The Day After

I’ve written before about why Scottish independence is such a deeply depressing prospect. But, three days out, to me this feels like one of the many elections I’ve observed where my side has narrowly lost (although we can still hope Salmond may have peaked too soon). There’s a reason why Westminster is (finally) panicking. Momentum is with the “Yes” campaign, and the normal rule that when in doubt people choose the status quo is less likely to help here: to the extent anyone fails to turn out on Thursday, it’s likely to be people who would vote “No” if forced but would rather not have to take an “unpatriotic” stand. “Yes” is exciting and positive; “No” is dull and contrary.

No doubt if Scotland does choose independence the recriminations will follow swiftly and with a vengeance. It is ridiculous that Cameron allowed the separatists to claim the psychological high ground by making “Yes” a vote for independence, that he set the threshold for an historic constitutional upheaval so low (compare the bare majority required here to the process of merely amending the US Constitution, for example), or that he allowed the issue to be framed as a decision relevant only to those people currently living in Scotland (as if Scots living elsewhere in the UK, or indeed, the English, Welsh and Northern Irish, had no stake in the outcome).

But, looking past Thursday to Friday and beyond, here are some of my thoughts on what we might expect to see:

  • Overnight, sterling will drop to USD 1.40-1.50. Prices in Scotland will begin to increase, stabilising at 5-8% above prices in England (a risk premium given all of the uncertainties discussed below). This, plus the 6-12% devaluation of the pound will lead to a 11-20% effective loss of purchasing power for Scottish residents, even before the currency question is decided. On top of this, Scottish real estate will decline in value by nearly as much: consider that house prices in Scotland lost 17.5% after the financial crisis, and you can predict a similar fall in value.
  • Any sensible person with deposits in Scottish bank accounts will immediately move their money south of the border. Many businesses and virtually all of Scotland’s financial institutions will quickly follow suit, particularly after the threats of nationalisation from an increasingly Hugo Chavez-sounding SNP over the weekend. Scotland will not be in a position to institute capital controls until it is finally independent, by which point most liquid capital will have left. (Note, too, that capital controls would be incompatible with any sort of currency union).
  • Whatever Cameron might say (and he’s right to say this to avoid giving the Scottish another reason to vote for independence), his position as Prime Minister will immediately become untenable. It is quite likely that the leaders of the other major parties will also be forced to resign (particularly Ed Miliband, given that the “No” campaign was largely subcontracted to Labour and the party has been looking for an excuse to get rid of him almost since he was elected leader).
  • Complicating the matter of choosing successors with be the fact that Scottish MPs will have become dead men walking: Scotland won’t be independent yet, so Scottish MPs will still have seats in Westminster, but it would obviously be inappropriate for them to help choose the person responsible for negotiating on behalf of England, Wales and Northern Ireland (EWNI, pronounced “Uni”). Do we have another election immediately? Do the Scots get to vote? If not, on what legal basis? Who will lead each of the election campaigns? My best guess is that there will not be another election immediately, as much because no one has any idea how to hold one than because it would be a bad idea. EWNI politicians might try to form a unity government around an elder statesman, although it is unclear who that statesman might be (Borris’s big moment? Or maybe Blair’s?!).
  • Things will get very messy very quickly, setting the stage for highly acrimonious negotiations. Particularly once the EWNI electorate has had a taste of some of the pain and disruption caused by the Scottish “Yes”, they will be in no mood to be conciliatory. I expect Scotland will end up taking slightly less than their per capita share of the debt, and considerably more than their per capita share of the oil (though somewhat less than geography might suggest).
  • Oil, unlike debt, eventually runs out. It could run out quite a lot sooner than expected if shale oil keeps pushing prices down, or the SNP makes good on its threat to nationalise BP. Again, Venezuela provides an instructive example of what happens when an oil-rich socialist state begins to overreach.
  • I am genuinely at a loss to solve the problem of an independent Scotland’s currency. If EWNI were feeling extremely generous, you can imagine how a currency union might work: the Bank of England guarantees Scottish deposits, Scotland has a seat on its board and agrees to abide by certain fiscal rules. But I can’t see EWNI agreeing to this: (a) because they will be in no mood to make such concessions and (b) because we’ve seen what happens with this type of currency union before. EWNI does not want to be Germany to Scotland’s Spain, and in the aftermath of a “Yes” vote I can’t see them agreeing to that very real possibility.
  • If a currency union is off the table, what then? Scotland won’t be in the EU, so it can’t use the Euro (more on the EU below). The other options would be either to use sterling directly (a la Panama) or to introduce a new currency pegged to the pound. The former is arguably the default option, but carries a great deal of risk for Scotland since it would be entirely at the mercy of EWNI’s monetary policy. If Scotland remains in an extended recession following independence (as seems likely), there could come a point relatively soon when the Bank of England decides to raise interest rates in response to EWNI growth, even though doing so compounds an ongoing Scottish recession.
  • Alternatively, pegging a new currency to the pound would give Scotland the “nuclear option” of devaluing its currency in such a situation. But the fact that Scotland could easily do this would discourage foreign investment and mean that it would have to pay an additional premium on any borrowing from the outset. I can’t see a peg to the pound lasting very long under any circumstances.
  • In either case, to be reasonably credible Scotland would have to amass a currency reserve. This would require (a) attracting significant inflows of cash through foreign investment and/or (b) running a consistent budget surplus over a period of time, all the while (c) not immediately spending any excess. The fact that (a) is the most likely gives you a sense of just how unlikely it is that Scotland will be able to create the currency reserve required to maintain fiscal independence.
  • Scotland will want to join the EU. But the EU will not want Scotland to join, at least not on the the terms given to the UK (and inherited by EWNI). As well as the danger that allowing Scotland to join would encourage separatist movements in other EU countries, it would upset the balance of power in the EU at a time when the Eurozone countries are increasingly trying to marginalise “Anglo-Saxon” influence (which, in this case, includes the Celts). While it seems likely that some form of accommodation with the EU would eventually be reached, you get a sense of the obstacle when you imagine the scale of negotiations between Scotland and EWNI and multiply the number of parties by 28.
  • From EWNI’s perspective, the best possible outcome for negotiations between Scotland and the EU might be if Scotland were to agree on something akin to Norway or Switzerland, giving access to EU markets without actually being in the EU and setting a precedent if a more Eurosceptic EWNI were later to decide to leave.
  • Scotland will keep the Queen, but Salmond will not be her prime minister. There is ample precedent for the role the Queen will play as head of state of a country that is not part of the UK, and it’s quite different from what the Scots are used to. While the Queen is obliged to follow the instructions of David Cameron, she is under no such obligation in relation to Stephen Harper or Tony Abbott. There is a reason for this: if Abbott were to give her instructions that conflicted with those of Cameron, the someone’s instructions would have to prevail and, by constitutional convention, it is Cameron’s instructions that would win the day. Scotland, like Canada and Australia, will (eventually, if it doesn’t become a republic) have to appoint a governor to act in the Queen’s stead and so avoid the embarrassment of the Queen herself being subject to conflicting duties. This point may not have much practical significance compared to everything else, but it is yet another example of things that will inevitably change following a “Yes” vote and which few Scots seem to have considered.

