U.K. Braces for a Nail-Biter in Scottish Independence Vote

The London-based government of the United Kingdom has never paid sufficient attention to Scotland. This idea, which campaigners for Scottish independence say underpins their case, has recently received a boost ahead of the country’s Sept. 18 independence referendum—and from exactly those people who usually deny it.

As if awakened from slumber by a drenching with glacial loch water, U.K. politicians yelped in surprised indignation when opinion polls, which for much of this year have returned a comfortable lead for a No vote, suddenly tightened this week. A Sept. 2 YouGov poll put the Yes campaign only six points behind No, sending sterling dropping by almost a cent against the U.S. dollar. The possibility of victory for the Yes campaign, so long dismissed as the longest of long shots, is now focusing minds outside Scotland on what’s happening in Scotland.

Scottish voters have a tricky decision to make. There are persuasive arguments for and against a split (both cases are set out in this article). But it should always have been as apparent as the knees on a tall man in a kilt that Scotland’s departure was a real possibility and that it would have a negative impact on the rest of the U.K.

True, nobody knows exactly how a divorce settlement would pan out. Would Scotland get to keep North sea oil but walk out the door leaving its debt behind for the rest of the U.K. to shoulder? In the case of a Yes vote, these and many other details would need to be hashed out in detailed negotiations before a final separation in 2016.

But markets and businesses don’t like uncertainty, and the prospect of a close race is inspiring some hair-raising scenarios. Kevin Daly, a senior economist at Goldman Sachs, warned that a standalone Scotland sharing the pound with the rest of the U.K. could precipitate a currency crisis similar to the one that continues to grip the euro zone. In an interview with the Guardian newspaper, a London-based think tank Capital Economics raised the specter of a run on Scottish banks following a Yes vote.

Rob Wood, chief U.K. economist at the German private bank Berenberg issued a dire warning in the same article: “The near-term fallout could be serious. The biggest initial issue would be a spike in uncertainty. Firms could delay investment and consumers could shun big-ticket spending until the post-independent arrangements became clear. That could cause a serious setback for the Scottish economy and a material hit to the rump U.K.”

Other voices in the City of London say the ructions wouldn’t be so great. “I think a lot of the currency argument has been overdone,” says Christopher Edwards, an investment manager at Fabien Pictet & Partners. He points out that after Ireland won autonomy from the U.K. in the 1920s and switched from the pound to its own currency, it for years never moved more than 20% from parity. “So the scope of movement for a Scottish pound isn’t huge.”

Douglas McNeill, an investment director at investment management company Charles Stanley, also says the repercussions of a Yes vote for most businesses either side of the border would be negligible. Scotland is a small market for companies of any size, he says. “Unless you’re very focused on selling into Scotland, [the impact]’s not really going to show up.”

Companies that manufacture or operate out of Scotland, such as oil companies and distillers are going to be able to continue to do so no matter how the country votes, he says. “The financial services companies are more sensitive because they have to retain the confidence of customers, which is why some companies have contingency plans to move their legal registrations to the U.K. Would they move their whole operations? That’s not obviously necessary.”

Yet even if the economic turbulence might not be quite so marked as some are predicting, the political turbulence across the U.K. would be profound, and it is this revelation that seems finally to caught the attention of Westminster politicians.

The next elections to the U.K. parliament are scheduled for May 7 of next year, ten months before the envisaged date for the break-up of Scotland and the U.K. in the event of a Yes vote. Opinion polls across the U.K. suggest that the Labour party may just win enough seats to oust the ruling Conservative-Liberal Democrat coalition.

But a big chunk of those seats will be in Scotland. Labour currently has 41 MPs in Westminster elected by Scottish constituencies, and their disappearance would almost certainly tip the balance of power in the House of Commons back to the Conservatives, less than a year into a new government. One possibility could be to delay the Westminster elections until after the split, but that wouldn’t be an easy process. Whenever such an election took place, it would pit parties against each other that had been profoundly damaged by the Yes vote: the Conservatives for leading the government that agreed to the referendum and Labour, stripped of its Scottish seats and pilloried for the failure of the No campaign, Better Together, which it has fronted.

Campaigning in support of the union has taken on a new urgency and a surreal quality. One factor increasing support for the Yes campaign is the unpopularity in Scotland of the Westminster government and especially of the Conservative party that leads it. So the Labour party is assuring Scots voters that it will definitely oust the Conservatives next year, dispatching Labour leader Ed Miliband to Scotland today to carry that message in person. He received unexpected support from the leader of the Scottish Conservatives Ruth Davidson. Asked in a TV debate about the prospects for a Conservative victory, she replied: “Frankly it isn’t looking likely”.