I bet that until a few days ago you thought the referendum in Scotland was a mildly amusing sideshow. Perhaps you still do. Perhaps you are convinced that the ‘silent majority’ that Better Together are so sure will step up to the plate at the last minute really exist. Perhaps you think that the reasons many people are giving for voting ‘yes’ are so vague that voters will change their mind on the day. Or even if they don’t you might think it is all an irrelevance.
Perhaps you know about the Faroe Islanders’ referendum for independence from Denmark back in 1946 and assume something similar will happen here on a ‘yes’ vote. Then the vote was stunningly close: 50.73 per cent of people voted yes, and 49.27 per cent voted no. The Faroe Islands declared independence but then almost immediately decided they didn’t fancy it much. They had the declaration annulled, and voted in a pro-Denmark government. Today the Faroe Islands have home rule or what Scotland would call devo max. But regardless of where you stand on all this, it might be time to start taking Scotland seriously.
The bookies are far from convinced that there will be a ‘yes’ vote (they put it at a likelihood of about 30 per cent), but the polls now suggest the odds are getting on for 50/50. So assuming no immediate annulment (fair, I think) is there any reason why anyone outside Scotland should care? In the long run maybe not. But in the short run it isn’t so simple.
Those in doubt need only look at what has happened to sterling since the market started to notice the momentum behind ‘yes’. It has fallen over 6 per cent since July. It is down 2.5 per cent in the last week alone. This partly reflects economic uncertainty. There is a possibility of a run on the Scottish banks — we have already heard lots of reports of individuals and companies moving their money out of Scottish banks to avoid any post-vote problems and that is a trickle that could turn into a flood after a ‘yes’ vote. The Bank of England — still Scotland’s lender of the last resort — would have to step in and that would have a nasty impact on the pound. Worse, for those who don’t get their money out in time, there is a possibility of that run on the banks ending in capital controls: if the Bank balks at a long-term bail out, it might insist on preventing depositors from withdrawing their money at all. This isn’t probable but it is possible. If you haven’t already, best move any cash you have in Scottish banks out now. There’s no downside.
Of course you don’t just have to worry about the pound. If there is an unseemly row about the allocation of British debt you might have to worry about the gilt market too. Taking on Scotland’s share isn’t that big a deal to the rest of the UK (it would add 6–9 percentage points to our debt level relative to GDP) but watching the one-time political union members bicker about who owes the most for the UK’s overspending on lousy IT projects and welfare isn’t exactly going to enhance our ‘sophisticated safe haven’ status in the global financial markets. That will push the gilt price down.
However, there is more to all this than these relatively obvious long-term economic effects (some of which will end up having only a marginal impact on non-Scotland-based residents of the UK). There are likely to be some very dramatic political effects — which will have further knock-on economic effects — too. A note from Gavkal-Dragonomics this week pointed out that a ‘yes’ vote is likely to end David Cameron’s premiership. He will either stand down or be dumped in a ‘putsch from right-wing Tories’. Then the UK has a lame duck government characterised by nothing but blame apportionment until the May 2015 election which would most likely then go to Labour with a pretty heft majority. Who is going to vote for a coalition incompetent enough to lose Scotland? This, says GavKal, ‘should be very alarming for investors in sterling’. Why? Because Labour is likely to campaign on a platform of higher taxes (property taxes in particular), higher spending and antagonism to the financial sector.
The upshot? It is hard to think of anything positive to say about holding British assets with all this going on. If you wanted to be a buyer of shares or sterling, best either be sure there will be a ‘no’ vote or wait until after 18 September. But whatever you do, take Scotland seriously.
Merryn Somerset Webb is editor in chief of MoneyWeek.