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Goodbye, (Alastair) Darling? What happens if Scotland says “Aye” to Independence?
As the referendum date draws closer (Thursday 18th September 2014), a shock narrowing in the polls has led to the establishment contemplating what was once considered unpalatable- the dissolution of the United Kingdom as Scotland seeks political independence.
As the “Better Together” campaigns’ lead has gradually eroded, with a tight margin in favour of independence now, the economic ramifications of independence could be huge for both the remainder of the UK and Scotland. Both camps have published analyses of what would happen, with both attracting criticism.
As the Better Together campaign made a list of things an independent Scotland would not be able to participate in; currency union, the monarchy, reapplication for NATO and the EU, the nationalists instead made a list of things they would refuse to do, including default on share of the national debt.
The recent surge has sent the establishment into a flurry of activity, with all three major party leaders heading to Scotland in an attempt to shore up support, and presenting policies which may violate the purdah in an attempt to sway voters with a “devo-max”. It may not be enough, however, as decades of perceived neglect and an establishment which has closed ranks around South Eastern England may not be enough to persuade voters to stay. Furthermore, voters’ increasingly believing the establishment is bluffing when it comes to these threats and the promises of Westminster ring hollow.
Currently Scotland stands as the 14th richest country in the OECD per capita, when taking into account geographical shares of oil revenues, a claim that has been distributed by the Yes campaign. This is four places above the current UK position, based on estimates made from the ONS. These figures could come in dispute, given this is nominal GDP and reflected by currency, and within the current UK set up. This position ultimately depends on the fate of Scotland’s currency, which insists on keeping sterling.
This uncertainty combined with the poll lead to Sterling suffering its biggest intra-day loss in over a year, sliding to $1.6150 against the US dollar, a rate not seen since November 2013.Financial markets also saw penalising of the Scottish companies listed in London, with RBS, Lloyds, Standard Life, and SSE all suffering share price declines.
Furthermore, this is consternation and askance positions regarding the currency union. Paul Krugman, Nobel Prize winning economist and usually harmonious with the left of centre SNP’s economic policies, has warned of the dangers of independence minus monetary policy control. He points to the debt stricken Eurozone countries who relinquished sovereignty over the money supply to participate in the Euro. It is highly like a Westminster controlled monetary authority would set rates to benefit the largest player, i.e. England and London, which would cause asymmetric shocks and responses which could not be solved by a single interest rate.
The decision to maintain the pound is somewhat startling in this respect; although the Scottish economy is highly integrated with the rest of the UK, and maintaining a separate currency would be difficult the comparisons between this and the Eurozone are too ominous to ignore. Scotland’s financial sector includes RBS and Lloyds, some of the most prolific offenders during the financial crisis. If the Scottish government cannot create its own money, this will cause severe consequences.
The counter argument for maintaining the currency is due to the highly integrated economies; with independence, the UK would account for 65% of Scotland’s trade. This would cause further economic uncertainty, and the new currency would be reliant on oil revenues, impacting transactions costs heavily. Going to the Euro would essentially be at the discretion of Germany, so it would be better to use the currency of the largest trading partner. It would hope that some of Sterling’s credibility would keep its borrowing costs down, in a similar way Greece and Spain leveraged Germany’s in the mid-2000s.
Another key debate over independence is the fate of North Sea oil. Reserves have been depleted over the years, and this is a totemic symbol of the nationalist movement. There are still some oil reserves, although output has declined considerably. Much rests on how the North Sea reserves will be distributed; if done on a geographic share, Scotland will be better off; in terms of population they will be in a deteriorated position. While offshore oil accounts for a considerable proportion of the Scottish economy (approximately a fifth), it also claims to have a significant proportion of the EU’s renewable reserves; a quarter of wind and tidal potential and 10% of wave energy potential. The onshore economy is accounted for over a half by financial services and government.
The referendum will also have further political and economic consequences; Spain has been a staunch supporter of remaining in the UK, as a Catalan independence poll is expected to go ahead in November 2014, with over three quarters expected to vote in favour. The Spanish government has branded the poll illegal, and unlike the UK where it was agreed in a legally binding agreement, this is a unilateral movement. It remains to be seen whether Wales will also follow suit and attempt to move towards its own governance.
There will also be an implication for the remainder of the UK; despite perceptions to the contrary, Scotland has been a net contributor to the UK treasury to the tune of GBP 220bn at current prices since 1980. Although the Scottish government currently runs a deficit of approximately 11%, the loss of oil revenues (particularly if separated geographically) will have a deleterious impact on the rest of the UK’s public finances, forcing either further cuts to the budget or tax raises.
Despite the currency concerns, the Scottish economy is small, possesses oil reserves and has a rich history in economic activity; it could indeed become one of the richest nations in the world, and would have powers to set corporate tax rates, something which “devo-max” will not permit. While attrition of the British establishment will be considered a political victory, the economic risks of independence are great, particularly as they pin their hopes on a currency union.
For MarketLine reports on Currency Union, please check out our following case studies: