By Mike Peacock
An opinion poll showing Scottish independence campaigners have a slim lead nine days before a crucial referendum has highlighted reasons for the wider world and investors to pay heed to the Sept. 18 vote, which could see Britain lose 5.3 million Scots.
Foreign governments and financial markets had long assumed Scots would view independence from the United Kingdom as too risky a leap but the sudden swing, confirmed by another survey showing the two camps neck-and-neck, has exploded such complacency.
Losing Scotland would likely weaken Britain as a power, dent its self-confidence and make it more introverted, increasing doubts about its future in Europe.
“BREXIT”
A lot of energy has been expended arguing whether an independent Scotland could join the European Union. The European Commission said on Monday it stood by its position that Scotland would have to leave the EU and re-apply for membership.
Even more telling could be Scotland’s absence from the debate about whether the rest of the country should remain part of the bloc, on which Prime Minister David Cameron has promised to give voters the final say if he is re-elected next year.
Overall, Scots are far more pro-EU than the English and if they secede in 2016 they would not get a say in the proposed 2017 referendum on Britain’s place in Europe.
Without Scotland, the chances of England, Wales and Northern Ireland voting to leave the EU are greater. Scots may only account for around 4 million of the UK’s 45 million voters but with opinion finely divided, that could tip the balance.
U.S. President Barack Obama said in June the UK would be stronger and more robust if it stuck together and Washington has made abundantly clear it wants Britain to stay in the EU.
Scottish nationalist (SNP) leader Alex Salmond says the biggest threat to Scotland staying in the EU is Cameron’s pledge to hold an in-out EU referendum.
POLITICAL INSTABILITY
Scottish independence would also alter the calculus for national politics in the rest of the country.
The opposition center-left Labor party has 41 members of the Westminster parliament in Scottish seats while the center-right Conservatives have only one. Take those out of the equation and the path for Labor to win power looks daunting.
“In Britain, it will mean the end of any chance of Labor winning power,” former Labor Europe minister Denis Macshane wrote on The Globalist website this week.
Whichever way the Sept. 18 referendum goes, Scots will still vote in a British general election next year, raising another uncertainty. If Labor won, its government might lose its parliamentary majority and fall within a year once its Scottish lawmakers go.
That loops back to EU membership since the Conservatives are committed to holding a plebiscite while Labor is not.
The irony is that the Conservatives have traditionally been the strongest defenders of the union and many would be aghast at independence even though it gave their party a permanent electoral advantage in what is left of the United Kingdom.
CAMERON’S POSITION
Cameron would face pressure to quit if he lost Scotland. The full name of his party is the Conservative & Unionist Party.
Compounding his woes, a parliamentary by-election in October could deliver the anti-EU UK Independence Party (UKIP) a first Westminster seat after the Conservative incumbent defected.
If Cameron were to go – he says he would not resign – there would be a clamor among the many eurosceptics in his party, and those who fear UKIP will cost them their seats, for a more clearly anti-EU leader to take his place.
That in turn could harden the chances of a British exit if a new Conservative leader would not campaign to stay in the bloc.
Salmond pressed for a third question on the ballot paper – for more devolved powers. Cameron’s rejection of that now looks like a miscalculation as the main parties scramble to promise Scots more autonomy if they vote “No”.
CONSTITUTIONAL QUESTIONS
Even if Scots vote to remain part of the UK, the constitutional genie is out of the bottle. Scotland is bound to get more autonomy if it stays.
Wales would almost inevitably demand more powers of its own and the so-called “West Lothian question” – why should Scottish and Welsh parliamentarians be allowed to vote on laws that only affect England when English lawmakers cannot do the reverse – would come to a head.
English nationalism, hitherto confined to the right-wing fringe, could take off, requiring a full-blown overhaul of the UK’s constitutional settlement.
INVESTOR UNCERTAINTY
For investors, there are many unknowns to ponder.
What share of Britain’s debt would Scotland take? Would it retain the pound? How much would Scotland get of oil revenues from the North Sea, estimates of which vary wildly? Would it follow a different fiscal policy? Can it join the EU?
The pound has dropped more than 3 percent against the dollar over the past week as the polls have narrowed dramatically.
