Introduction

In March this year, we issued our client advisory titled: "Scotland and Independence: Monetary, Financial and Institutional Issues"

Since that time, it has been formally agreed that Scotland will hold a referendum on independence during the course of.2014. This follows from the signature of the Edinburgh Agreement between the UK and Scottish Governments on 15 October. Under the terms of that Agreement, a statutory instrument will be made to allow for a "single question" referendum to vote in favour of, or against, an independent Scotland. Further legislation will be enacted within Scotland to sanction the referendum and to make the associated arrangements.

The possible dissolution of the Union between Scotland and the remainder of the United Kingdom does, however, give rise to issues concerning the status of Scotland for other Unions – in particular, for the European Union and for Monetary Union within the eurozone.

These issues have provoked a political disagreement in Scotland. The Information Commissioner had ordered the Scottish National Party to state whether it had obtained legal advice on Scotland's prospective status in Europe. Notwithstanding various apparently conflicting statements, it appears that formal advice had not been obtained, but that this will now be done. Scotland's Deputy First Minister announced on 23 October that "…In light of the Edinburgh Agreement, by which both governments have agreed the process for Scotland to achieve independence, I can confirm that the government has now commissioned specific legal advice from our law officers on the position of Scotland within the European Union if independence is achieved through this process…"

Both EU membership and the eurozone question were included among the several issues considered in our March advisory. But the signature of the Edinburgh Agreement – coupled with the ensuing political storm over the existence of suitable legal advice – means that a more detailed analysis of these specific issues has now become appropriate.

Membership of the European Union

Overview

Quite apart from the detailed legal issues to be discussed below, it seems clear that EU membership would be an important political objective for an independent Scotland.

The crucial question therefore is – will Scotland automatically succeed to EU membership, or will it be necessary for Scotland to make a new application for that purpose? The difference may be highly significant. Immediate and automatic EU membership would help to symbolise Scotland's new status on the international stage, and would give it the benefit of continued access to European markets on the current basis. On the other hand, a requirement to make a fresh membership application would be inconvenient at a number of levels. Most importantly, there would be a period of delay and uncertainty pending the approval of the application. In addition, there may be doubts about the application and enforcement of EU law, regulations and directives within Scotland during that period. This may be particularly unfortunate if the application process proves to be lengthy.

The distinction between automatic accession and a fresh application for EU membership is thus highly significant both in terms of the political backdrop and the legal framework. The two alternative scenarios will therefore be considered in turn.

Automatic Accession

In mid-September, a spokesman for the Scottish government  stated that an independent Scotland would remain an integral part of the EU "…as it has been for almost four decades, and by definition Scotland already meets all the criteria of EU membership…" He also noted that "…As many legal and constitutional experts have confirmed, Scotland is part of the territory of the European Union and the people of Scotland are citizens of the EU – there is no provision for either of these circumstances to change upon independence, and the rest of the UK will be in exactly the same position…We will both be successor States, with exactly the same status within the EU…"

To the extent that the above commentary forms the basis of the case for automatic accession to the EU, it is open to a number of objections. In particular:

