Examining the Economic Implications of an Independent Scotland

Joel Anderson |

scotland, england, great britain, united kingdom, sterling zone, scottish independence, referendum, economy

I was lucky enough to travel to Scotland, one piece of the Anderson family’s ancestral homeland, when I was 18-years-old. It was part of a trip my high school band was taking to England (another piece of said ancestory) and Scotland, and it involved a tour of Edinburgh Castle.

There, while looking up at a large banner celebrating the current sovereign, the guide made sure we all noticed that the banner said Elizabeth I and, no, that was not a typo. While Elizabeth Windsor may be Elizabeth II in England; where the legendary Elizabeth of the House of Tudor, she of the many Oscar-winning film turns, is Elizabeth I; in Scotland Elizabeth Windsor is Elizabeth I because Elizabeth Tudor did not reign over Scotland.

The woman delivering our tour was a delightful old lady who was bright, funny, and engaging and had managed to deliver several rather grisly portions of Medieval Scottish history that really smoothed over the rough edges. She had started that observation with the same sort of breezy tone, but she transitioned part way through to something a little sharper and ended it with a very pointed “and Queen Elizabeth I of England was NOT the Queen of Scotland.”

Scotland the Brave. Or Stupid. Or Both. We’ll See.

I remember at the time thinking it was a little odd. Sure, I was familiar with regional pride that can seem a little absurd to outsiders. Like any good Michigander I proclaim a deep hatred for all things Ohio and know all about the 1835 Toledo War. And most of my extended family is from Texas, originally, so the pride taken over Texas’ status as an independent country (for all of 10 years) is something I’ve seen firsthand.

But, clearly, this was pretty different. Despite the fact that Scotland and England had willingly coexisted under one government since James VI of Scotland became James I of England in 1603 (save a couple of notable hiccups), this lady (and a lot of people in Scotland) wasn’t letting go of Scotland’s national identity. It was something new for me, having grown up thousands of miles away, and it stuck with me.

That particular memory has jumped back into my mind as Scotland is poised on the precipice of a really big decision. Scottish voters are going to decide on Thursday if their sense of national identity is important enough to engage in a pretty major change that could have massive economic consequences. And the polling seems to indicate that there’s a really good chance it might happen.

This was a rather lengthy set-up for a key question: what exactly would the economic consequences of Scottish Independence be? When Scottish voters hit the polls on Thursday, what are they really voting on?

No, I Mean Crude in a Different Sense, Here

Scotland’s drive for independence isn’t simply driven by a strong sense of national identity. For starters, Scotland’s always been a more liberal country than England and has chaffed under having to tailor many of its social policies to the sensibilities of English Tories.

And for Scotland, this issue runs a bit deeper than just having different opinions on optimal public policy. The country is supplying a not insignificant portion to the tax coffers due to the fact that the country’s GDP per capita is more than $3,700 higher than Englands. Why? Because there’s oil in them thar…North Sea.

That’s right, the Brent Crude that serves as an international benchmark for crude oil is oil that’s coming from Scotland. For some Scots, the country’s been handing over large sums of revenue to the British government without getting enough say in how it’s spent, something that would ideally change with its independence.

However, Scotland’s oil reserves appear to be on the decline, making it clear that if Scotland is planning on relying on oil revenues into the future it might need to rethink things. It’s off nearly 40% since 2010 and has resulted in Scotland actually taking more money from the British government than it paid in 2013 ($89 billion in revenues against $109 billion in expenditures in Scotland).

And, as of Wednesday morning, Scottish energy consultants Wood MacKenzie dumped a bit more cold water on Scottish hopes of becoming a new oil power when it estimated that oil reserves for the entire United Kingdom at 15.3 billion barrels with Scotland controlling as much as 84%, some 10 billion barrels lower than independence leaders have been touting.

Scotland’s only industry is definitely not oil, but it’s been an important one during this independence debate. And significantly lower oil revenues would significantly change the proposed picture for what an independent Scotland would look like.

So…Are You Going to Get This?

The question of who’s actually going to pick up the tab on British sovereign debt is another major question to explore. These two countries have been sitting down to dinner together and now Scotland’s talking about leaving early and they have to work out who owes what. And that could get complicated.

