Written evidence submitted by the Scottish Universities Lawyers, Network on Europe (SULNE).[1]

Scotland’s Place in Europe Enquiry

Terms of reference

1.              How will the EU referendum result affect Scotland's relationship with Europe?

2.              In light of the way Scotland voted in the EU referendum, what options exist for Scotland to remain a member of the EU?[2]

3.              What role will Scotland have in the process of the UK's withdrawal from the EU?

4.              How will Scotland be included in the Government's Brexit negotiations?

5.              What future relationship with the EU would be best for Scotland?

6.              How will Scottish interests be represented in the negotiations regarding the UK's withdrawal from, and future relationship with, the EU?[3]

7.              How will the UK’s withdrawal from the EU affect Scottish devolution and Scotland's funding settlement?

8.              What consequences and opportunities exist for developing Scottish trade in Europe and beyond in light of the EU referendum result?

1.              How will the EU referendum result affect Scotland's relationship with Europe?

The referendum result has the potential to impact hugely on Scotland’s relationship with the European Union. Should the UK Government choose on the basis of the overall result of the referendum to activate Article 50 TEU and the UK then leaves the European Union, Scotland will also as leave the European Union. This is because the United Kingdom, a state recognised under international law, is the signatory to the European Treaties. As a constituent part of the UK, Scotland would leave the EU along with England, Wales and Northern Ireland, should the UK take that path.

The EU referendum result has triggered enormous constitutional uncertainty - and probably, eventually, change - both at the domestic (UK) level and the EU level. At the domestic level, the referendum result has exposed and exacerbated the fragility of the UK’s devolution settlement. The referendum result, which saw, Scotland and Northern Ireland voting to remain in the EU (by 62 per cent and 56 per cent respectively), and England and Wales voting to leave (by 53 percent and 52.5 per cent respectively) has prompted calls from the First Minister of Scotland to ‘take all possible steps and explore all options to give effect to how people in Scotland voted.’ One of these options is a second independence referendum in Scotland, which the First Minister described as is ‘highly likely’ in the next two-and-a-half years following UK’s vote to leave the EU. In her view it is ‘democratically unacceptable’ for Scotland to be taken out of the EU against its will. Should Scotland democratically secede from the UK it would then be in a position to be a full member of the EU in its own right as a fully independent and recognised state. The particular legal route to such membership for Scotland is contested and will be considered in below in answer to Q2.

At the EU level, this is also unprecedented political and legal territory. Article 50 TEU has never been activated before: no Member State has chosen to leave the EU in its history. The EU is also in the unenviable position of not knowing when and if the UK will trigger Article 50 TEU and what the preferred future relationship with the EU is. From its side, there might be a degree of political goodwill towards Scotland on the basis that its electorate have clearly expressed a desire to remain part of the EU and would be forced to leave it against its will if the UK withdraws its membership. When considering their own positions, the leaders of the EU institutions and the Member States will be all too aware of the rise and spread of Euroscepticism and also other secessionist/independence movements across Europe. Certainly the EU is a remarkably flexible legal order; indeed the UK, more than any other EU Member State has taken advantage of the EU’s ability and willingness to accommodate different domestic preferences. EU law has also allowed for a differentiated application of EU law within the territory of the Member States, which might be a particularly instructive avenue to consider in negotiations on the possible future relationship between the EU and the UK and/or Scotland. Some specific examples of this form of intra-state differentiation, namely those relating to Cyprus and Denmark/Greenland will be considered further below in answer to Q2. More generally, one might expect an openness from the EU to new degrees and forms of flexibility (in terms of (semi?)-membership and participation) in the coming years.

2.              In light of the way Scotland voted in the EU referendum, what options exist for Scotland to remain a member of the EU?

Were Scotland to become independent, this would offer the clearest legal route to membership of the EU, should the UK leave. As with the first independence referendum, an agreement would need to be reached between Holyrood and Westminster to provide the necessary legislative competence for a further referendum to take place, it being assumed within the UK constitutional system that only a consensual separation based on the will of the Scottish people and the legislative consent of the Westminster Parliament will be possible. Assuming this could be achieved and that Scotland did indeed become an independent state, the question of whether it would be able to ‘remain’ a member of the EU depends primarily on the EU legal route that is chosen, and that is contested.

A second and parallel on-going discussion is whether Scotland could remain in the EU without seeking independence. Could England and Wales effectively withdraw their membership of the EU and the UK’s membership somehow be retained through a relationship with Scotland and Northern Ireland? Suffice to say, this would require a high level of political will and legal creativity at both the domestic and the EU level. This is uncharted political and legal territory although it is instructive to study and learn from those examples where the EU has accommodated differential territorial application within a Member State. Perhaps more than anything else, these examples illustrate the capacity and willingness of the EU to behave in flexible ways!

Scotland’s position following the Brexit vote invites comparison with other cases of States in the EU which have territories that are not considered formal members of the EU and, instead, operate their relation with the EU on another basis. It is worthwhile examining other atypical arrangements in the EU and other arrangements for states which are part of the European continent, but not part of the EU.

