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Question of the Week - September 15, 2014

Question of the Week - September 15, 2014

Guest Post - Monday, September 15, 2014

What's happening in Scotland?

This is an unusual wildcard to include, as it was long considered to be a very low-probability event, but as time's gone on, Scotland's referendum to secede from the United Kingdom looks increasingly popular. According to the most recent polls, it runs the potential of passing—noted by a quick move from ‘yes' support of 25% to near 50%, with a critical share remaining undecided. This has come up as an issue from nationalist elements in Scotland for several decades, but wasn't taken seriously as an option, as the formal union of Scotland and England has lasted since 1707. Even if this doesn't pass, however, British leaders have offered and are likely to offer broader ‘home rule' powers to Scotland to stem this nationalistic tide.

From the perspective of most Americans, the relationship between the two gets a little confusing. While already its own country (Scotland's fight for independence from English repression in the early 1300's is probably best known through depiction in the movie Braveheart), this upcoming vote serves to sever its formal affiliation from the United Kingdom, which encompasses England, Scotland, Wales and Northern Ireland. (The Republic of Ireland was created when the rest of Ireland departed via their own revolutionary movement in the 1920s, so have not been part of the U.K.)

The ties between the two nations are not only cultural and functional, but also financial—which gets to the complexity of the vote as it relates to the economy of each. Scotland pales in size to its English neighbor—in population, 5 mil. vs. 53 mil. (for perspective's sake, that puts it between the states of Colorado and Minnesota), and its GDP is roughly the same proportion of England's. It does possess a decent amount of land—a scarce commodity in Great Britain, which is becoming more densely populated—as well as significant oil and gas reserves in the North Sea. If these reserves are concentrated to Scottish hands, would be a loss of significant resources for the combined U.K. At the same time, Scotland has also benefitted from its affiliation with England, with the pound being a major world currency (offering monetary and purchasing power stability) not to mention economic and military power. Going it alone may sound appealing to a certain element, but comes with some risks. Some questions that would need to be answered: Whose currency will they use (U.K. pound or create their own...or join the EMU)? How will Scotland's share of the U.K.'s debts be unwound? Will Scottish banks defect and relocate to London (as they've threatened to do)? Will Scotland remain part of NATO? How would this affect other business/government contracts and operations? Easy separation at first glance, but, as you can see, this type of uncertainty is almost more serious in developed nations that it would be in emerging ones due to the more sophisticated infrastructure and myriad of legal issues.

This certainly wouldn't be the end of the world, but markets like stability/certainty and hate surprises. Consequently, the British pound suffered a steep drop against the dollar–reaching a 10-month low. This gets back to the basis for a currency's value, which is geopolitical and economic might. The referendum vote is this week, so we'll see how this comes together.

Perhaps more importantly, such as precedent would almost be ironic, considering the stubborn opposition many Western nations voiced over the potential ‘secession' of Crimea and other eastern portions of Ukraine. There are several other areas in Europe with regionalist movements, such as Catalonia in Spain, Belgium and pockets of Eastern Europe, so a separation here could have more of a ripple effect than it first appears. Then again, it just may end up to be another potentially scary non-event.

Additional Reading

Read our Weekly Review for July 28, 2014.

Read the previous Question of the Week, July 28, 2014.

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