In just over one week Scotland will vote in a referendum on whether to break free of the United Kingdom, dissolving a 307-year-old political and economic union, and become Europe’s newest country.
It comes as the U.K. itself debating the future of its other political affiliation – specifically its frequently bad-tempered, reluctant membership of the European Union.
Last weekend, two separate polls suggested for the first time that the ”Yes” vote would win the September 18 Scottish referendum.
The prospect of independence has created a deep sense of unease among some.
When markets opened on Monday, the British pound fell by 1.3 percent against the U.S. dollar to $1.611. Investors sold off companies with any exposure to Scotland, including the Royal Bank of Scotland and Lloyds Banking Group, which owns the Bank of Scotland, as well as engineering group Weir and fund managers Aberdeen Asset Management.
“Markets hate uncertainty and the only thing we can be sure of is that this vote is creating uncertainty,” David Buik, a London-based market strategist for investment firm Panmure Gordon, said.
Neither side has been able to say what will happen if Scotland breaks free.
The British government has insisted a currency union with Scotland using the pound will be out of the question.
“Economically speaking, Scotland is not very significant. England is much more important. But politically, Scotland is extremely significant.”
The Scottish National Party leader, Alex Salmond, who has run an exuberant, confident campaign for independence, has said he sees no reason why Scotland cannot keep the pound and has been vague on whether this will happen via a formal currency union or a looser system.
The former E.U. commissioner for monetary union, Olli Rehn, told the British government in August that Scotland would not be able to join the European Union without either a formal currency union with the euro or the European Central Bank.
The Bank of England’s governor, Mark Carney, comes from Canada, a country that weathered its own separation referendum in Quebec. Mr. Carney admitted in a speech in August that disputes over whether Scotland is allowed to keep the pound “could raise financial stability issues.”
He said the bank is setting emergency measures in place, but refused to give details of what they are.
In the interim, the pound has weakened signficantly for the first time in recent memory.
“The pound has been on a downward slide for the last few months, but I would say the last 4 cents fall is down to uncertainty over Scotland,” said Mr. Buik of Panmure Gordon. “The possibility of an unsatisfactory outcome, which I define as a ‘yes’ vote or a very narrow ‘no’ vote, could bring the pound to 155 pence (against the U.S. dollar).”
Manuel Andersch, an analyst at Bayern LB in Munich, said a ‘yes’ vote would also weaken the pound against the euro. In the short term, he thinks the euro may strengthen to 83 British pence from current level of 79.9 pence.
Swiss bank UBS warned in a July report that there was a real risk of Scottish depositors moving their money to England in the light of the referendum. It pointed out that savers took money out of Slovakia when it separated from the Czech Republic in 1993, and money moved out of Quebec as the province debated whether to remain part of Canada.
The banking sector is also braced for uncertainty. The Royal Bank of Scotland, currently domiciled in Scotland, was one of the biggest failures of the banking crisis, and required a 46 billion pound (€57 billion) bailout. It is still part-owned by the British government along with Lloyds Banking Group. Both are headquartered in Scotland, but E.U. legislation states that financial institutions must be based in the country where they do the most businesses.
Scotland, with a population of 5.2 million, and a size of 78,772 square kilometers, roughly the size of South Carolina, is a small country, but the debates over whether it will separate from the United Kingdom, seek to join the euro or maintain its existing links with the pound sterling, and continue to be in the European Union, are being played out across the world.
Countries such as Spain, which face their own separatist movements in the Basque region and in Catalonia, are anxious to make sure that Scottish independence is not portrayed as an easy option. Scotland is also one of the most pro-E.U. parts of the United Kingdom. If it breaks free, many feel there will be a strong desire in the rest of Britain to leave the European Union.
“Economically speaking, Scotland is not very significant. England is much more important. But politically, Scotland is extremely significant, because it would strengthen Britain’s tendencies towards an E.U. exit,” Lüder Gerken, head of the Center for European Policy based in the southern German city of Freiburg, told Handelsblatt Global Edition. “This would be a disaster for the European Union. The probability is higher if Scotland is no longer a part of the United Kingdom.”
Ruth Berschens, Handelsblatt’s Brussels editor, points out that that the European Union now risks losing a member state in the first time in its history. There is also no precedent on how to treat Scotland, as there has never been a new member state created within the 28-country E.U. bloc.
These issues will not be resolved anytime soon.
Meanwhile, the referendum is approaching. If Scots opt for independence, total political and economic separation is not likely to happen until March 2016.
“It will be three years of turmoil that will seriously damage the U.K. and Scotland’s opportunity to do business with the rest of the world,” said Mr. Buik of Panmure Gordon. “Negotiations between England and Scotland are going to be deeply unpleasant. There will be all this uncertainty and rancor that will damage us all.”