previously citizens.

But in its verbose statement on Wednesday, the European Commission has given the independence debate in Scotland some more to chew on.

It relates to the fiscal rules for membership: a government deficit of no more than 3% of Gross Domestic Product (GDP, the measured total output from across the economy), and a government debt of no more than 60% of GDP.

Where stands Scotland now? Last fiscal year, Scottish government figures show the deficit at 12.3%, and the UK at 6.1%. But that was the second year of Covid. A more helpful guide would be the pre-Covid figures.

The notional Scottish deficit (estimates of all government spending set against all tax from Scots) ran between 8% and 9% of GDP in the three years up to April 2020. The UK figure was under 3%, as a result of those austerity years.

And debt? Scotland doesn't carry debt in any conventional sense. And at the SNP conference last month, Nicola Sturgeon swiped aside the notion that an independent Holyrood could repudiate any responsibility for the UK's debt.

At the end of September, the UK had public sector net debt of £2450bn, or 98% of GDP. Scotland's share would be negotiable, but it's likely to be based on population share or the proportion of the UK economy.

On both deficit and debt, an independent Scotland would be far outside the EU rules.

From that starting point, those who favour independence may welcome the reform news from Brussels. If the new fiscal rules are adopted, there will be more flexibility in getting debt and deficits down.

That's partly because EU members have had to borrow and splurge to get their health systems and economies through the pandemic, and now they're spending big on mitigating the impact of higher energy bills. So others are also breaking the rules.

Last month, official EU statistics showed average government deficits, on average, fell from 6.7% of GDP in the first year of Covid to 4.6% last year.

Debt varies widely. Fourteen EU members ended last year above the 60% of GDP threshold and only 13 within it. Government debt was 88% of output.

Seven countries had a higher deficit level than the UK, topped by Greece with 194% and Italy with 150%, while Estonia, Bulgaria and Luxembourg were around 20%.

The Commission is conceding that these rules are not fit for purpose. It was doing so even before Covid struck, when it began this reform consultation.

It is now proposing that Brussels is less heavy-handed with the surveillance of nations' budgets, with onerous reporting requirements, and aims its efforts at those countries with deficits and debts that pose a risk.

Those with debt levels that break EU rules will be required, automatically, to enter the Excessive Deficit Procedure, agreeing to a four-year plan to get back below the limit. It will be flexible enough not to choke off investment in things the Commission likes, including a green, digital economy.

And it should be 'owned' by the member country, in shaping the fiscal plan and in policing it. This is in the hope that it is seen as something that's not imposed from Brussels, or by its big powers - notably Germany.

Remember how it looked from Greece's point of view, as German Chancellor Angela Merkel was seen to be calling the shots and forcing its compliance with debt reduction during the euro crisis?

The reforms address one of the more bizarre aspects of these rules - that the punishment for those governments which break the rules, and which do not have enough money to pay their bills, is to fine them, heavily.

Enforcement has been patchy at best, and the Commission makes the bold claim that reformed rules will work better if it is backed by lower fines. It adds there could also be an unspecified reputational hit.

That's where these proposed reforms are not so good for the Scottish independence cause.

While saying there should be more flexibility, they firm up the rules, saying that there will still be a 3% of GDP maximum deficit and 60% maximum debt.

That's in a treaty and there is no flexibility there. Reformed rules mean there will be less opportunity for members to get round them.

If Scotland takes a population share of the UK's public sector net debt, that looks close to £200bn. And if that is around 98% of GDP, assuming Scottish and UK GDP per head are at similar levels, a cut to the 60% limit implies a debt reduction would be required of nearly £80bn.

That does not require a straight-forward paying back of debt, as if paying off a loan. To placate the bond markets, the UK Treasury is currently trying to find a way of getting debt down as a proportion of GDP, and not by paying debt back early, but by using both growth and inflation to ease the pain of spending cuts and tax increases.

You'll see how it's getting on when the Chancellor Jeremy Hunt, delivers his autumn statement next week. It probably won't look pretty.

Under the EU rules, an independent Scotland would have to do something similar, negotiating it with the European Commission, and then being watched closely to ensure it's sticking to the 'agreed' plan.

Its government deficit - on a pre-Covid trend nearly three times higher than the permitted EU limit - would face similar measures.

After the Brexit referendum and a period of uncertainty, the SNP came down clearly in favour of a newly independent Scotland getting into the European Union.

Not all supporters of independence agree. And the flexing and strengthening of the fiscal and borrowing rules in Brussels raises the question: how independent would an independent Scotland really be inside the European Union?