The road towards the Scottish referendum has been pitted, bumpy and full of twists and turns.
Along the way the arguments have been muddied by political obfuscation and some amateurish propaganda against a ‘Yes’ vote by sections of the business community.
Can it really be the case that from Friday morning the Scots household will have to pay more for their porridge, eggs and milk?
Food for thought: Can it really be the case that from Friday morning the Scots household will have to pay more for their porridge?
Yet it would only be foolish to pretend that if a country of 5m people and 8 per cent of the nation’s GDP broke away from the union, it would not be profoundly disruptive.
Breaking up, as the countries of the former Soviet Union and Yugoslavia found, is extraordinarily difficult. Fortunately – despite the poisonous atmosphere of some of the campaigning and the foolishness of the Government in not giving the Scots a third option of greater devolution – a divorce may change UK politics for ever, but it will not result in the violence that has occurred in less mature democracies.
Such conflict that will take place will be on the financial markets.
Predictions that sterling could be staring into the abyss are almost certainly over the top, but we should not underestimate the profound immediate consequences for the Scottish financial system, its economy and ultimately output and living standards in the newly independent country.
All kinds of currency scenarios for the new Scotland have been mentioned. They include keeping the pound (if Westminster will allow it), or opting for an independent free-floating currency that will eventually seek to become part of the eurozone. That would effectively mean dancing to the tune of the Bundesbank and the German Constitutional Court rather than the Bank of England.
These are all possible but none offer stable scenarios. In the event that the pound is maintained it would mean Scotland keeping to monetary and fiscal targets set by the existing state’s monetary and fiscal policy.It might be possible to have a different fiscal envelope – higher taxes and higher spending – which is parallel to that of the rest of the UK, but it will be a distance from the low-tax model Alex Salmond embraces.
Keeping the Scottish pound in line with sterling would require some kind of currency board to enforce the monetary discipline (including, perhaps, higher interest rates).
But the risk would be of an Argentine-style forced devaluation and abrogation of debt when pressures on the domestic economy became too great.
One of the difficulties is that the Scottish financial system only functions because of the Bank of England and UK taxpayer subsidy.
That includes £350bn of quantitative easing, super-low interest rates and the equity holdings of the Government in Royal Bank of Scotland and Bank of Scotland (part of Lloyds). Both banks have plans to head south, along with Standard Life. Some of the deposits, despite the current consumer protection of the Financial Services Compensation Scheme, already have fled the country.
Moreover, Edinburgh might cast an eye over Greece, where youth unemployment is 53 per cent, or Spain where it is 50.5 per cent. It is not exactly the dream scenario.
This is not to say Scotland could not be a viable state. Such oil revenues as they are, around 90 per cent depending on where you draw the lines, will come their way.
And the Scottish economy is by no means a basket case. Outside of Greater London it is one of the UK’s strongest regions. GDP per capita is close to the national average.
That, of course, is before the Edinburgh financial community, one of the strongest in the UK outside of the City, migrates to the Square Mile and Canary Wharf.
The biggest threat of all in such circumstances is uncertainty.
Uncertainty about the safety of the banking system, uncertainty about the currency, about the fiscal settlement and about almost every aspect of Scottish life from the trade preferences for Scotch whisky, to the disposal of nuclear waste and whether the national or euro lotteries could extend to the new state.
That could be a torrent by Friday lunchtime, requiring the Bank of England to resort to its lender of last resort powers for the first time since the autumn of 2008, when it covertly lent RBS and HBOS £61.6bn to prevent the ATMs freezing up. As for the euro route, it is out of the question now, and maybe for ever if Spain, Belgium and France, all with their own secessionist tendencies, have their way.
These are all known unknowns and the kind of things markets detest. The pound has already been under pressure, partly the result of Russian oligarchs (fearing an asset freeze) moving their billions to Dubai.
Other investors, overseas and domestic, can be expected to do the same in the case of a ‘No’ vote. Heavy selling pressure will see sterling forced lower and bond yields surging. In Scotland itself the lack of credit and a credible currency and fiscal system will lead to a recession every bit as deep as that of 2009, if not more cataclysmic, and surging unemployment and falling wages.
Independence may come but it may be decades before the Utopian dream of Nordic prosperity is, if ever, achieved.
Independence May Come, But It May Be Decades Before Utopian Dream Of Nordic Prosperity Is, If Ever, Achieved
51% of 5 Million Welfare Addicts Set to Vote For Economic Hara-Kiri: Poll Says Scots Will Vote Aye in #IndyRef – Great News!