It’s not as though people are sifting through an enormous box of receipts, but Scotland’s decision on just how much debt to pick up could easily make any separation a particularly acrimonious one pretty rapidly. The Economist observed in February that one of the only comparable splits in (relatively) recent memory was when Ireland achieved independence in 1922 (at the end of a process that undoubtedly has at least some of the Irish looking at Thursday’s simple referendum with more than a little frustration).

In that case, Ireland actually defaulted on some of its debt with Britain in 1932, prompting an economic war that put a serious damper on the Irish economy.

The Pound and its Sterling Reputation

But the debt question is actually just a sub-category of a much bigger question: currency.

See, Alex Salmond, the leader of the independence movement, has said that he wants Scotland to remain on the British pound, allowing them to create a new currency zone for the pound sterling. Which prompted England to return with “Um, no, you vote to leave and we’ll take our currency and go home.” Which prompted Salmond to say, and I’m paraphrasing here, “We’ll just use it anyway and, while we’re at it, we won’t be picking up any of the tab for the United Kingdom’s debt.”

On the whole, it’s the biggest unknown facing the entire process.

Firstly, just how much of all of this is posturing is yet to be seen. Scotland, as Salmond observed on Wednesday, is England’s second-biggest trading partner. The creation of a new currency would be a real pain in everyone’s rear, so it’s possible, in the event of a yes vote, English authorities may just come around to the Sterling zone idea rather than stubbornly keep fighting it. Besides, as Salmond observes, it’s not as though England can just stop Scotland from using the pound.

But that would mean using a currency over which the nation would have no supply controls. Go ahead and ask Greece and/or Spain if there’s any potential issues that may crop up there, they’ll tell you. Scotland may ultimately just want its own currency in the end anyway despite all the hullabaloo about the pound. If anyone’s ready to tell you at this point that they know, with certainty, how that would all play out, they’re lying.

No, I said “EU,” Not “Ew”

“Ah, but what about the Euro?” I can hear you thinking. And, yes, you have correctly anticipated this segue as Scotland’s potential membership in the EU is another pretty pressing question surrounding this independence vote.

See, splitting from England would mean Scotland would no longer be a member of the EU (of which England is a part). The leaders of the independence movement seem to think the timetable for entrance into the EU would be about 18 months.

However, some, like Spanish European Affairs Minister Inigo Mendez de Vigo, are skeptical, stating that the new country would have to apply for membership from scratch, meaning it would be “more or less five years” before Scotland would be in the EU.

FREEDOM! Wait, Where Are You Going?

Another issue raised by an independent Scotland would be the creation of a new border. Suddenly, Scottish companies are facing a potentially very different legal and regulatory framework. Also, there’s now a national border between Scotland and its biggest trading partner that could complicate things.

Royal Bank of Scotland ($RBS) and Lloyd’s (LYG) have both indicated that they’ll be leaving an independent Scotland to incorporate in London. Whether or not that temptation would extend to other businesses and industries is hard to say, but it would create the sort of situation where both countries’ tax situation would be under new scrutiny.

Given the cultural similarities and geographical proximity, if a newly independent Scotland starts charging a higher corporate tax rate to fund its new increase in social spending, does that send a flood of companies south of the border to reincorporate with a lower tax rate in England?

What About England’s Economy?

While it’s unclear how things will affect Scotland’s situation, England’s not suffering from such trepidation. It’s going to be bad. England’s not gaining independence, they’re only losing Scotland.

A poll of 100 FTSE company chairman revealed that 67 believed a split would be bad news for UK blue chip companies.

Scotland for the Scottish?

When all is said and done and the smoke clears, this vote has a chance to dramatically change the direction of the history of these two nations as well as shift the economic landscape in a distinct and largely unpredictable way.

I don’t really have any skin in this game, but I’m definitely going to be watching to see how this plays out. At the very least, whatever happens on Thursday, it’s going to be interesting to watch. Just hopefully not in a bad way.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
LYG Lloyds Banking Group Plc American Depositary Share 2.83 0.08 2.91 3,458,318
RBS Royal Bank of Scotland Group Plc New (The) ADS 4.83 0.12 2.55 2,331,260


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