Overseas countries and territories represent a distinct grouping in the EU and have their own agreements (for which provision is made in Articles 198-204 of the Treaty on the Functioning of the European Union (TFEU)) which regulate their relationships with the EU. Features common to all include being an island territory and having an enduring connection to an existing Member State. They tend to form part of the Outermost regions of the EU – territories which are still part of a Member State, but which are not part of the European continent. Greenland is one such territory, and remains connected to Denmark, while Aruba is part of The Netherlands. There are varying degrees of control that the Member State has in relation to the OCTs – Greenland has full home rule, while Aruba is more or less an administrative region of The Netherlands – but the connection remains. The EU provides economic support to these territories, often in return for access to the natural wealth of these territories, such as fishing in Greenland. For the most part, the inhabitants of these islands are EU citizens, but EU law does not apply. The trade arrangements are established under a Council decision, the latest of which is still being debated.

The situation of these countries is distinct from that of both Scotland and the UK. If Scotland sought to remain in the EU, it would be doing so without a connection to an existing Member State of the EU. It would also, at present, not be considered an independent State. As such, the OCT arrangement could not apply because of the existing requirement that there be a link between the OCT and a Member State. Interestingly, it may be possible for Northern Ireland to argue that they may partner on the basis of a link with the Republic of Ireland, but this would not be possible for Scotland.

There are a number of microstates in the EU which are located within Member States’ borders, such as Monaco in France and San Marino in Italy. These states are autonomous and independent, and are not part of the EU. The critical element here, in relation to Scotland’s case, is that their governments are entirely independent of the larger state which surrounds them and that they are able to enter into independent agreements. The interesting situation that Monaco presents is that it has sought independence from the French government and has become part of the customs union and the Schengen Area more recently as a consequence of its relationship with France. San Marino is in a similar position, having concluded a customs agreement with the EU. In 2012, a mandate was given by the Council to begin negotiations on an association agreement with San Marino, Monaco and Andorra.

The key difference again is the fact that the recognised state ruling Scotland, England, Northern Ireland and Wales is the United Kingdom, meaning that Scotland cannot take any independent action in respect of international agreements. Scotland could not, at present, negotiate to become part of the customs union or to form an association agreement with the EU. Indeed, these are more likely paths for the British government on the part of the UK when negotiating its future relationship with the EU.

Norway, Switzerland and Liechtenstein are other states which form part of the European continent without being part of the EU. Norway and Liechtenstein, along with Iceland, are non-EU states which are part of the European Economic Area. Participation in the EEA allows ‘extended’ access to the single market, with the requirement that EU law be implemented at the domestic level. The States are able to participate in EU agencies, but have no voting rights, leading to the frequent lament of ‘all pay, no say.’ Switzerland is a separate case and has a number of bilateral agreements with the EU, which underpin its relationship, including the alignment of many of its laws. However, Switzerland has recently voted to reject further freedom of movement, and the EU has responded by stating its intention to withdraw from any negotiations on the internal market if the principles of non-discrimination, freedom of establishment and right to reside are not respected.

The EEA represents the most practical model for the UK as a whole to undertake in the near future, if it wishes to renegotiate its relationship with Europe, as the UK as a whole is already party to the EEA agreement.. Interestingly, however, this also provides an opportunity for Scotland and Northern Ireland to remain inside the EU. The Treaty on the Functioning of the European Union and the Treaty on European Union consistently refer to ‘Member States’ and ‘States’ when discussing the law applying to states within the EU, but interestingly switches to ‘countries’ when referring to those outside the EU, under articles 8 and Chapter V of the Treaty on European Union. In using such language, the EU provides an opportunity for England, Wales and Scotland to be considered ‘countries’ and to conclude agreements with Westminster representing England and Wales as third countries. In this light, the UK could remain a state, the Westminster Parliament would have the power to negotiate on the part of the necessary populations, but the Scottish and Northern Irish parts of the existing states could remain part of the EU. This provides legal authority for the oft-cited ‘reverse Greenland’ idea, which is not really possible without further devolution to the individual regions / countries of the United Kingdom. The possibility does exist, as the Swiss Constitution provides that certain cantons may conclude treaties within their area of competence with foreign states, under article 56, allowing them certain treaty-making powers. With such practice in other states, it is possible to envisage this scenario.

Cyprus is an unusual state in any sense, as it is composed of two parts, one of which unilaterally seceded in 1983 and which is not recognised as separate by any State other than Turkey. The application of the EU’s acquis is suspended in the northern part, which is effectively controlled by Turkey (Protocol No 10 of the Treaty of Accession 2003) and applies only in the west and south Greek-speaking areas of the country. The northern part of the territory depends heavily on Turkey, but this may be set to change as more recently reunification talks have opened up between the north and south-west. Cyprus has sometimes been highlighted as an example of a situation where select parts of a territory can be inside the EU, while the rest remains outside, while the situation in reality has a greater similarity to that of the German Democratic Republic and the Federal Republic of Germany. The territory outside the EU has never been part of the EU, and retains a connection, based around trade and population, to the existing state inside the EU.

