Going it alone is not a perfect solution.

Scots Should Be Careful What They Wish For

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.
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According to one new poll, the recent surge of support for Scottish independence may have been checked -- but the result of Thursday's referendum could still go either way. If the Scots do vote to astonish the world and break up the United Kingdom, it won't be because they've weighed the choice intelligently. In a case like this, you should be careful what you wish for. The campaign for independence has been clever, but nobody could accuse it of being careful.

The "Yes" campaign has rested on a fiscal fantasy. The central claim is that independence would make Scotland more prosperous and more equitable: The new country could keep its oil revenues rather than send them to England, and it could adopt the kind of progressive pro-growth policies that the Tories in Westminster can't abide. Both ideas are nonsense.

QuickTake Scotland's Independence

To begin with, Scots assume they'll get almost all of the U.K.'s North Sea oil. That's what a division based on maps would dictate, and this approach hasn't been seriously challenged -- yet. Bear in mind, though, that known reserves are currently a U.K. asset, just as the country's debts are a U.K. liability. This suggests a division on the same basis -- population, not geography -- which would give Scotland less than 10 percent of known oil rather than 90 percent. In practice, some blend of the two approaches seems plausible. In any case, if the Scots vote yes, expect this issue to surface in the negotiations.

For the sake of argument, take the most optimistic case from Scotland's point of view: Assume the Scots get almost all of the oil. Even then, the Yes campaign's fiscal arithmetic is wrong.

At the moment, oil revenues remitted to the U.K. roughly balance extra fiscal transfers going the other way. (Public spending per person in Scotland is 1,200 pounds a year higher than in the rest of the U.K.) So, even with the oil, Scottish public spending couldn't rise without higher taxes or higher borrowing.

Actually, it's worse than that, because the Yes campaign counts the oil revenues not twice but three times: It promises to use them for existing public spending, for new public spending, and to build an oil fund that would guard against fluctuations in the price. As a small, resource-dependent country, Scotland would need such a fund -- but the money, again, would have to come from somewhere else, because the oil revenues would be needed to pay for existing programs.

Independence promises no fiscal windfall for Scotland. At best, a generous allocation of the oil together with a spike in prices would make the Scots better off for a while -- but prices can fall, too, and the reserves are running out. In fiscal terms, independence is a bet Scotland could easily lose.

Even odder is the Yes campaign's insistence that an independent Scotland would keep the pound, whether the rest of the U.K liked it or not. So much for progressive pro-growth economic policies.

Have the Scots noticed what's been happening in the euro area? Have they been reading about Ireland or Spain or Greece lately? A currency union without fiscal and banking unions is a formula for ruin. If the rest of the U.K. refused to accept Scotland's bizarre proposal, it would actually be doing the Scots a favor: The new country would be better off with its own currency. In promising Scots they can keep the currency they know, the Yes campaign offers the thrill of independence -- but not so much independence as to cause anxiety. Again, that's a deeply dishonest prospectus.

None of this is to say that independence for Scotland would be wrong or unaffordable. The Scots have a distinctive culture, history and political tradition. Their policy preferences are systematically overridden. They have a legitimate desire for self-government, and small countries can and do prosper. Independence would be an economic shock and, in a thousand ways, a major upheaval, so the transitional costs could be large. But, by definition, transitional costs are temporary.

Notice as well that there's dishonesty on the other side of the debate. When unionists talk about what might be lost, with much stress on Britain's international standing, they usually aren't talking about what Scotland would lose. The remainder of a dismantled U.K. would be diminished, perhaps even humiliated, and would count for less in the world -- but an independent Scotland would count for more. (Ask yourself: Would Canada get more respect if it was absorbed into the U.S.?)

Granted, this is an understandable evasion on the unionists' part. To tell Scotland it should stay in the U.K. for England's sake isn't a very compelling argument.

The question Thursday is whether Scotland should stay in the U.K. for Scotland's sake. It's a close call. Though many small countries do well, they face risks that big countries can more easily absorb. One such risk is that they fail to get along with their bigger neighbors. An independent Scotland would need good relations with England more than England would need good relations with Scotland. That's something Scots should keep in mind.

The main danger, in fact, is that the divorce they're contemplating might turn bitter. This could happen easily, and if it did, Scotland would be the weaker party. As that became obvious, Scots might pine for the benefits of a tolerably, even if not blissfully, happy union.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Clive Crook at ccrook5@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net