What Effect Would Scottish Independence Have On World Business?

Scotland, which is located in the northern region of Great Britain, is believed to have been inhabited for at least 12,000 years, but it was first recorded in history with the arrival of the Romans to its territory around 100 AD. They knew the region as "Caledonia," which was originally inhabited by Celtic people known as the Picts. It was later also populated by migrant Viking mariners.^[1]

The population first came together as a nation in the 10th century, when it was called the Kingdom of Alba. In 1320, Scottish noblemen united to send a communique to Pope John XXII declaring Scotland as an independent and sovereign state. After resisting several attempts at annexation by England to the south, Scotland eventually entered an agreement with England in the early 18th century and came to be considered a member-nation of the United Kingdom.^[1]

Background On Scottish Independence Vote

Over the years, there have been several calls for a return for Scottish independence, and the country held a referendum on independence in September 2014. The proposal was rejected, with the population choosing to remain a part of the United Kingdom by a margin of 55% to 45%.

In a June 2016 referendum, however, the U.K. voted to leave the broader European Union (EU), which includes a large number of countries in the continent. More than 60% of Scottish voters voted to remain in the EU and, since the U.K. vote, there have been renewed calls for Scotland to hold another referendum on whether it will remain part of the U.K.

Shortly following the Brexit vote, Scottish First Minister Nicola Sturgeon said that a second referendum on Scottish independence was "on the table" and "highly likely."^[2] She didn't specify a timeline for when a new vote within Scotland would be held. In the meantime, recent polls have hinted that a majority of Scottish voters have changed their minds following the Brexit vote, and would consider voting in favour of a move to independence.^[2]

In the aftermath of the Brexit referendum, many analysts predicted a severely negative effect on U.K. exports, business and financial markets. EU ties contribute about US$20 billion per year to the Scottish economy alone. It's unclear whether the U.K. government will actually follow through with the voter mandate to exit the EU in addition to when and how it might happen.^[3]

Although the country held a referendum, the government is not formally required to carry out the move. This will depend on negotiations within the government and the political will of Brexit supporters to force the transition. Scottish authorities have hinted that they could call a new referendum on their country's partnership with the U.K., after Britain invokes article 50 of its agreement with the EU and cancels its membership. This could possibly happen as early as 2017 or 2018.^[3]

Impact On Britain

The prospect of a Britain without Scotland raises questions about the future economic welfare of both countries. Scotland represents about one-third of U.K. territory and about 8% of its population. It also contributes US$220 billion to the US$2.8 trillion U.K. economy, or about 8% of the total GDP.

UK would lose control over key oil and natural gas supplies provided by Scotland in addition to other important exports. On the positive side, the U.K. would be freed from backing Scottish debt and financing Scottish budget deficits. U.K. debt, which stands at around US$1.8 trillion, or 90% of GDP, could be reduced by about US$240 billion after Scottish independence.

Impact On Scotland

While Scottish independence may represent a loss for the U.K., there is also much for Scotland itself to consider economically. Scotland is a comparatively smaller economy than the U.K., but it is also comparatively wealthier considering its resources per capita. So, as the sum of Scotland's wealth is currently distributed to the rest of the U.K., upon independence it would go to benefit the smaller Scottish population.

Although Scotland is the 57th largest economy in the world, OECD authorities have calculated that it could rank among the top 15 wealthiest countries in terms of GDP per capita if it achieved independence, placing it ahead of countries like France, China and the U.K. itself. However, this may come at a cost.

Any Scottish government budget deficits are currently absorbed by the U.K., and in a post-independence situation the country would have to finance its own spending on public services. Per capita government spending in Scotland has recently been more than US$1,500 higher than in the U.K.

Scotland could also be strongly affected in its foreign trade. The country currently sells about 64% of its total exports within the U.K., about 16% to the EU, and 20% to the rest of the world. If it left the U.K., it would likely have to shift a large portion of its export sales to the EU and other regions of the world, possibly through adoption of its own international trade agreements with partners outside the U.K.

