Scotland the economically brave?
In Scotland, barely 10 days ahead of the referendum vote on independence, the tectonic plates appear to be shifting. It remains to be seen just how decisive the shift will turn out to be.
Nevertheless, a vote in favour of independence is now acknowledged to be a real possibility.
Sterling was down by a cent against the US dollar as the markets digested the result of a poll by YouGov showing a dramatic shrinkage in the lead enjoyed by the ‘Better Together’ campaign which favours rejection of the independence option.
The really dramatic shift in voter attitudes appears to be occurring in the traditional working class communities in Greater Glasgow and in adjoining towns; places where the Labour party has enjoyed huge majorities for the best part of a century.
Labour’s vote is imploding. The effect is to make British national politics, already shaken up by UKIP, even more unpredictable, raising the prospect of an in-built right-of-centre majority in a shrunken UK which could, itself, be facing into a referendum on a British exit — from the EU.
The London financial media has reacted with some alarm to the prospect of a Scottish exit, while a whole host of big business worthies have lined up to warn of the dire consequences that could follow the ending of a Union that has existed since 1707.
There are concerns that investors could take flight taking their savings south of a soon-to-be-created border. Scotland is a major player in the financial services sector, with £750bn (€945bn) in pension funds under management and forty million account holders. Investors will want to continue to enjoy the protection of the Bank of England. Expect a groundswell, here.
And while the SNP government has sought to calm fears with a pledge that Scotland would retain the pound, many question whether such a currency union would be viable given that the government in Edinburgh could not, by itself, stand by a financial sector which is huge in proportion to Scotland’s stand alone economy. Savings could flow south en masse.
And to matters macro. Some believe Scotland, like other small economies, will be faced with higher interest rates and taxes. This is not certain.
Ireland’s sovereign debt interest rate is currently lower than that in the UK, but then Britain has higher inflation, while the actual cost of borrowing for Irish companies and individuals is currently steeper than across the water.
The practical consequences of a break-up of the Union do not stop there. The political and constitutional implications could be considerable. If Labour wins the general election in Britain next May, it is likely it will do so due to the support of a swathe of Scottish MPs. However, independence has been pencilled in for March 2016 should the Scottish electorate vote ‘Yes’.
Many Tories are insisting that elected MPs from
Scotland should vacate their seats should this event occur.
There are implications for the defence of Britain. Alex Salmond has pledged to take Scotland into Nato, but he is also committed to a non-nuclear strategy; something not contemplated by the western alliance.
At another level, there could be enormous issues to be faced by companies and any holders of assets straddling the divide between Scotland and the rest of the UK which would become, in effect, a ‘rump’ UK in the event of a ‘Yes’ vote. Lawyers and valuers would have a field day.
The prospect of a new Scottish currency is giving some people sleepless nights. Mr Salmond’s talk about retaining the pound may simply be rhetoric, designed to soothe. One suspects that his real design is Scottish entry to the eurozone — assuming it still exists, of course — some years down the line. The wait could be lengthy if Brussels sticks to its guns in declining immediate membership to the Scots.
The ‘Nats’ have succeeded, however, in presenting a positive vision of a Scotland the Economically Brave, enjoying a jobs boom — an extra 27,000 posts — on the back of a more competitive 17% corporation tax rate. Mr Salmond clearly has Ireland in his sights, but then so does the British Chancellor, George Osborne. He is cutting the UK rate to 20% by 2015. Northern Ireland, which has enjoyed success in capturing jobs projects recently, looks set to redouble its efforts to secure a lower rate should Scottish independence emerge. This could trigger similar calls in the UK regions for fiscal flexibility.
As Nils Pratley of the Guardian put it, last week, the prospect of Scottish independence has finally rattled the City of London.
In his view, the likely impact of a ‘Yes’ vote would be a slower economy. This, of itself, should concern us. The UK and the US have been acting as key drivers in the embryonic Irish recovery. The ripple effects could be expected to spread to the eurozone, where growth is being squeezed by a combination of austerity, fiscal and monetary, and the fast-evolving crisis in Ukraine.
The outgoing European Commission President José Manuel Barroso has already signalled Scotland would have to take its place at the back of the queue when it comes to applying for membership of the EU.
However, there is logic in Mr Barroso’s stance. As a former prime minister of Portugal, he is well-acquainted with politics on the Iberian peninsula. The last thing European leaders wish for is a break-up of Spain, with the departure of the Basques and Catalans into independence.
Across Europe, states have broken up since the fall of communism. The break-up of Yugoslavia was violent, with more than 200,000 dying in wars involving Croats, Serbs, Bosnians and Kosovar Albanians. However, Slovenia, Montenegro and the ‘Former Republic of Macedonia’ all emerged into independence, unscathed by civil war.
The most interesting template for the Scots is arguably the Czech Republic and Slovakia, two countries which split away from each other in 1993. The break-up of Czechoslovakia came to be known as the Velvet Divorce .
The Slovaks were traditionally more rural than their Czech counterparts, some of whom looked down on them. Since the late 1990s and the election of a reformist Government, which helped pave theway for EU membership Slovakia has thrived.
And when the former BBC broadcaster, Angus Roxburgh, visited the Czech Republic, although he discovered that some people had mixed feelings about the move and others regret the fact that they now live in a smaller, more parochial country — there is general agreement that old tensions between Czechs and Slovaks have faded since the split. Alex Salmond, the Scottish First Minister and Scottish National Party leader, has succeeded in capturing the hearts and minds of floating, younger voters with his talk about a green economy creating 130,000 jobs, cheaper childcare and a Scandinavian approach. It will certainly create juicy state jobs for a group of connected administrators and politicians: a whole new caste of ambassadors will come into being, but this will all have to be paid for. The ‘Better Together’ campaign has sounded negative, a bit like old Corporal Fraser in the series, Dad’s Army, with the famous catchphrase “We are all doomed.”
They warn that under an independent Scotland, taxes will have to be higher, spending lower by as much as £1,000 per person as the new state sets out to survive by pursuing a tight fiscal policy.
In his understated way, Bank of England governor Mark Carney has hinted at the danger, warning that currency unions require very close fiscal co-ordination between member states if they are to succeed.
If Scotland wishes to retain sterling, he implies, its government will have to adhere very closely to the policy edicts set down by the Bank of England and in Westminster.
However, the temptation for a government in Edinburgh to go rogue ahead of a major political contest will be considerable.
One thing is clear: win or lose, the Scottish First Minister has re-shaped the debate and things are unlikely to be the same again. The cat is among the pigeons and the fur and feathers are beginning to fly.
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