Legal creativity at the domestic and EU level

There is potential, regarding the issue of legal creativity at both domestic and EU level, and the EU's ability to behave in a flexible way. Art. 4(2) on the Treaty on the European Union  (" The Union shall respect the equality of Member States before the Treaties as well as their national identities, inherent in their fundamental structures, political and constitutional, inclusive of regional and local self-government. It shall respect their essential State functions, including ensuring the territorial integrity of the State, maintaining law and order and safeguarding national security. In particular, national security remains the sole responsibility of each Member State") could be taken into account, when exploring Scotland's chances of remaining in the EU according to the "reverse Greenland" model or "Cyprus-model". On the basis of this provision, and for the purpose of question 2,  it may be argued that the UK,  whilst being a State under public international law, currently includes a bundle of four different national identities, among which the Scottish national identity, which would be inherent in the  current UK's fundamental structures inclusive of the  Scottish (self-) Government.  Under this interpretation, in light of Art. 4(2), the EU would have a duty to respect the Scottish national identity, particularly in light of the Scottish people's overwhelming vote to remain in the EU. 

A way to respect the Scottish national identity would be for the EU to offer (either on request or spontaneously) a differential treatment for Scotland, under Art. 4(2) TEU, during Brexit negotiation with the UK Government (and for the UK Government to accept this differential treatment, as the UK would legally remain a Member State until the end of negotiations), i.e. to offer a treatment taking into account the desire, by the majority of the Scottish people, to remain in the EU.   This treatment could consist of the continuing application of the "acquis communautaire" to Scotland alone after the end of Brexit negotiations, to allow Scotland to retain the benefits of membership (according to the "reverse Greenland" option or "Cyprus-model" option).

This would not be at odds with the independence option that the Scottish Government has stated the intention to explore.  In contrast, in the event of future Scottish independence, this route of a differential treatment based on Art. 4(2) TEU - if pursued during Brexit negotiations - would allow a continuation of Scottish EU membership without the need to submit a formal "ex novo" application under Art. 49 (i.e., a continuation of membership as a successor State to the UK).

The above evidence demonstrates that the UK has bucked a significant trend in choosing to move away from the European Union, while other small countries seek a closer relationship. It also demonstrates precisely how unprecedented the situation: parallels may be drawn with situations in Cyprus and in the OCTs of Member States, as Skoutaris and others have sought to demonstrate, but the action remains unprecedented as there are no previous instances of a Member State seeking to leave, while constituent parts wished to remain. However, the extent to which the UK can act without maintaining a relationship of sorts with the EU is questionable.

3. What role will Scotland have in the process of the UK's withdrawal from the EU?

For the purposes of this question, we understand references to Scotland to mean both (i) the political organs of government in Scotland, namely the Scottish Government and Scottish Parliament, and (ii) representatives of Scotland and Scottish constituencies in other parliaments. Our answer does not consider private and third sector entities which might seek to exercise informal influence over the process.

The power to negotiate and conclude treaties lies with the Crown. In order to create rights and obligations in the legal systems of the United Kingdom, treaties concluded by the executive must then be ratified by Parliament. In addition, Parliament would be required to repeal or amend the European Communities Act 1972 with a view to accommodating such arrangements as are required by the treaty or treaties concluded following withdrawal. Accordingly, in formal terms, Scotland’s role could be limited to the exercise of influence by Members of Parliament representing Scottish constituencies.

As a corollary to the extensive power residing in the government of the United Kingdom, however, there are no legal impediments to the inclusion of the Scottish government in the process of withdrawal. Indeed, a Concordat on the Coordination of EU Policy Issues provides that the ‘UK Government will involve the devolved administrations as fully as possible in discussions about the formulation of the UK’s policy position on all EU and international issues which touch on devolved matters.’ Historically, this has afforded the Scottish Government a limited degree of influence over some UK policy in EU law-making. Nevertheless, the effects of the Concordat are limited in that (i) it does not have the force of law, and (ii) it recognises the privileged position of the UK Government insofar as it requires ‘adherence to the resultant UK line’. The legal power of the UK Government to conclude treaties independently of devolved administrations is therefore unaffected.

The Prime Minister has declared that she will seek outcomes that are to the satisfaction of all parts of the United Kingdom. Notwithstanding the declared openness of the UK Government, it is not entirely clear that the Scottish Government’s position is compatible with that of other parts of the UK. It follows that the extensive involvement of the Scottish Government in the process of withdrawal may be politically difficult in the absence of especially creative compromises.

Insofar as UK constitutional arrangements are concerned, there has been some discussion concerning the extent to which the Scottish Parliament could exercise control over the outcome of the withdrawal process. It is argued that the Sewel convention requires the agreement of both the Scottish Parliament and the UK Parliament in order for changes to the Scottish constitutional order to be made. We are not persuaded, however, that this amounts to an effective veto. The constitutional law of the United Kingdom is founded on the principle that Parliament is sovereign and that acts of parliament (i) override conventions, and (ii) repeal all previous acts with which they are incompatible. It follows that the powers of the Scottish Parliament are limited to political influence, as opposed to legal force.

