Everything is connected to everything else, as Lenin was fond of remarking. If Scotland votes for independence on September 18, a horrendous possibility which now looks more likely by the day, it would trigger a series of highly unpredictable events with immense knock-on effects on economies, financial markets and countries around the world. It would be an event of a magnitude that too few in industry and in finance have fully grasped.
Europe and Britain would soon find out that independence can be highly contagious. Once one country decides to smash itself up, others will follow; the momentum will change dramatically. The English in particular remain remarkably relaxed about the fate of the UK – but the rest of the world is watching in amazement as one of the most successful and prosperous countries in the world looks increasingly set to be broken up.
The end of the UK would be a massive global story; it would act as an extraordinary catalyst for secessionist movements. When was the last time that a Western country broke up, let alone in a peaceful, democratic manner? Czechoslovakia doesn’t count as its divorce was a byproduct of the end of the Soviet Empire. Ditto Yugoslavia, which suffered a dreadful war. Astonishingly, one of the most recent break-ups was of the UK itself, first time around, when Ireland left in 1922.
The consequences will, therefore, be explosive for the economy, financial markets, business, political elites and all of us; the pound’s slide has only just started. It will fall again if the polls continue to shift in favour of a “Yes” vote; and it will fall further if the nationalists triumph. It will then continue to slide when the full scale of the political and constitutional chaos in Westminster is laid bare, and as the long and nasty negotiations between London and Edinburgh continue.
But, while the pound will be the big loser in the short term, and has already plummeted from $1.71 in early July to $1.61 today, the euro will be next in the line of fire as the independence mania spreads. Spain in particular would be under huge pressure as a result and could easily be the next European country to split. As Deutsche Bank points out, the Catalans and Basques will be watching carefully; and further afield, separatists in Flanders, northern Italy and elsewhere will be jumping up and down with joy. In Catalonia, the regional government wants to hold a referendum in November but the legality of it is heavily contested; it will become much harder for Madrid to continue to stall if the Scots vote for independence.
My own guess is that if Scotland goes, Spain will break up and so will Belgium – Italy is less likely to follow suit but one never knows, especially given its never-ending economic stagnation and debilitated political system. The euro will slump in value. The whole of the EU will be thrown into constitutional crisis – and that even before the UK decides whether or not to leave the bloc.
Perhaps less surprisingly, the psychological and political impact of a break-up of the UK will change English politics forever. The Tories would probably force David Cameron’s resignation, potentially crippling the Coalition and triggering further turmoil in the financial markets. At the same time, the party, which has just one seat in Scotland, would become much more powerful in the rest of the UK; conversely, Labour will be dramatically weakened. A Yes vote might allow Boris Johnson, Sajid Javid or another new generation Tory with a broader appeal to take over, bolstering the party’s appeal. Ukip would also gain heavily.
A referendum on EU membership would become much more likely; and a rest-of-the-UK departure from the EU almost certain. In turn, other countries would probably also choose to go it alone; it is not just nation states that would begin to fragment but also supra national bureaucracies.
The pressure will be especially acute in France, where President Francois Hollande is almost completely discredited and where the Fifth Republic and the current constitutional settlement look increasingly fragile. With the dreadful Marine le Pen now in the lead in the opinion polls, all bets are off, especially if unemployment continues to rise, the UK quits the EU and Spain, Belgium and the rest split up. A union of extremists and populists from Left and Right would be an extremely potent force in France.
One of the reasons why the Scottish Yes camp is doing so well is that the backlash against the political and financial establishments is continuing to grow. Many voters don’t believe what Westminster politicians or big business executives are telling them; they are not interested in the facts and figures about Scotland’s collapsing oil production, the threat to the Scottish banking industry or the black hole at the heart of Alex Salmond’s plan for the public finances. They loathe the UK’s political and financial establishment and want to be rid of them. Far too few people in the City understand the extent of this feeling; as it spreads across Europe, many technocratic constructs will be swept away, for better or for worse. The great danger is that many people will turn to economically illiterate anti-capitalists, wrecking entire economies in the process.
Salmond understands economics perfectly well but he is being deeply duplicitous when it comes to the public finances of an independent Scotland. North Sea oil and gas output is down dramatically from its peak in 1999; there is simply no way that his projected tax receipts from the industry could possibly materialise. The result will be a fiscal bloodbath.
As Michael Saunders of Citigroup points out, this would be a great problem for the rest of the UK. An independent Scotland would be the rest of the UK’s second-biggest trading partner after America when it comes to goods and services. Investment and financial ties would be hugely important. The problem for the rest of the UK is that any Edinburgh government led by the present Scottish nationalist political establishment would be bound to blunder its way into one economic crisis after another.
A major recession in Scotland would be very bad news for the rest of the country, and hit jobs and growth elsewhere. So, whether we like it or not, the fate of the Scottish economy would continue to matter hugely to the rest of us.