THE BRITISH establishment will have breathed a collective sigh of relief following the Scottish referendum result.
The contest had become tightly fought according to the opinion polls – some of which had even been indicating a ‘Yes’ victory ahead of the vote. Sterling and equity prices rallied on the news it was ‘No’, though both GBP/EUR and the FTSE 100 index have edged lower since.
Thanks to a prolonged period of fractious negotiations a Yes vote would have generated, market moves would almost certainly have been significantly more negative on the news of a ‘Yes’ vote than the mild uptick in asset prices we actually saw on the morning of 19 September.
The most likely component of UK-wide economic growth affected by Scotland’s decision was investment. Business and inward investment may well have been impeded had a ‘Yes’ vote been forthcoming, the result of increased uncertainty. Indeed, business investment may have grown more quickly over the past two years had it not been for doubts about the outcome of the referendum.
The Bank of England can rest more easily on two counts following the ‘No’ vote. First, there was no need for the Bank to calm the financial markets and address the potential issue of capital flight. And second, with the uncertainty over Scotland’s future now removed the Bank of England can think more clearly about the timing of the first policy tightening. The markets moved to reflect increased confidence in rate rises, though three million libor futures have since moved back to their pre-referendum levels.
Despite the referendum having cleared the air, a No vote still raises important political questions. First, in the run up to the referendum the leaders of the three major Westminster parties agreed to transfer more powers to Scotland. This raises once again the issue of the so-called ‘West Lothian question’ – the unfairness of Scotland being given more autonomy to decide its own future yet continue to have a say over English-only matters in Westminster.
If the transfer of more powers to Scotland does not coincide with a redress of this issue then a backbench revolt may result. Indeed it only takes 15% (46 by number) of Conservative MPs to trigger a vote of no confidence in David Cameron.
It is understandable why the opposition is reluctant to make a hurried decision – after all, of the 59 Scottish MPs in the House of Commons some 41 are Labour and just one Conservative. That could make it difficult for a Labour government with a small majority to pass legislation related to England alone (the Budget, for example). So, if Labour were to win the 2015 general election with a slender majority of say 20 seats, that majority would be turned into an effective minority should Scottish MPs wings be clipped. Cameron thus has an incentive to introduce such changes swiftly to limit Labour’s powers in the event they are outright winners in May’s general election.
The implications from Scotland’s ‘No’ stretch far beyond the UK. While a ‘Yes’ may have given more credence to other movements calling for self-determination (such as Spain’s largest region, Catalonia), the fact a Scottish referendum was granted in the first place has drawn more attention to the Catalan issue and prompted questions over why they should not have a say on an independent future, just as Scotland has had.
Moreover, there are implications for the UK’s future in Europe too. Some have argued that a ‘No’ vote reduces the chance of Brexit as a Conservative government is less likely with Scottish MPs in the mix, and Scotland is generally perceived as more EU-friendly than the rest of the UK. To counter that, however, Cameron may have little appetite for another referendum in three years’ time following the Scotland scare, especially if he is unable to achieve sufficient renegotiation with the EU to present to the British public.
The binary nature of Scotland’s vote is plain to see post-event. We can now shelve discussions about currency options, how to split Scotland’s oil wealth, how to apportion the national debt (and whether the Scottish government would be willing to pay its share if a currency union was not offered by Westminster), whether independence would produce bank runs/capital flight, and what to do with Britain’s nuclear deterrent – Trident – which will now continue to be based north of the border.
Significant changes are afoot even after the No vote. Westminster parties have agreed to provide greater powers to Scotland over taxation and spending; these are unlikely to be well received in the rest of the UK in the absence of some curtailing of Scottish MPs’ powers in the House of Commons. Cameron’s post-result comments suggest this is high on his agenda. Along with this, focus must now turn to healing some of the divisions that have been created across the political spectrum on the issue of Scottish secession.
George Buckley is UK chief economist at Deutsche Bank