As noted elsewhere in this response, the Scottish public voted to remain in the European Union. The Scottish Government has, consequently, articulated a distinct political position concerning the outcomes to be sought in the process of withdrawal. This is addressed further in Question 6 below.

In addition to the above noted domestic roles, Scottish representatives in the European Parliament may exercise some influence over the process of withdrawal. It is noteworthy that the consent of the European Parliament will be required in order for a withdrawal agreement to be concluded with the United Kingdom (as per Article 50 TEU). Scottish MEPs may be well placed to influence the position of their respective political groupings. Nevertheless, the extent of the European Parliament’s role may be limited as a consequence of executive dominance in the withdrawal process.

Furthermore, it is not altogether clear that Scottish MEPs will be able to vote in matters pertaining to the withdrawal process. While Article 50 is clear that Council will vote as constituted by remaining Member States, the position of MEPs is not addressed in Article 50 TEU. It appears, therefore, that MEPs representing Scotland will be able to vote, but in practice this may depend on emergent political conventions. This may, however, be a moot point if the United Kingdom is no longer a member of the European Union when the matter comes to a vote in the European Parliament.

4. How will Scotland be included in the Government's Brexit negotiations?

International law does not require the inclusion of sub-state regions in negotiations between States. Nor does European Union law, or indeed the law of the United Kingdom, require that Scotland be included as a distinct entity. There is not, however, any negative prescription in any law that would require Scotland to be excluded from the process. It follows that the Scottish Government may have a formal role in negotiations.

The authority to determine whether the Scottish Government will have a role, and what that role might be, resides with the government of the United Kingdom as a matter of domestic, EU and international law. While there is no legal impediment to direct participation, it is expected that the Scottish Government will be consulted, rather than being included directly. Similarly, it is not presently envisaged that the Secretary of State for Scotland will have a direct role in negotiations, other than by way of influence in Cabinet and Parliament.

We argue in Question 6 hereunder that there is a need to define how Brexit will be governed. In particular, Scotland is a key stakeholder in the Brexit process, but is politically and constitutionally vulnerable to control from larger parts of the United Kingdom. The magnitude of the constitutional change occasioned by Brexit suggests that traditional models of the conduct of international relations may be inappropriate going forward. It follows, in our view, that Scottish representation should be accorded a formal role in the oversight, and – to the extent possible – the conduct, of Brexit negotiations.

5.              What future relationship with the EU would be best for Scotland?

The question of the future relationship with the EU post ‘Brexit’ was not put to the electorate on 23 June. In light of this, the UK Prime Minister cannot legitimately state that the express will of the people is clear on this point. Of course this (rather crucial) matter did not feature in the official campaigns in the run up to the referendum, hence we have entered into a post-referendum period of immense uncertainty in which the airing and scrutiny of a range of different options available to the UK and Scotland vis-à-vis the EU is only now taking place (beyond academic circles). The backdrop of the UK’s domestic constitutional settlement and the more emphatic opposing referendum outcomes in two of its constituent nations are, and should be, particularly important features to weigh in the balance during the weeks and months ahead.

It is widely accepted that the referendum outcome represents an existential threat or at least a risk to the UK itself. The Scottish First Minister said in the immediate aftermath of the referendum that "the vote makes clear that the people of Scotland see their future as part of the European Union". She also made clear that the option of a second Scottish independence referendum is very clearly on the table as a consequence of the referendum outcome. Legally speaking, leaving the UK and becoming an independent state under international law is the most obvious route for Scotland to take should it wish to retain (or more easily attain) membership of the EU (leaving aside the question of whether Scotland would wish to maintain the range of opt-out/opt-in mechanisms that currently apply to the UK.) Whether that is ‘best for Scotland’ is more difficult to answer objectively and may well depend on how certain issues are resolved between it and its nearest neighbour – the rest of the UK, which might well be a non-EU state. Prominent issues include the operation of borders (for goods and people) and citizenship and currency.

6. How will Scottish interests be represented in the negotiations regarding the UK's withdrawal from, and future relationship with, the EU?

The process of UK withdrawal has been marked by a notable shift in international attitudes to Scotland’s status as an international entity. While Scotland does not have formal international legal personality, prominent members of European governments and of the European Commission and Parliament have been willing to conduct discussions with the First Minister. While it is noteworthy that no Head of State, Head of Government or representative of the European Council has hosted the Scottish First Minister, meetings with the President of the European Commission, the President of the European Parliament and the German Minister for Europe indicate that the Scottish Government will find that Member States and EU institutions are willing to accord Scotland distinct international status, albeit without according the full privileges afforded to States.

In general, it is expected that Scottish interests will not be treated as distinct from those of the UK as a whole. There are, however, a number of sectors in which Scotland’s stake is disproportionate to its size. These include beverages, fisheries, agriculture and energy. Strategies should be devised to ensure that connectivity in key markets is safeguarded and that outcomes of negotiations ensure that the competitiveness of these sectors is not hampered in future.