In summary, there’s virtually no question that a “Yes” vote will result in 5-10 years of significant hardship for Scotland. That’s not to say Scotland won’t be able to make a go of it, or ultimately even benefit from independence. But whether that hardship will be worth it in the end depends, in large part, on whether the Scottish people positively adapt as a result of these challenges, in the model of a country like Slovakia, or use them as an excuse to continue nursing historical grievances against their former compatriots. Based on the performance of the SNP and the actions of “Yes” supporters so far, I can’t say I’m particularly optimistic.

What about for the rest of the UK? The uncertainties of the separation process, along with the inevitable costs of, e.g., moving military facilities, relocating government offices, rewriting legislation, etc., will have a significant negative effect on the EWNI economy (estimated as a reduction of 1% of GDP). The long-term effects, however, are very much up to the people of EWNI. Scotland accounts for 8.3% of the UK’s population and 7.7% of its GDP. These are significant figures, but not a mortal loss. Scotland accounts for an even lower percentage of recent economic growth, much of which has been centered in the south-east. ENWI will only lose its seat on the Security Council if it lacks the confidence to retain it.

The best-case scenario is that I’ll be wrong and Scotland will vote “No” (and, even better, that the “No” will be decisive, forestalling a “neverendum“). Next best is that the loss of Scotland will allow EWNI to finally shake off the spectre of imperial decadence and forge a new international identity as one of a handful of nations with the cultural, economic, legal and military power to have a significant and positive effect on world events. Let us hope rejection by the Scots, should it occur, proves as galvanising as it is dispiriting, and that with the renewed conviction of the people of England, Wales and Northern Ireland, “the life of the world may [once again] move forward into broad, sunlit uplands”.

2 Responses to “The Day After”

  1. Robert Newcombe says:

    Hoping that those not responding in opinion polls include large numbers of those who’ll vote ‘no’ but are only prepared to express this preference in the secret ballot.

  2. Gary Reed says:

    Surely those that are still undecided, having heard the same arguments put forward so many times in the past two weeks, are more likely to abstain on polling day?

Leave a Reply to Robert Newcombe