Scotland votes to stay in UK

Early this morning New Y0rk time the results of the Scottish independence referendum were announced.  The main features:

1.  “No,” meaning stay in the UK, votes made up 55% of the total; “Yes” votes were 45%.  

Yeses were much weaker than late polls had predicted.  Part of this is the nature of polling.  Part is also that sixteen-year-olds have the vote in Scotland and political pollsters have a difficult time getting accurate teen opinions.  I think the greatest part, though, is that No voters felt their views would be frowned on and were reluctant to share them.

2.  Almost 85% of eligible voters cast a ballot.  This is an immense number and indicates that citizens regarded the vote as crucially important.

3.  The result averts potentially destabilizing ripple effects throughout the EU.  Had Yes carried the day, separatists in, for example, Spain or Italy would have had a concrete example of success to spur on their own efforts.

4.  Scotland will become more autonomous.  This is partly the result of promises the UK made to tip the voting toward No, partly pragmatic politics to ensure an independence vote won’t recur.  Presumably similar, though likely smaller, efforts to assuage unhappy regions will take place elsewhere in the EU.

 

The response of stock markets has been positive, but small.  This is understandable, since the near-term effect of a No vote is preservation of the status quo.  Interestingly, though, the recent decline in sterling, which had been attributed to Scottish independence fears, hasn’t reversed itself–implying that other factors are behind the weakness.

the Scotland referendum

the vote comes on Thursday

On Thursday, Scotland will vote on the Scottish Independence Referendum Bill.  A simple majority of those voting saying Yes will make Scotland (population: 5.3 million) an independent country, no longer part of the United Kingdom.  Recent polls show that likely voters are about evenly split between those who want independence and those who don’t.  (A finer point:  the polls actually tally only what respondents are willing to say to pollsters, which is not necessarily the same as what they intend to do in the voting booth.)

As I see it, the best possible outcome would be for Scotland to become independent and use its small size and new economic vulnerability as the spur for a rush of entrepreneurial creativity.  Maybe the residual UK becomes even a bit more modern, too.  The worst outcome is probably that the referendum fails, but by a small enough margin that the issue remains front and center on the minds of Scottish politicians.  This leaves everyone worrying about what will happen and loathe to invest.

implications of “Yes”

–Scotland will be no longer a part of the UK, and therefore, of the EU.  This means that companies wanting unfettered access to the union must redomicile.  This is already happening, with firms relocating to England.

–Scotland will probably find it very hard to join the EU itself, because existing members–notably, Spain–will not want to give encouragement to their own regional independence movements.

–Negotiations will commence to determine what portion of UK national obligations–government debt, pension/medical insurance…–Scotland will assume.

–Scotland will have to create its own currency, central bank, tax and regulatory regime–all necessary parts of being its own country.  The most stable course, but not necessarily the best, would be for Scotland to mimic the UK; in particular, its currency would track sterling.  Higher tax rates and/or an iffier currency would doubtless have corporate headquarters and national savings headed south.

–Perhaps most important, Scotland has been a big supporter of the Liberal Party.  This suggests that the new UK would be more Conservative than before, implying that Parliament too might vote to distance itself further from the core EU, or leave the union entirely.

investment implications

A Yes vote will probably cause a continuation of recent sterling weakness;  a resounding No vote would likely spark a rebound.  That has implications for stock selection in London (exporters if Yes, domestic firms if No).  Otherwise, we should keep in mind the possibility that Scotland may become a kind of Hong Kong to the EU’s China.  The analogy is a little far-fetched   …but who knows.