In particular, strategic thinking should take into account Scotland’s position within the UK as an exporter of energy to the EU. Scotland is a major exporter of oil and gas, and the EU’s on-going security concerns related to dependence on Russian fossil fuels makes the UK an attractive partner for meeting its energy needs. In addition, Scotland is blessed with some of the EU’s best renewable energy resources. It could become a leading provider of renewable electricity to a decarbonised EU, bearing in mind the EU’s policy goal of 80 to 95% reductions in greenhouse gas emissions against 1990 levels by 2050. However, it will only be able to take economic advantage of its renewable assets fully through the development and maintenance of appropriate interconnections with EU Member States including full involvement in the proposed North Sea Electricity Grid project and constructing links with Ireland such as those proposed in the ISLES project, and through its continued participation in EU energy markets and engagement with the EU’s goal of creating a single energy market.

Moreover, it is to be recalled that the Treaty of Union 1707 preserved Scotland’s distinct legal system. The devolution process has reinvigorated the development of Scots law. It follows that Scotland has an interest in considering the extent to which Brexit will affect the law and law-making of Scotland.Indeed, a further consideration is the extent to which withdrawal from the European Union will affect the interaction of Scots law with other legal systems both within and outwith the United Kingdom. By way of example, changes to private international law will have direct and indirect effects on the jurisdiction of Scottish courts and the territorial scope of Scots law.

While it is too early to comment on a UK negotiating strategy that is yet to be articulated, it is submitted that there is a need to recognise at this early stage the importance for Scotland of clear lines of communication between the multiple layers of Scottish governance.

In addition, the First Minister has stated that the following are ‘key interests’ to be preserved in the process of withdrawal:

“Our democratic interest. Scotland voted to remain – by a 24 point margin. Our voice must be heard. 

Our economic interest. Our access to a single market of 500 million people, funding for our farmers and universities, and the ability to travel anywhere within the EU are all vital for jobs and our economy.

Our interest in social protection. Scotland benefits from the core rights and protections for workers guaranteed by the EU - like paid holidays, maternity leave, limits to working hours, and health and safety protections. A UK government outside of the single market could roll back rights and protections that we take for granted.

Our interest in solidarity. The EU brings independent countries together to protect our security and address big global challenges. EU initiatives also give our young people the chance to study in other countries and deepen their understanding of different countries.

Influence. Scotland must be able to shape the rules of the single market as well as abiding by them.”[4]

A number of these ‘key interests’ appear to be compatible with the political course chosen by the UK Government. In particular, Scotland’s economic interest in access to the single market is consistent with the stated aim of the UK Government to retain a close trading relationship with the European Union.

Nevertheless, if this is understood to also encompass the free movement of people, as is the stated intention of the Scottish Government, innovative solutions, such as the further federalisation of the United Kingdom including the devolution of immigration policy, will be required in order to accommodate the policy goals of both the UK and Scottish governments. This is also true of Scotland’s ‘democratic interest’, its ‘interest in solidarity’ and its ‘influence’. It appears that these interests are not compatible with a Brexit scenario in which the United Kingdom does not differentiate negotiating outcomes for different parts of the state. The safeguarding of these interests, therefore, requires careful consideration of constitutional implications for the United Kingdom. It is not clear that the timeframe required for withdrawal from the EU and the magnitude of the task of withdrawal could run in parallel with fundamental constitutional changes. This is especially so in the context of a constitutional order that is, arguably, resistant to paradigmatic change.

The social protections identified by the Scottish Government, on the other hand, may be retained by the UK Parliament, albeit possibly without the added protection of a supranational legal system which provides safeguards against the infringement or repeal of rights which are currently protected. In addition, it is arguable that a Brexit model that focuses on free trade agreements without harmonisation of social protection may bring pressure to bear on social standards as a consequence of competition from free trade partners whose standards of protection might not be consistent with those required of Member States of the European Union.

In sum, therefore, the safeguarding of Scottish interests in the negotiations regarding the UK’s withdrawal from the EU requires unprecedented degrees of political flexibility and strategic synergy between the UK and its constituent parts. We are not persuaded that this will be possible within the confines of the United Kingdom’s present constitutional order. Nor is it clear that the burden of reordering the UK’s relationship with the EU allows for simultaneous reordering of the UK’s internal legal order. This is not to say, however, that Scottish interests cannot be safeguarded. But the scale of the task should not be underestimated. It is submitted that immediate action is required to establish a system of governance of Brexit which departs from traditional approaches with a view to accommodating new political realities and evolving constitutional relationships within the UK.

7. How will the UK’s withdrawal from the EU affect Scottish devolution and Scotland's funding settlement?

The proposed UK withdrawal from the United Kingdom appears to pose several legal questions for Scottish devolution and the funding settlement in Scotland. It should be noted, before proceeding, that all answers until the negotiations to leave the EU begin frame a ‘false debate’ because we cannot know what the outcome of negotiations will be. As a consequence, these comments will highlight the main areas of contention and the legal issues which may arise as a consequence of leaving the EU.

