Lately, GBPUSD continue to be pressured by the issue of Scottish Independence. But what really is the problem here for the UK economy and its currency?

Lately, GBPUSD continue to be pressured by the issue of Scottish Independence. As the day of the referendum draws near, Yes camp supporter grows, and investors are getting worried that a Scottish Independence will divert UK economy from the right track. But what really is the problem here for the UK and its currency? This editorial will recount it one by one.

Kemerdekaan

The Referendum: Yes Or No?

The United Kingdom is a union of four big parts: England, Nothern Ireland, Scotland, and Wales. Historically and culturally, Scotland differs from the UK; they even have different royalty before. If you have seen the epic movie Braveheart starred by Mel Gibson, you will remember that it was created based on fights for independence in 13th century that was won by Scotland. In the next era, however, Scotland decided to join in the UK, until it decided that it would be better off being independent. Subsequent fight for Scottish Independence then took off through politics by demanding referendum for the Scots. Consequently, a referendum is scheduled to be held next week at September 18th, 2014.

If the majority choose No in the referendum, then Scotland will continue to be part of the UK, with some additional privileges granted, as Westminster has promised. But if the Yes voter excels, then it will come to independence formally on 24 March 2016. Her Majesty Queen Elizabeth II will still be the head of the country, but it will no longer abide by the same government and law as the rest of the UK. As a part of the UK, Scotland have already established its own legislative council and government under First Minister Alex Salmond. The government is now preparing for the referendum, and will have the next 18 months to arrange transition to a free Scotland.

Voting ResultResult of Scottish Independence polls held by Sunday Times. Last week, Yes camp reached 51%.
Source: The Spectator

Earlier, the No voters exceeds the Yes voters. But as time went by, the Yes camp grew, and at the last poll even defeated the No camp. However, the slight gap between Yes and No show that the Scots are still at the crossroads. The Yes voters are basically fed up by UK foreign policies and of how the UK government treats Scotland. While the No voters are mainly concerned about how Scottish Independence might negatively influence its economy in various sectors.

 

The Risks: Less Support, More Uncertainties

What will happen if Scotland gets its independence? Scotland actually has enough resources to get by as an independent country due to its North Sea oil and gas, as well as other export-worthy goods and services. Unemployment rate in the country too, is marginally lower than the UK as a whole. But for a long time, it has tied its economic system with the UK, and the current Scotland has not prepared a sufficient alternative. As the result, many Scots are againts Scotland independence.

One of the most famous Scots, JK Rowling, even has donated 1 million Pound for the No campaign. In its public statement, the creator of the wildly popular Harry Potter franchise mentioned that although she does not favor Westminster government, there are many benefits for Scotland as a part of the UK. She pointed to BOE bailout for Scotland banks, wordlessly question whether an independent Scotland will be able to do the same in similar situation. She also seemed to doubt Scotland's future economic plan and its ability to survive afterward.

Those concerns are not baseless. Scotland post-independence plan relies heavily on the North Sea oil and gas; which is not unlimited. On the other hand, health and education aids from the UK will stop once independence is declared. Rowling called attention to the medical research for Multiple Sclerosis that has been supported by her. UK funding for the research will stop, but Scotland government does not seem to have a similarly beneficial arrangement to replace it or other such research. In short, Scotland is quite unprepared from the fiscal side.

Furthermore, there are questions over Scotland's monetary system. Salmond seem to be thinking of using either Pound or Euro as Scotland post-indepence currency. However, politicians from both the UK and EU have warned that currency union is not possible. Not to mention that in the independence scenario, there has been no arrangement for who will be the lender of the last resort and take the place of BOE for Scotland banks.

There is a high possibility for Scotland to succeeds the transition, but the Yes camp winning will surely be followed by economic woes for the rest of the UK.

 

1. Who Will Pay The Debt?

Even after prolonged austerity, the UK has high debt count, which it used for development in the Scotland as well as in the rest of the UK. But in behalf of the Yes camp, Salmond stated that Scotland refused to take responsibility on those debts. It pushes UK burden higher, while its revenues-particularly from tax and exports- will be decreased significantly.

DataExports from Scotland to the UK and other countries.
Source: Financial Times

 

2. Direct And Indirect Side Effect

Apart from the direct result of decreased revenues, the UK also will be at high risk if Scotland economy worsens. An independent Scotland will be UK main trade partner beside of the EU. Therefore, if Scotland post-indepence economy worsen, then the UK will suffer too. This is while it also suffer the impact of slowdowns in the Eurozone.

 

3. Which Currency Will Be Used?

To this day, there is still no clarity over which currency an independent Scotland will use after it secedes. Speculation are rampant between Pound and Euro, but Scotland will face opposition from both. European Union Commission President, Jean-Claude Juncker, have mentioned that EU will not admit new member till at least five years forward. Meanwhile, Westminster and the BOE have stated their objection for a currency union with Scotland.

One thing is clear though: whichever is chosen by an independent Scotland, it will not be good news for the Pounds. The longer the uncertainty remains, the worse Poundsterling will be.

 

The Effect: Business Relocation And Rate Hike Delay

The rising Yes for Scotland Independence have triggered panic selling on GBPUSD in the beginning of this week. The main reason is the possibility that Scotland will no longer use the Pound. But actually, there are heavier problems here.

 

1. Relocation of Businesses from Scotland

Rising uncertainties in Scotland will drive people to move their businesses from this area to the UK or other countries. Lingerie brand Ultimo owner Michelle Mone have declared her intention to move her business to the UK if Scotland secedes. Insurance company Standard Life and banking giant Lloyds also have said that they are considering similar move. Mass relocation will hit Scotland hard, and could indirectly influence UK economy. Although the UK economy is currently one of the best performer in the world, but the condition might change once Scotland is no longer a part of it. Even worse, the impact of such scenario on Poundserling would be long-lasting, because the cause comes from decreased investment and growing uncertainties, instead of mere speculation.



2. Possibility Of BoE Rate Hike Postponement

The same uncertainty might influence Bank of England consideration on the topic of interest rate hike. Furthermore, there are rumours that a Yes win for Scotland might incite the government to postpone UK General Election that is scheduled to be held in May 7, 2015. The longer uncertainties surround BOE rate hike issue, the farther GBPUSD would fall, due to the Fed rate hike that is already on the horizon.

Are you confused in reading this topic? well, we are sure that the Scots think so too about this dilemma. This referendum might be a beginning of a new era for Scotland, but it has triggered bottomless uncertainty that might last for a while, and could be longer if Scotland decided to secede from the UK. If, say, the Scots decided to say nay, the topic will linger and most likely will resurface in the next few years. Meanwhile, UK economy and Poundsterling will suffer each time it happens.

Another pressing issue is that a Scottish Independence might be contagious; spreading Virus of Independence to neighboring countries. In European Union, many separatist movements exists, most notably in Germany, France, and Spain. The movements are sometimes violent, and sometimes take more peaceful approach through politics, such as Scotland.

Most active groups including those that support the independence of Catalonia, Basque, and Bavaria. Catalonia, for instance, have repeatedly asked for a referendum, but refused by Madrid. If Scotland succeeds, then there will be higher pressure for Spain to hold similar referendum in Catalonia. On this reason, many separatists movements supporters are closely watching the development of Scottish Independence referendum: if it is successful, then similar approach might work somewhere else. Such phenomenon threaten the existence of the Union and the stability of its currency, the Euro.