Below is a cheat sheet to use to follow what a “yes” vote tomorrow would mean for Scotland to secede from the U.K. Sources include Wall Street houses, including Societe Generale, as well as the University of Glasgow, and the National Institute of Economic and Social Research (see here: http://www.niesr.ac.uk/research-theme/economics-scotland).
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Yes vote increases likelihood U.K. leaves the European Union: Westminster officials are already saying a yes vote means they may have to summon another referendum vote about leaving the European Union. That would throw the Eurozone into further turmoil as Europe’s recession has deepened, with France and Germany already seeing negligible to flat line growth. If Scotland breaks away, the U.K. would drop to a lonely fourth behind Italy in the EU in terms of GDP. A yes vote “would increase the risk of a U.K. exit from the European Union” with “a referendum then more likely to take place in 2017,” says Societe Generale economist Michala Marcussen.
NATO/EU: Scotland could get kicked out of NATO and the EU if it breaks away, leaving it even more vulnerable, officials have already warned.
Currency: Scotland’s own currency would weaken because it would not have a central bank to backstop its debt, its currency, and its own banks, so no lender of last resort in the Bank of England. Scotland’s own currency would be put under even more pressure if Scotland makes good on its threats to renege on the debt it owes. Even if it opts not to launch its own national currency, it’s still unclear if an independent Scotland would adopt the euro or just continue using Great Britain’s currency, much like Bermuda or the Bahamas use the U.S. dollar. As it dithers, Scotland’s borrowers and its companies could be hit with higher loan rates.
Banks Depart: Financial concerns like the Royal Bank of Scotland and Lloyds Banking Group already say they would move their legal headquarters to London from Edinburgh, Scotland in the event of a yes vote. Worth remembering here is that Scotland’s banking system faced bankruptcy during the financial crisis of 2008, until the U.K. (its taxpayers) rescued it. It’s already been reported that bank debt in Scotland is about 12 times the size of its economy, versus Ireland’s ratio of about eight times as large as its GDP, as of 2007.
Bank Runs: Banks in Scotland are stockpiling cash, getting banknotes from banks in England, in case a yes vote happens, Wall Street sources and reports indicate. If Scotland gets kicked out of using England’s currency, Scotland’s use of its own currency could put Scottish people’s savings at risk because Scotland’s currency would be devalued due to an expected economic downturn and lack of a central bank to guarantee it. In the event of a yes vote, the Bank of England says it will backstop all accounts in Scotland for the next eighteen months, up until March 2016, the deadline for when Scotland would have to officially break away.
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North Sea Oil: Now dwindling, the revenues are not enough to back Scotland’s own currency. Estimates range from 15 billion to 24 billion recoverable barrels of oil. Knock out that oil, and Scotland has run a deficit for the last 30 years, says the University of Glasgow’s Centre for Public Policy for Regions (see here: http://www.gla.ac.uk/media/media_273150_en.pdf). Factor the oil in, Scotland still has run a deficit in 20 of the last 21 years, estimates show.
Where does that oil money go? Lots of social welfare spending on schools, health care, and pensions, all of which would be vulnerable to oil price movements set by OPEC if Scotland breaks away. An independent Scotland would need a growth strategy beyond its oil revenues, as it would face higher borrowing and tax costs, as well as the expenses of launching new government agencies to handle its welfare, education, pension, tax, diplomatic and border control systems. All could easily put Scotland on the road toward insolvency.
Pension Time Bomb: Scotland, like most Eurozone countries, has to contend with a demographic time bomb. The U.K. Pensions Protection Fund now backstops Scotland’s pensions in the event companies go bankrupt, so a yes vote means severe cuts to retiree payouts as Scotland moves to set up its own pension guaranty system. Per retiree, Scotland gets more money for its pensions than anywhere in the U.K., an estimated average of 1,400 pounds versus 1,300 pounds elsewhere in the U.K., the data show.
Health Care Time Bomb: U.K. taxpayers finance Scotland’s healthcare system. The average Scot gets roughly 200 pounds a year more in health spending versus elsewhere in the U.K., estimates show.
British bond markets go haywire: Gilt yields are already at an eight-month high due to fears of a yes vote. If Scotland secedes, U.S. treasury yields would drop and the U.S. dollar would strengthen due to a flight to safety, as U.S. bonds continue to be the tallest midget in the room. Albert Edwards, a strategist at Société Générale, has warned: “Capital will not be moving from north of the Scottish border to the south. It will be moving out of the U.K. altogether” if Scotland departs.
Scotland Claims a Yes Vote Means It Becomes a Tax Haven: Nationalists claim the country will cut its corporate tax rates after independence, down from the current U.K. rate of 21 percent, in order to turn itself into a tax haven like Ireland, which has a 12.5 percent corporate tax rate.
A No Vote Still Means Turmoil for the U.K.: England’s top three political parties have vowed Scotland will get more power over tax and spend policies if it votes no, but that would deepen the U.K.’s debt crisis. Scotland would get even more social welfare money from England, weakening its currency and its bonds. More spending means the U.S. dollar and U.S. Treasuries remain a safe haven—aiding and abetting a spendthrift U.S. government.