The current nature of the Scottish Parliament and the Scottish devolution settlement, if it can be called a fixed settlement, is partly legal and partly political: law has created the Parliament, but the ultimate power to make and repeal law rests with Westminster and thus political agreements are in place to moderate the use of this power. Many of the areas of competence handed to the Parliament following the passing of the Scotland Act 1998 were already held by the Scotland Office, but without the right to legislate. There is something of a tension between the devolved and reserved powers shared between the Scottish Parliament and Westminster: agriculture and fishing is devolved, while trade and industry is reserved, economic development is devolved, while areas that impact directly on economic development such as immigration, employment law and equality are reserved. Nationality and citizenship, presumably including EU citizenship as mandated by the Lisbon Treaty, would fall within the reserved power of Westminster. Foreign affairs and the constitution, two key areas for future decision-making and international relations in Scotland, are also reserved.

The legislation presents a very black and white view of devolution, in that power is granted to the Scottish Parliament to legislate, but that Westminster remains the most significant legislator and political actor on the part of the Scottish people, as part of the British polity. There are a number of conventions and non-binding agreements which allow the Scottish Government representation and consultation at relevant discussions, but most demonstrate that Westminster has the final say. For example, the Memorandum of Understanding of 1 October 1999 is effectively a gentleman’s agreement between Westminster and the devolved regions, including Scotland, which commits in honour alone each party to good communication and cooperation and requires each devolved party to implement EU obligations, where relevant. However, EU business is confirmed as the responsibility of the UK government alone, although there is a promise to involve the devolved administrations in EU business. The recent meetings between devolved administration leaders and EU officials demonstrate the non-binding character of this agreement. The Sewel Convention is equally another constitutional agreement that Westminster would not legislate on devolved matters without the consent of the Scottish Parliament. The power of Westminster has not been diminished by devolution and indeed, devolution is more akin to the sharing of responsibility than the handing over of power.

The above comments underline the importance of Westminster for Scottish legislation and representation at the EU level; there is no separate EU delegation for Scotland, despite devolved powers to legislate domestically in these areas. Many Scottish MEPs take an active interest in debates that affect Scotland and represent the people at that level, but there is no ‘Scottish delegation’ or sole Scottish representation at the EU level. The next issue is that of making law for Scotland on issues that may be affected by the EU.

The Scottish Parliament is clearly constrained by both the Scotland Act 1998, which holds that it may not legislate outwith the confines of its devolved powers. However, there are two further restraints on its power: the inability to make laws which are in conflict with either (or both) of the body of EU law or the European Convention on Human Rights. The actual law-making may take place, but the laws created would not be considered law. This presents a challenge of which the authorities should be mindful if the UK should exit the EU, as the Scotland Act would need to be amended to prevent any constitutional problems. As above, the Westminster government would need to make these changes, as the Scotland Act is not a devolved piece of legislation and constitutional elements thereof are reserved to Westminster.

Much of what has been said in this part of our note highlights the importance of Westminster, and the significant role it plays as the authoritative body which represents and legislates for the UK, sometimes passing some of that authority to other bodies in the regions. However, there is a constitutional principle which suggests that the sovereign power of the State rests not in a Parliament of any kind, but rather in the people. In MacCormick v Lord Advocate it was held that the doctrine of unlimited sovereignty was abolished by the Act of Union and that the Scottish concept of sovereignty, vested in the people, now carries greater weight. This is particularly important now that Scotland has its own Parliament and can make the representative wishes of the people known with greater force. This is of particular import given the split in the constituencies that voted for and against Brexit.

Although the devolution ‘settlement’ for Scotland is of great importance to the UK as a whole, it is not regarded by the EU as anything more than an internal matter. The Lisbon Treaty does not prescribe how regions and devolved administrations should be dealt with in light of a decision to exit the Union and focuses instead on how withdrawal should be negotiated. In light of the above, it would appear that exit would be negotiated on the part of the UK for the whole of the UK, with the processes and timelines set out by Article 50 of the Lisbon Treaty. Thus, there are no special arrangements in law required to take account of the Scottish approach to the Brexit referendum. However, in light of the above-mentioned principle, there may be domestic constitutional consequences if the UK government wished to ignore the clear wishes of the Scottish people, demonstrated by the majority vote for Remain. There are no immediate effects of the vote on the Scottish Parliament, or the lawfulness of the Acts it passes, because EU law will continue to apply until the European Communities Act 1972 is repealed.

Since the Brexit vote, it has been repeatedly highlighted that there is no precedent for a Member State leaving the EU. However, there have been a number of internal changes to membership over the years, some of which are tantamount to exit and renegotiation of the relationship. This generally arises as a consequence of the territory in question being an autonomous part of a Member State, without being fully independent. The two examples discussed here are Greenland and Saint-Barthélémy, both of which are Overseas Countries and Territories of the EU.

Greenland is an autonomous region within Denmark which has operated under a system of self-government with a Parliament and governing administration since 2009, of which notice has been given to the United Nations. It has the power to negotiate international agreements with other nations, but is not, currently, fully independent of the Danish State. Greenland renegotiated its relationship under the above agreement and is now part of the Overseas Countries and Territories arrangement. The EU pays to access their fisheries area, and Greenland is bound to cooperate with the EU in areas such as marine conservation and environmental protection. The EU notes that Greenlanders are in principle EU citizens, but Greenland is not part of Schengen and a permit to reside in Denmark does not extend to Greenland.