  1. it seems clear that the creation of an independent Scotland would amount to a case of State separation or secession. In other words, England, Wales and Northern Ireland would remain the "United Kingdom" in the sense that it would continue in existence as the same international legal entity, albeit with a reduced geographical scope. Scotland, on the other hand, would become an entirely new State, in charge of its own affairs and its international relations;
  2.  the (reduced) United Kingdom would remain a party to the EU Treaties and would thus remain a member of the European Union. This general principal remains valid even though the consequent territorial and population reduction may have other treaty consequences (e.g. in terms of the United Kingdom's contribution to the EU budget);
  3. the starting point must therefore be that Scotland would not be a member of the EU at the point of independence, for the straightforward reason that it is not a signatory to the treaties concerned. As a general rule and subject to various exceptions, a State is not bound by, nor can it take the benefit of, a treaty to which it is not a party; 
  4. the general position stated in paragraph (c) above becomes even more clear when the treaty concerned involves the membership of an international organisation – such as the European Union. In such a case, it is clear that the newly-created State must apply for its own membership, and does not automatically accede to membership by a "pro rata" succession to the membership of the continuing State. 
  5. a direct and comparable precedent is offered by membership of the United Nations in the context of the partition of India and Pakistan in 1947. India continued to exist as the same State – albeit with a reduced territorial area – and thus automatically continued as a member of the UN. However, the UN General Assembly rejected Pakistan's argument that it, too, enjoyed automatic membership as a result of "co-succession" with India. Pakistan was accordingly required to make a fresh application for its own UN membership; 
  6. similarly, when Singapore ceased to be a part of Malaysia and became an independent State on 9 August 1965, Malaysia retained its existing UN membership, but Singapore had to apply for a new membership in its own right;
  7. a more recent example is offered by the dissolution of the Soviet Union, when Russia was recognised as the successor State to the Soviet Union because it accounted for the majority of the population and territory of the USSR. Russia therefore automatically assumed the USSR's former membership of the United Nations and its seat on the Security Council. In contrast, may of the other, former Soviet republics had to make separate applications for membership;
  8. whilst Article 34 of the Vienna Convention on the Succession of States in respect of Treaties attempts to provide a rule of succession for both the existing and the new States in this type of situation, this provision does not apply "…if…it appears from the treaty or is otherwise established that the application of the treaty in respect of the successor State would be incompatible with the object and purpose of the treaty or would radically change the conditions for its operation…" The terms of this reservation are plainly met in the present case. Article 49 of the Treaty on European Union is discussed below but it clearly contemplates that a country can only become a new Member State if it makes an application to do so. This requirement cannot be circumvented even by an expansive approach to the doctrine of State succession; and 
  9. It may be objected that Germany continued as a member of the European Union even after the merger of West and East Germany in 1990. But, in this case, the "old" West Germany was regarded as the continuing Member State, subject to territorial expansion. Since Germany was not a "new" State, no fresh application for EU membership was required.

On the basis of the above discussion, it is difficult to identify any cogent basis upon which Scotland could automatically accede to EU membership upon its independence from the remainder of the United Kingdom. This conclusion is unsurprising, since one would expect existing members of such an organisation to require a degree of control over new admissions.

Separate Application

In the light of the views expressed in the preceding section, it is necessary to consider the legal requirements applicable to an application for EU membership.

In this context, Article 49 of the Treaty on European Union reads:

"Any European State which respects the values referred to in Article 2 [human dignity, freedom, democracy, equality, the rule of law and respect for human rights] and is committed to promoting them may apply to become a member of the Union. The European Parliament and national Parliaments shall be notified of this application. The applicant State shall address its application to the Council, which shall act unanimously after consulting the Commission and after receiving the consent of the European Parliament, which shall act by a majority of its component members. The conditions of eligibility agreed upon by the Council shall be taken into account.

The conditions of admission and the adjustments to the Treaties on which the Union is founded, which such admission entails, shall be the subject of an agreement between the Member States and the applicant State. The agreement shall be submitted for ratification by all the contracting States in accordance with their respective constitutional requirements."

A few points may be drawn from the terms of Article 49:

  1. first of all, an application may only be made by a European State. The necessary consequence is that Scotland could only make such an application after it has actually achieved independence. It could not apply for membership conditionally or in anticipation of achieving that status; 
  2. secondly, it must follow that Scotland will cease to be a part of the EU between the date of its application and the date of successful completion of its application process; 
  3. thirdly, it must also follow that Members of the European Parliament representing Scotland would have to vacate their seats upon independence; 
  4. fourthly, the application process may not be swift or straightforward. In particular, the application requires the unanimous approval of the European Council. Whilst the government of the United Kingdom would no doubt support such an application, certain other Member States may have their own political reservations about new membership following State separation; and 
  5. fifthly, Article 49 requires the negotiation of an accession treaty and its ratification by all existing Member States. Again, this may be a time-consuming process. 

