Why Scotland shouldn't bet on easy path back to EU

Just a week has passed since the U.K. voted to leave the European Union (EU) and Scotland has wasted no time or effort in telling the EU that it wants to remain a part of the bloc. But analysts say that Scotland's path back towards the EU won't be quick or easy.

In the referendum on EU membership last Thursday, a majority in England voted to leave the EU but a majority in Scotland voted to remain. Scotland's First Minister Nicola Sturgeon was quick to leap on the result, announcing that the will of the Scottish people was to stay in the EU and in order to do so, a second independence referendum was now firmly "on the table."

The result sent a shockwave through the British political establishment because it signaled that not only had the U.K. voted to leave the EU but that its own identity as a single entity was now threatened.

Analysts now believe that at least a partial break-up of the U.K. is a distinct possibility – predicting another independence vote in 2019 around the time the U.K.'s process of withdrawal from the EU could be completed -- and that if Scotland becomes independent, it will apply to re-join the EU.

Duncan Thomson, Brian McCutcheon, John Patterson and Arthur Murdoch,from King of Scots Robert the Bruce Society, hold the Scottish flags as they prepare to vote in the Scottish independence referendum on September 14, 2014 in Loch Lomond.
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Duncan Thomson, Brian McCutcheon, John Patterson and Arthur Murdoch,from King of Scots Robert the Bruce Society, hold the Scottish flags as they prepare to vote in the Scottish independence referendum on September 14, 2014 in Loch Lomond.

There are obstacles along the way, however, with a protracted entry process to the EU and issues surrounding the adoption of another currency such as the euro, monetary policy and a "hard border" with England all having to be addressed.

How times change

During the Scottish independence referendum campaign of 2014, the EU sided with Westminster in as much as it tried to deter Scottish voters from opting for independence, saying that there was no guarantee it would be able to join the EU and even then, that an independent Scotland would need to go through the usual procedures for a new state to join the EU if it wished to do so.

After the Brexit vote, however, analysts think the EU's approach to Scotland could "soften" and it could be granted an "accelerated entry" into the EU as an independent country.

The process of joining can be drawn out, with J.P. Morgan Economist Malcolm Barr noting this week that it can take five to seven years and unanimous agreement among the member states over entry qualification, although there is a possibility that if Scotland were to become independent and then re-apply to join the EU, the process could be quicker, Barr noted.

"The signal being sent from the rest of the EU last time around was that Scotland joining the EU would not be an accelerated process, given that a number of countries were and still are struggling to manage regional pressures of their own. In the wake of the rest of the U.K.'s decision to leave the EU, however, we expect the EU's position to soften," he said in a note Thursday.

"Though difficult issues will remain to be dealt with, we expect the EU to signal that the process will be accelerated as much as possible should Scotland become independent and wish to join."

Euros and borders

While Scotland might have to wait years before it can become independent and even join the EU, other thorny issues such as currency and borders would need to be addressed.

J.P. Morgan's Barr said that if Scotland was afforded access to the EU and that free movement of individuals between the EU and Scotland was retained, "a by-product would be the need for a 'hard' border between England and Scotland, so that flows of individuals between the two nations could be controlled." Another issue would be the eventual adoption of the euro, Barr noted.

"All countries joining the EU since Maastricht have a treaty obligation to join the euro at some point. In the Scottish case, we would expect the same. But this legal requirement does not come with any predetermined timescale (so) Scotland could avoid being forced to adopt the euro and the single monetary policy that comes with it for many years."

However, it was highly unlikely that Scotland would be able to continue to use the pound sterling as its currency on an ongoing basis, he said. "As an independent country it would have no claim on influencing the Bank of England's monetary policy, and no access to a stock of sterling reserves large enough to underpin a lender of last resort facility for its financial sector."

As a result, "independence would likely come with the need to create a new currency for Scotland, and an independent monetary policy. That raises big challenges of implementation," he said.

"Given at least some shared interest both in England and the rest of the EU, in establishing stability in Scotland post-independence (it would still be a big market for English firms) we could imagine a framework where both the ECB and the Bank of England made some small portion of their reserves available to assist in the management of the new currency upon its launch."

The Madrid factor

While the EU might be more willing this time around to embrace Scotland as a new member of the bloc, another obstacle remains in the form of other EU states that are reluctant to encourage separatist movements within their own territories.

That reluctance was made clear when Sturgeon visited Brussels earlier this week to state Scotland's case for potential future EU membership with some leaders giving her the cold shoulder and others refusing to interfere with "internal" British politics.

France's president Francois Hollande said the EU would make no advance deal with Scotland over EU membership and Spain signaled that it was against Scottish EU membership lest it encourages a large separatist movement in Catalonia to break away and bid to join the EU too.

Spanish Prime Minister Mariano Rajoy told a news conference following an EU summit on Tuesday that it was "very clear Scotland does not have the competence to negotiate with the European Union. Spain opposes any negotiation by anyone other than the government of United Kingdom."

"I am extremely against it, the treaties are extremely against it and I believe everyone is extremely against it. If the United Kingdom leaves...Scotland leaves," he said.

Kallum Pickering, senior U.K. economist at Berenberg Bank, said that Spain would oppose a Scottish EU bid but the EU might be more compromising in the end. "Spain is strongly opposed to having separate talks with Scotland," he said in a note on Thursday. "However, our best guess is that if Scotland were to have a second referendum that ended in a vote to leave the U.K., the EU would find some compromise to allow Scotland to retain full access to the single market."

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