Scotland could further benefit from additional outside investment. The country has recently enjoyed a renaissance in foreign investment and has seen particular interest from EU partners. About 40% of foreign firms operating in Scotland are based in the EU, and more than 25% of foreign direct investment in Scotland comes from EU-based companies.^[8]

In particular a move toward independence could stand to boost Scotland's status as an alternative location for financial services and energy sector investments.^[9]

Oil And The Scottish Economy

In the 1970s, the development of significant oil deposits in the North Sea off the northeastern coast of the U.K. significantly transformed the economic prospects for the U.K. and Scotland. According to studies, about 95% of U.K. oil and 58% of natural gas is produced in Scottish territories. In all, some 80% of North Sea hydrocarbon production and revenues is produced in Scotland. Scottish production accounted for about 90% of total U.K. tax revenues related to hydrocarbons.^[10]

However, oil can be a double-edged sword. When global oil prices fell in 2014, Scotland experienced a steep loss of revenues that had been used to cover its spending locally.^[11]

Indebtedness

One special economic problem for Scotland following independence would be management of a heavy national debt load. Some studies have suggested that Scottish debt could rise from a current level of around 90% of GDP to more than 140% of GDP after independence. Much of this could be backed by future oil revenues. With declines in oil prices in recent years and uncertainties in the oil market, however, there may be no guarantee that Scotland would have an easy time meeting its debt obligations.^[12]

Impact On Europe

At a time when European Union has sought to expand its size and membership, the renewed call for Scottish independence from the U.K. may be helpful to its cause. The U.K.'s decision to abandon its EU membership has been cited as a motivating factor for many voters to lean toward independence from the U.K.

Polls indicate a large percentage of the Scottish voters favourably view continued membership in the EU. About 36% of Scotland's imports currently come from the EU, and that figure could increase if the country enters the EU as a full member. The admittance of Scotland would add a 29th member and new tax revenues to the EU in addition to five million new consumers to the 500 million EU market.

Scottish Currency

Scotland participates in an agreement with the U.K. where it uses the British pound as its own currency. Throughout its early history as an independent country, Scotland used several of its own currencies and coins, including the groat, the bodle, the bawbee, the plack and the merk. Before the formal unification of the kingdoms of Scotland and England in 1707, the unit of currency used in Scotland was the pound Scots.

It's not clear what currency Scotland would use if it voted for independence, but analysts have suggested some possibilities. Among these would be to maintain a formal agreement with the U.K. for the use of the pound, or to adopt the pound informally without the expressed agreement of the U.K. Other much discussed options are to adopt the EU currency, the euro, or to begin issuing its own national currency. The latter could mean a return to currency like the pound Scots and the establishment of a Scottish central bank.

Each of these options present different advantages and disadvantages. The main disadvantage to using other currencies is that Scotland, albeit independent, would lose control over its own monetary policy. Further, if it adopted the euro, the country would be required to meet economic performance criteria in relation to indicators like debt and inflation. However, if it adopted its own currency, the country may incur additional costs related to currency issuance. British authorities have hinted that they wouldn't look favourably on a continued agreement for Scotland to use the pound, but until Scotland formally votes for independence, that discussion remains in the realm of speculation.

Summary

While maintaining fierce rhetoric in favour of independence through the years, Scotland's population rejected the idea in a 2014 referendum. But now, after the U.K.'s 2016 vote to abandon ties with the EU, Scotland has been giving new motivation to reconsider the possibility. As such, the country is now faced with a real and difficult choice of remaining with the U.K. and any economic advantages that may offer, while being excluded from a larger pact with the EU.

The turn of events has pushed a majority of Scottish voters back toward favouring a break from their country's long-held partnership with their neighbors to the immediate south. Ultimately, the decision will likely come down to the economic benefits of Scotland's remaining in the U.K. pact, and those of its venturing out on its own as an independent nation.

As a small nation with an industrial history and access to ample natural resources, prospects may now favour implementation of Scotland's centuries-old dream and ambition of stepping out on its own as an independent state.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.