It follows that Scotland may have to accept a significant period of non-EU membership after it attains independence. The precise period will depend upon the extent to which Scotland may choose to seek concessions in specific policy areas. and the willingness of other Member States to assist in expediting the process.

Monetary Union

Overview

Our March advisory also considers various issues in relation to the currency to be used by Scotland in the post-independence era. At present, the assumption appears to be that Scotland will continue to use sterling. But would a renewed EU membership involve Scotland in an obligation to adopt the euro?

Analysis

If Scotland could accede to the United Kingdom's membership of the European Union on a "pro rata" basis, then it would thereby automatically become entitled to the benefit of the UK's well-known "opt-out" from monetary union. However, as noted above, Scotland cannot become a member of the EU via this route. As a result, its position in relation to monetary union would be a matter for negotiation in its own accession treaty.

In this context, it may be noted that monetary union is seen as one of the core objectives and functions of the EU. Perhaps unsurprisingly, therefore, unilateral opt-outs have fallen out of favour with the EU since the United Kingdom achieved its own special treatment under the terms of the Maastricht Treaty.

Thus, Article 4 of the Act of Accession for the Czech Republic and others (2003) and Article 5 of the Act of Accession for Bulgaria and Romania (2005) each state that "…Each of the new Member States shall participate in Economic and Monetary Union from the date of accession as a Member State with a derogation…". This means that those Member States must become membersof the euro area if they meet the economic tests for membership (the so-called "Maastricht Criteria").  It must therefore be unlikely that Scotland could negotiate its own opt-out from monetary union, because this would be perceived as discriminatory when viewed against more recent accession arrangements.

Whether or not this matters will naturally depend on relative views on (i) the merits of the continued use of sterling and (ii) the benefits that may be derived from euro area membership. But in reality, any obligation for Scotland to join the euro is likely to remain a matter of theory, rather than a practical proposition.. The Maastricht Criteria are now contained in Article 140 of the Treaty on the Functioning of the European Union and, amongst other things, these include:

  1. a requirement that Scotland's currency has observed "…the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the euro…". For so long as it continues to use sterling, Scotland will clearly be unable to meet this requirement because it will lack its own monetary system and cannot become a member of the exchange-rate mechanism; and 
  2. a requirement that the statutes of its central bank ensure its independence from the national government. Given that Scotland would, by this time, be using the currency of another State, it could not meet this requirement because it would not have a central bank within the accepted meaning of that term. 

It is true that eligibility for eurozone membership is to be assessed "…by reference to.." the Maastricht Criteria, and that strict compliance which each and every criterion is not a necessary condition to euro area accession. But Sweden has effectively maintained a de facto opt-out from monetary union by refusing to grant the necessary degree of independence to its central bank. It should likewise be open to Scotland to maintain a de facto opt-out, given that it will not have a central bank at all.

It follows from this analysis that (i) in negotiating its terms of accession, Scotland would probably have to accept that it would have to become a eurozone member if it met the Maastricht Criteria but (ii) in practice, the continued use of sterling would render it impossible for Scotland to meet those criteria.

Conclusions

It must follow from the analysis set out above that Scotland could not automatically become an EU Member State at the point of its independence. A fresh application would be required for that purpose, and a period of uncertainty may follow whilst the application is considered and the accession terms are negotiated. It may of course be that these obstacles are viewed as a necessary part of the process and should not be seen as an impediment or objection to the principle of an independent Scotland. But that issue is a matter of political assessment, rather than a strict question of law.

It must also follow that, in negotiating its accession terms, Scotland would be likely to have to accept the status of a "candidate" member of the eurozone. However, in the absence of its own currency and central bank, Scotland will not be able to meet the entry criteria. Alternatively, the lack of its own central bank will enable Scotland to maintain a unilateral opt-out in practical terms, even if no such reservation is written into its terms of accession. Questions touching eurozone membership for Scotland are thus likely to remain purely theoretical matters for the foreseeable future.