Countries don’t break up every day, particularly those as large and prosperous as the United Kingdom of Great Britain and Northern Ireland. But it is possible that, two weeks from now, the headline writers will be calling it the “Disunited Kingdom” if the Scots vote for independence in a referendum on September 18th.
For much of the year, markets have been ignoring the vote, largely because the No side has been consistently ahead. But the latest polls have been narrowing, putting the No vote just six points in front – within a plausible margin for error (remember all those 2012 polls showing Romney heading for the White House). Even a narrow No victory might be unsettling, implying the likelihood of a further vote in a few years’ time. So the markets are having to contemplate what the financial consequences might be; sterling recently reached a five month low against the dollar.
The issues, for those non-Britons who have not been following the debate, are fourfold. What currency will the Scots adopt? The Yes campaign says they will keep the pound, the Westminster parties say this is out of the question (essentially this would recreate the euro problem, in which monetary union would exist without political union. The EU could insist, as it does with other new nations, that the Scots agree eventually to join the euro. The pro-independence group says EU spokesmen are wrong (Scots are already in the EU so would not be be new members) and that the English parties are bluffing. An independent Scotland can call the bluff of the rest of the UK by taking a hard line on the second big issue – the allocation of national debt. How should this debt be apportioned among the rump UK countries? By population? By GDP? If Westminster plays hard ball, the Scots could walk away altogether (although this sounds a bit like a bluff as well; the consequences for the new state would be stark, in the short term).
Both of these issues are big areas of uncertainty that will cause market concern if the Yes campaign wins. The remaining two financial issues are probably less market-sensitive but are still significant. How will the Scots manage their finances without the public spending support of the rest of the country? Or as the pro-independence campaign would put it, how will the rest of the UK survive without the revenue support provided by Scottish oil? There could be some long and complex negotiations on these two issues.
Such negotiations may be made even more difficult by the implications for the Westminster parliament. Scotland contributes 59 of the 650 MPs, of which 40 are Labour, 11 LibDem, 6 Scottish Nationalist, 1 independent and only 1 Conservative.
So how would the markets react to independence? The immediate reaction would probably be to sell sterling. UK government bonds (gilts) would probably weaken as well. For a start, it is not clear how the debt split would be practically acheived.
Then there is the banking sector. Some of Britain’s biggest banks are Scottish-based. Will English depositors be happy to hold their money in a foreign bank (the Icelandic example is not a good one)? Mr David Owen thinks that some banks will quickly move their domicile to London.
