Michael Smith
Is Scotland about to separate from the rest of the United Kingdom and become an independent nation? This is the question circulating the political and economic press in Britain at present, following a challenge from British Prime Minister David Cameron telling Scotland to either put up or shut up.
But what options face Scotland before it can hold a referendum regarding independence, and what problems could it encounter?
Terms and Timing
Perhaps the most important issue at this point concerns the terms and timing of a possible referendum. Unionists (i.e. those that support Scotland remaining inside the United Kingdom) prefer a straightforward in-or-out question. This reflects opinion polls indicating that – faced with a choice between remaining in the union or becoming independent – most Scots prefer the former.
On the other hand, separatists (including First Minister of Scotland Alex Salmond) want a possible referendum to include a third option. This gives voters the chance to opt for increased devolution (giving Scotland powers to raise its own taxes for instance) while remaining in the UK. This idea receives support from an overwhelming majority of Scots in opinion polls.
In addition there is the question of timing.
The British government has speculated giving Scotland an 18 month timeframe to hold a referendum up until the end of 2013. This again reflects opinion polls indicating that – at present – support for independence among Scottish voters isn’t high. In contrast, Alex Salmond prefers to hold a referendum in 2014. This (supposedly) gives him time to gain support for independence during the next 24 months, before holding a referendum then.
To Keep the Pound?
Second, if and when Scotland does become independent, it faces several tough decisions.
Not the least of these concerns whether Scotland keeps British sterling, as pointed out by former Chancellor of the Exchequer (and Scotsman) Alistair Darling. Darling argues that the troubling global climate makes this a terrible time to abandon sterling. The Scottish government has no idea how investors would react to a small nation launching a new currency. It would wake up one morning not knowing how much its debts and savings are worth.
In addition, were Scotland to either retain the pound or adopt the euro, it would sacrifice some big advantages of being independent. For instance, setting interest rates and adopting an appropriate monetary policy. Hence, Darling feels this is not an opportune moment to exit the United Kingdom.
Black Gold
Perhaps most important, there is also the question of whether England or Scotland retains control of the North Sea oil fields.
Should Scotland retain ownership it would have no problem maintaining its financial independence. On the other hand, it is more than possible that Westminster will give Scotland the chance to exit the United Kingdom, only if England retains North Sea tax revenues. This would make independence a challenging prospect for the Scots. Of course, for the moment this is all theoretical.
Scotland has not made moves toward independence, while a referendum remains only an idea. Nonetheless, it could only be a matter of months before the possibility of an independent Scotland becomes a reality.
Michael Smith is a foreign exchange specialist at Pure FX.