The SNP wants to keep sterling but that is opposed by all the main political parties in London, creating uncertainty which could persist for the 18 months penciled in for negotiating details of a divorce.
What is certain is that minus Scotland, Britain would slip down the ranks from being the world’s sixth largest economy.
There could even be longer-term questions about whether it should keep a seat on the U.N. Security Council and stay in the Group of Seven major economies at a time when power is shifting to the world’s big emerging economies.
The UK economy is Europe’s biggest destination for foreign direct investment. Without Scotland those flows would fall and the rest of the UK’s current account deficit could rise to a level that discomfits investors.
The British Treasury has said it would honor all existing government debt regardless of whether Scots vote for independence, a move aimed at preventing bond market volatility.
But Salmond has said an independent Scotland could walk away from its share of the UK’s debt if it were not allowed to use the pound. That could make Scotland a pariah on the bond market.
Ratings agency Moody’s has said an independent Scotland could expect an investment-grade credit rating but face higher borrowing costs than the rest of Britain. If negotiations on how to separate proved acrimonious, its rating would be lower.
Rival agency Fitch said the UK would need longer to recover its triple-A debt rating if Scotland split away.
MONETARY POLICY
The Bank of England has not been drawn beyond saying it has contingency plans in place for a “Yes” vote.
But investors have begun pushing back expectations of when it will begin to raise interest rates given the uncertainty that could follow next week’s vote.
The sterling overnight interbank average shows the market had pushed back its forecast of a UK rate hike to seven months’ time, compared with its expectation of six months last week.
“The implications of increased economic uncertainty, financial volatility and fiscal risk post-separation would most likely result in delayed BoE rate hikes and tighter bank regulation to manage systemic risk in a fragmented union,” said Lena Komileva at G+ Economics.
BUSINESS TO VOTE WITH ITS FEET?
Though reticent to go public, a number of major Scottish-based financial companies could head south if Scotland goes it alone.
Royal Bank of Scotland said in June it was considering its options should Scotland vote for independence, adding that the vote had created a great deal of uncertainty.
Banking sources told Reuters that Lloyds Banking Group is considering having its registered office in London rather than Edinburgh if Scotland breaks away.
There could also be a more unruly rush for the exits. “In the event of a “Yes” vote there is a significant risk of bank deposits shifting abruptly out of Scotland,” UBS said in a note.
Pensions heavyweight Standard Life has warned it could move partly out of Scotland and oil giants Royal Dutch Shell and BP have said they want Scotland to remain part of the UK.
DEFENSE
Britain has four submarines carrying Trident nuclear warheads at the Faslane naval base in Scotland. The SNP wants nuclear weapons removed from an independent Scotland at the earliest opportunity.
Former British defense chiefs warned against such a move earlier this year, saying it would cost billions of pounds, cut thousands of jobs and create resentment internationally.
At a time of heightened tension with Russia, NATO allies will be concerned, although it would likely take years to move the naval base.
The future of the nuclear submarines are seen by some as one of Scotland’s main bargaining chips in getting what it wants in the 18 months of negotiations that would follow a “Yes” vote to work out how it leaves the United Kingdom.
SECESSIONISTS IN SPAIN, BELGIUM
Europe is watching keenly, none more so than Spain.
The government in Madrid has refused to let Catalonia hold a vote on independence in November but the region has vowed to press ahead with a non-binding referendum anyway.
If that is blocked, Catalan President Artur Mas said he would call an election as a proxy vote on independence.
Scottish secession would embolden Catalans and some Basques, as well as potentially Flemish nationalists in Belgium. That may be one reason why officials in Brussels have told the Scots that it would be difficult for them to join the EU. Newcomers have to be voted in unanimously by existing member states.
NORTHERN IRELAND
Scottish independence could also destabilize Northern Ireland.
Though a 1998 peace deal largely ended decades of sectarian violence, Northern Ireland remains deeply split between Protestants who mainly want to remain part of Britain and Catholics tending to favor unification with Ireland.
The unionists have particularly close links with Scotland while those who favor uniting with Ireland could seize on a Scottish “Yes” vote to press their claims more forcefully. (Editing by Paul Taylor)
