The Scottish referendum is somewhat off topic, but then again, what is Scotland, if not Evelyn Ward North? We may not have any vote on an issue that will affect everyone in these islands (a feeling the Scots will need to get used to if they do choose independence), but that's no reason not to discuss it here.
There is of course, a lot of bluff and bluster surrounding this issue, so let's start with what we know. There are some guaranteed consequences:
- The uncertainty around the future of both countries will cause UK share prices and the pound to drop, while investment plans will get delayed or cancelled.
- The disentanglement of two countries will lead to additional regulatory and cultural complexity, making supply chains more expensive, increasing the costs of doing business.
- There will be doubling up of government services and administrative costs (everything from embassies to the DVLA, intelligence services to NICE) – losing the efficiencies of scale you get with a bigger country.
There are also some consequences which are not guaranteed but you’d be a fool to bet against them:
- Borrowing costs on international markets will rise, pushing up the cost of financing public debt.
- Some jobs, particularly in the financial sector, will leave Scotland and relocate elsewhere within the UK. It seems likely that in the early days of independence, this would be more like a trickle than a flood – a few thousand jobs. And of course, other parts of the UK would be beneficiaries.
- It’s likely that trade between Scotland and the rest of the UK would decline from its historic levels. This will partly be due to the animosity that will follow the negotiations and partly due to the inevitable result of uncoupling our economies. Falling trade will make us all poorer.
- Government revenues in Scotland will fall, requiring public spending cuts. The Scottish government may try to increase borrowing and will offer incentives to business (lower taxes) to increase oil production or relocate to Scotland, but these measures will take a while to have any effect. The best hope is that the global oil price rises to boost government coffers. In the meantime, the exodus of UK-funded jobs will make the loss of private sector jobs seem trivial.
Then, there are the costs that depend on political decisions that will follow the result:
- There is no good reason to expect the UK to agree to a currency union with Scotland. Yes, without Scottish sales of whisky, salmon, oil and other key exports, the value of the pound will face a little downward pressure, but it’s strengthened in recent months in spite of a yawning trade gap. Many people consider that it is now too high. A bit of a fall in the value of the pound is a price worth paying to avoid having to underwrite the borrowing decisions of another country. Scotland can threaten to default on its share of the UK’s debt, but only once they have been given independence – at which point they have to choose whether starting life as the new Argentina is a smart move. With default a hollow threat, there is no other reason to expect currency union. Scotland will do a Panama and adopt a currency they have no control over. Higher borrowing costs are inevitable.
- It seems sensible to assume that the EU will want Scotland back in at some point. But they will have a lot of member countries like Spain and Belgium who’ll not want to let them back in in a hurry. A period of some years outside the EU seems almost certain, hitting exports in the short-to-medium term. Once they do get back in, the Scots will have to adopt the Euro and surrender much of the independence they just paid a heavy price to secure.
These then, are the likely real costs that independence will bring. Nothing apocalyptic, but real, significant costs. As a result of them, we will all be poorer – but Scotland will potentially be hit very hard, while some UK communities, will get a boost from the transfer of things like shipbuilding and financial services to other locations.
Money isn’t everything of course and there are lots of other arguments for and against independence, but there can be no proper debate without accepting the reality of the cost of breaking up a major country with 300 years of close-knit connections.
In part two of this article, I’ll try to cover the central themes of the debate: Identity, Democracy, Values and the Economy.
In part three, I will make one of my unerringly accurate predictions.