Saint-Barthélémy is a Caribbean island which forms part of Guadeloupe, one of the overseas territories of France. It chose to secede from Guadeloupe, part of France, in 2003, although it became an overseas territory of the EU in 2012, gaining the right to development funds. Its citizens have French citizenship and consequently, are EU citizens.

Both situations differ substantially from the UK position, both being island territories with continuing links to EU member states. Scotland would be in the converse position, being a part of a potentially former member state. One of the most marked differences between Greenland and Scotland is that there is still a significant portion of control retained by Westminster in respect of Scotland. Scotland does not have the authority to conclude international agreements on the part of the Scottish people, and the above memorandum and conventions guarantee nothing in respect of representation or consultation. With Saint-Barthélémey, the choice to become an OCT was linked more closely with separation from Guadeloupe. The issue was thus internal and not directly connected to that of EU membership.

The famous line that ‘devolution is a process, not an event’ resonates strongly with the current Scottish position in light of the Brexit vote. Scotland has some power to legislate, but the ultimate power rests in the hands of Westminster, particularly where negotiating with the EU is an issue. As no powers have been given to the Scottish Parliament or government to negotiate on the part of Scotland at the EU level, the devolution settlement and powers of the Scottish government are not particularly affected by the process of withdrawal itself. However, the constraints on the exercise of powers will be altered as a consequence of the reordering of governance above the regional level. The clear desire of the Scottish population to remain in Europe is a separate issue, and one which existing precedent does not cover.

8. What consequences and opportunities exist for developing Scottish trade in Europe and beyond in light of the EU referendum result?

The constitutional issues surrounding leaving the EU are documented above, but there are further issues that would need to be discussed. The following will discuss the consequences and opportunities for developing Scottish trade in the EU and beyond following the Brexit vote. The first half of these comments will focus on the domestic and EU constitutional issues, and the second shall deal with the competition law rules. We focus particularly on competition law both by way of presenting a case study to illustrate broader questions concerning post-Brexit governance, and in order to offer a modest contribution to discussion of a central aspect of EU economic governance that has, arguably, been neglected in public discourse concerning Brexit.

Scotland’s services are funded through a block grant from the Westminster government, calculated using what is referred to as the ‘Barnett formula.’ Although there are no current amendments proposed to the way in which the formula is calculated, the falling pound and economic problems, if these persist, would affect the value of the sum that Holyrood receives. Although the Scottish Parliament may take responsibility for income tax in Scotland, following the Scotland Act 2012, the value of such revenue is now a key issue. From the EU perspective, this would be considered an internal matter, but the ‘EU effect’ would remain depending on how much the UK would need to pay to the EU’s budget in order to maintain whatever new relationship is finally agreed. The removal of the UK’s existing, generous EU ‘rebate’ which was agreed between the EU and the UK as part of a political settlement is another factor to consider These issues are still unclear at this present time.

There are some complex issues which relate to the reserved and devolved powers connected to the economy. Trade in general is reserved to Westminster while significant areas of trade, such as agriculture and fisheries, are devolved to Holyrood. The responsibility for foreign affairs and trade negotiations would thus fall to Westminster, which means that Scotland would be represented by the UK in trade negotiations. This gives rise to a tension if, for example, fisheries policy, and access to territory in order to fish, acquires a significant trade dimension. It should also be noted that the EU has exclusive competence in concluding international agreements where they affect the common commercial policy, the customs union and competition rules and thus it is highly unlikely that agreements could be reached with individual Member States of the EU, without those States breaching EU law. However, agriculture and fisheries and the internal market are both areas of shared competence, meaning that Member States may legislate if the EU does not do so first. In most cases, the EU firstly creates a strategy and the Member State then carries it out, as opposed to there being separate areas of competence. This creates serious problems for the UK as a whole and Scotland as a constituent part. Taking fisheries policy as an example, the UK may have an interest in it as part of its trade objectives. However, the Scottish Parliament has power to make law and policy in this area. It would be possible for individual Member States to make agreements in this area, but not if the EU puts in motion a policy or law beforehand. There is also nothing to stop the EU from creating law and policy in these areas while the negotiations are ongoing. This single example demonstrates the complexity of the issue, and the delicate political balancing act required in order to take decisions relating to this one issue.

Trade and competition law

This section will focus on how the vote may affect the application by businesses of competition rules which affect various dimensions of their business practice and incentives to trade in Europe.

