If Scotland votes ‘Yes’ on Thursday, What Next? #2: Scotland

by George_East on September 17, 2014

imageFollowing yesterday’s post on the potential implications of a Yes vote in the Scottish Independence referendum tomorrow, I turn now to the implications for Scotland. One thing to remember, of course, is that although Scotland would have voted ‘Yes’, the final break and independence itself will not take place until 2016.   It is likely therefore that the implications for Scotland of a vote for independence will not be as immediate as those for rUK (which will enter into a period of political and constitutional turmoil).  In the period between the referendum and the final break there will be lengthy negotiations and it is difficult to know quite how they will turn out, particularly as it is likely that the rUK government will harden in its approach, as a result of the inevitable political pressures independence will unleash.

But here are 5 potential consequences for Scotland:

 

1. It is forced to launch its own currency

 

The politicians of the three main Westminster parties and the governor of the Bank of England have made it repeatedly clear that a currency union is not on offer. This line may soften in negotiations (particularly if it is traded for the continued location of trident at Faslane) but it has been repeated so often and with such clarity, it would be extremely difficult for that line to change – if it did it would make it very hard to believe a word uttered by any of the politicians involved again.

Although no currency union does not mean no sterling, Scotland can always adopt the Panama option (as we have repeatedly observed on these pages), of having the pound as its currency without being part of any union at all, but this will have the serious downside of monetary policy being set by the Bank of England with no regard for its impact on Scotland. It may also result in a de facto separate currency as sterling is likely to have (over time) an artificially high value in Scotland compared to the rest of the UK, as its ‘true’ value will be masked by being a shared currency.

Sober financial analysis may then result in little choice but to launch a Scottish Pound or Scottish Crown as a separate currency as the least worst remaining option – the Euro is obviously political impossible in the short term and would make no sense unless EU membership could be resolved quickly (see more below). This would actually be, in my view, a pretty good option – the advantages of having your own currency for a small nation have been seen in recent times in Iceland (compare its experience of the financial crisis with that of, say Greece). The Scottish population is roughly equivalent to that of Denmark, who have retained their own currency, so size is not an issue.

 

2. Scotland struggles to get into the EU

 

I have no doubt that it will happen. The EU tends ultimately towards inclusivity of the nations within the European geographic area – even Serbia and Albania are currently candidate countries.  However, there is a queue and EU bureaucracy is never quick.  A good example again is Iceland – which following the financial crisis applied to join the EU in 2009, in what was expected to be a relatively swift accession to full member status.  Four years later in 2013 with negotiations stalled, Iceland suspended the process and has now shelved it indefinitely.

An additional factor in the case of Scotland is that it will have lined up against it Spain and quite possibly Belgium, both of whom will be keen to dissuade their own separatist movements from breaking off on the premise that they will get straight into the EU.   The addition of a new member state requires ratification of all existing members (now 28) and so Spain’s opposition could in itself be fatal or at least take considerable work to overcome.

There is an additional irony here though, which Jackie South noted in his comment on my post yesterday – Scotland’s accession could hasten the rest of the UK’s exit, as it will produce a new Treaty which would (under current legislation) have to be the subject of a ratification vote in a referendum in rUK.   Given the likely timetable this will probably be moot, as Nigel Farage and a determinedly right wing Tory party take  rUK out of the EU in the 2017 referendum in any event.

 

3. Increased real interest rates in Scotland

 

By real interest rates I mean the ones that ordinary folk pay on mortgages and bank loans, rather than the base rate, which will, be dependent upon the currency solution.   This is not because Scotland cannot stand on her own economically.  My own view is that the pending economic apocalypse  pushed by the No campaign is scaremongering propaganda.  However, what the markets undoubtedly hate is uncertainty.  There will be that in bucketloads for the first few years of independence.  After a while it will probably settle down – but much like the Eastern European economies post the fall of the Iron Curtain there is likely to be a good deal of economic volatility until things settle down.

 

The consequence of increased real interest rates in the short term will be higher unemployment, reductions in growth and pressures for cuts in spending (in the usual wrong-headed austerity economics way). Scotland can find its way through this (particularly if it has its own currency), but it will need to hold its nerve.

 

4. SNP carry all before them in 2015

 

If independence occurs then its achievement will be very largely at the door of Alex Salmond, Nicola Sturgeon and the rest of the SNP leadership. With the exception of the Greens and a few fringe groups, the Yes campaign has, in effect, been an SNP vehicle.    King Alex the First will have been vindicated and the Labour Party in Scotland massively disheartened by a Yes result.  Given that there are elections for the Holyrood parliament due next year, I expect the SNP to push on to an even more commanding position than they are currently in, taking large swathes of traditionally Labour territory in the election.  I also expect them to do well in the general election for the last UK parliament, as the SNP runs on a platform of making sure Scotland’s voice is fully heard in the negotiations and against the Westminster parties who opposed independence who are not to be trusted in that process.

 

5. The SNP begins to fracture and party realignment

 

This might take a little longer but a Yes vote will begin the process of dissolving the glue that holds the SNP together. The party will, after all, have achieved its raison d’etre.  It is a curious party ideologically, spanning from far right nationalists through to Scottish socialists who would be on the very left of the Labour Party  if they were in the party.     There is already a distinct difference between the left wing rhetoric of the SNP and much of their policy agenda (slashing corporation tax, for example) and the idealistic expectations of much of the Yes vote are likely to be shattered by the policies that Salmond will actually pursue, particularly if the economy is, as it likely to be, bumpy for the initial years of independence.

While the goal of independence was there, it made sense for the ideological differences within the SNP to be sublimated in a popular front with its eye on a common prize. However, once that prize is won, those differences are bound to bubble to the surface and there is a real chance that over time that will result in formal splits.

The Labour Party may need to pick itself up off the floor and rebuild but that, if it is politically deft (is this a time for the return of Gordon Brown?), is entirely possible aligned with allies from the left of the SNP and the Greens.   Similarly without the poisonous effect of association with the Westminster and Home County Tories who run Westminster, the Scottish right could find itself in prime position for revival.

Interesting times.

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