Later this year, Scotland will vote on whether to sever its union with England which has been in place for more than 300 years. A successful separation is likely to be far more complex and lengthy than Alex Salmond and the Scottish National Party are suggesting and, thanks to Scotland’s large financial sector, there are likely to be some specific concerns for investors.
“Salmond cannot expect Scotland to walk away from the union while expecting taxpayers in England and Wales to stand behind its economy. It would be like embarking on a damaging divorce and insisting on still sharing a credit card.”
Danny Alexander
The Scottish Financial Enterprise (SFE), the trade body for 110 banks, insurers, finance firms and pension companies, has said the scale and complexity of the task facing Scotland after a ‘yes’ vote cast real doubts on whether the Scottish government’s target of declaring independence in March 2016 was achievable. “Having consulted widely and in particular with those not advancing a case on either side of the independence debate, it looks likely that negotiations will take several years and certainly a lot longer than the 18 months suggested by the Scottish government,” the SFE said. So what issues are likely to cause the biggest financial headaches for an independent Scotland, and how might they affect the rest of the UK?
Currency
The three major UK political parties are against a split, and while leaks to the press have suggested otherwise, Westminster has publically dashed hopes of a currency union. Speaking to delegates at the National Association of Pension Fund’s annual investment conference in Edinburgh in March, chief secretary to the Treasury, Danny Alexander said the government would not change its mind on a union, which it believes would be detrimental for both Scotland and the rest of the UK. “Our decision – taken in the best interests of Scotland and the rest of the UK – is final. No ifs, no buts, ” Alexander said. “Alex Salmond cannot expect Scotland to walk away from the union while expecting taxpayers in England and Wales to stand behind its economy. It would be like embarking on a damaging divorce and insisting on still sharing a credit card.” The lack of a currency union with the the rest of the UK leaves an independent Scotland with few options. Its proposed entry into the eurozone is unfeasable – for the foreseeable future at least – so according to a research paper for investors by Blackrock, launching its own currency might be Scotland’s best option. “Scotland would have the best chance of operating under monetary policy conditions and an exchange rate suited to its economy,” Blackrock believes. “After Scotland established its monetary credentials, there could be advantages to operating the currency as a managed float. Its value could be linked to the currencies of its main trading partners and the price of oil.” Scotland could then choose to adopt the euro at a later date, the paper adds.
Doing business
This option is not without costs however, including some lack of policy sovereignty and the likely relocation of some financial sector players. While an independent Scotland is likely to adopt the Solvency II regime, the paper warns that firms are likely to face an interim regulatory phase: “This has driven some [ insurers] to make contingency plans for relocation of regulated activities,” it says. “Fund management companies with investment trusts in their stable would presumably want to make similar preparations.” Indeed, several financial institutions including Standard Life, Lloyds, RBS and Alliance Trust are already making contingency plans to move large parts of their businesses into England if Scotland votes for independence on 18 September, with others likely to follow them south. A newly-independent Scotland would also need to issue debt (kilt-edged securities, as Blackrock helpfully suggests) to fund its government, which again will not be easy. “Scotland’s fiscal position is weak – even with the most generous allocation of North Sea oil revenues,” says Blackrock. “Its estimated deficit totals 14.6% of GDP excluding North Sea revenues; 13.5% of GDP with a per-capita share of North Sea revenue; and still 5% of GDP with a geographical share, according to Government Expenditure and Revenue Scotland (see chart). Even an optimistic assessment for oil prices and production would leave Scotland’s fiscal deficit at 0.6% of GDP by 2017-2018, according to the Centre for Public Policy for Regions.” In fact, additional research by the Institute of Fiscal Studies suggests Scotland would need a fiscal swing of at least five percentage points of GDP to get to a primary fiscal balance (excluding interest payments on Scotland’s share of the UK debt). Guessing which way the vote will go is an impossible task from this far away and only once that is known can we start to look further ahead. As the SFE says: “As has been obvious ever since the referendum process was launched, nobody can know, this side of the referendum, what the consequences of a yes vote will be.”
Comments