In their trade practices, businesses in Scotland need to comply with EU and UK Competition rules. EU Competition Law is directly applicable by the UK Competition authority – the Competition and Markets Authority – as well as by UK courts, pursuant Regulation 1/2003. What determines the applicable rule – is whether a particular conduct affects trade between EU Member States (which has been defined broadly). When a practice does not affect trade between EU Member States, UK competition law applies to conduct by Scottish companies. The interaction between national and EU competition laws, as well as the allocation of cases are clearly defined, and is also achieved via the European Competition Network (ECN). In terms of Merger Control, the EU has exclusive power to review mergers that have an EU dimension (thereby providing a one-stop-shop for parties to such transactions). By statutory requirement (section 60 of the Competition Act 1998), UK competition rules must be interpreted in a manner consistent with competition case-law of the Court of Justice of the EU.

UK competition law is to be applied and enforced across the UK in a uniform manner by the CMA based in London and is not a matter which is devolved to the Scottish Parliament or involving any separate Scottish institutions. There has been limited enforcement practice in relation to Scottish businesses. However, under the Scotland Act 2016, the Scottish Parliament and Scottish Government recently gained some power in respect of competition policy – with a particular focus on consumer protection The Scottish Government is engaging with stakeholders to develop a strategy for the effective implementation of the newly gained powers. (See Scottish Government, Consumer and Competition Policy for Scotland).

Therefore, Scottish trade practices are currently subject to EU competition rules when they have an EU dimension, and UK competition law otherwise. The substance of rules and existing enforcement procedures provides a streamlined two-tier competition system that ensures certainty to businesses. In addition, both regimes are very similar in substance – although one example of notable difference is the market investigation system available in the UK for non-EU cases.

One of the first questions to ask is the extent to which the impact of the vote is specific to Scottish businesses, as opposed to other UK-based businesses. In other words, the question is whether Scotland will be impacted differently, when focusing on the impact on competition rules. The CMA’s response to the Smith Commission (2014) indicates that for most goods, the market is the UK, or wider. This suggests that while the Scottish economy may have very distinct characteristics, Scotland’s trade practices are very much integrated with the rest of the UK (and beyond). In addition, there are only a very limited number of competition law cases with a Scottish focus arising under the existing regime post-2000. Therefore, what follows is likely to apply to any UK-based business (apart from in the possible future scenario of Scottish independence).

The first thing to stress is that any practices by UK companies that affect trade between EU Member States will still be subject to EU Competition Law.

The impact that Brexit may have on competition policy will depend on whether the UK remains in the European Economic Area (EEA) or rejoins the European Free Trade Association (EFTA); or whether the UK and the EU enter into a specific free trade agreement, subject to WTO rules. In addition, we need to consider the event in which Scotland becomes independent from the UK as a possible indirect consequence of the EU referendum.

Businesses in Scotland would not be significantly impacted by the EEA and EFTA type of scenarios since the UK would be part of economic areas in which they continue applying competition rules that are substantially similar (although some changes are expected to arise -see A. Stephan, Will much change in Antitrust post Brexit?). If the UK’s relationship with the EU is based on a free trade agreement subject to WTO rules, there is more room for divergence between the substance and enforcement of EU and UK competition law rules; this scenario may imply the existence of trade tariffs which will of course affect the trade opportunities of Scottish businesses. While the UK will theoretically be able to adopt very different rules, it seems unlikely that UK Competition Law, whose main provisions largely mirror the EU provisions – will substantially evolve. However, if this is the case, businesses will need to comply with two sets of diverging competition rules depending on whether their practice affects trade with other EU Member States. Additionally, UK aid to businesses will no longer be submitted to EU State aid rules – which also means that the UK will not be able to rely on/take any EU enforcement or judicial review action against aid given by other Member States.

In terms of enforcement of competition rules, however, changes may affect business practices and their incentive to trade. In all these scenarios, the CMA will no longer be submitted to the rules of cooperation and case allocation by the ECN, since the CMA will lose competence to apply EU competition law – and some sort of duplication – inducing more cost to businesses – may be one of the consequences, owing to the possibility of concurrent proceedings. Similarly, in terms of Merger Control, there will no longer be a one-stop shop for the notification of mergers – and if a transaction falls within the scope of the EU Merger Regulation it may need to be notified both at the EU and UK levels. (See for more details, A. Komninos, Brexit and competition law). The extent of a divergent interpretation of UK competition rules will also depend on whether the link with EU competition law established by section 60 Competition Act 1998 will be cut. But since UK case law has developed consistently with EU Law until now, the effect of such change will not be felt until later. (P. Willis and R. Eccles, Brexit: Competition law implications)

In the event that Scotland gains its independence or if Scotland’s devolution process develops to allow the creation of a Scottish Competition authority, the consequences will be very different and probably more specific to Scottish businesses, to the extent that trade practices are specific to Scotland, and that competition issues can be fixed independently of the rest of the UK. This scenario has been assessed in detail in the CMA report.

The huge uncertainty associated with the unknown consequences of the vote increases the chance that trade practices will be undermined or affected. Businesses may be hesitant to engage in further trade with EU partners (thereby possibly falling within the scope of EU Competition Rules) if they foresee that in the near future they may need to comply with an additional layer of competition rules, causing more administrative burden, at least in a period of transition. Depending on the relationship that will emerge, Scottish business may fear the prospect of more complex competition law rules, which certainly will impact the incentives to trade.

August 2016

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