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Analysis
Scots` independence battle hots up as Brown prepares to speak

Scots` independence battle hots up as Brown prepares to speak

Sterling, gilts could be affected if Yes vote builds further 

by David Marsh

Tue 22 Apr 2014

At stake in the Scottish independence referendum on 18 September is not just the future of a 307-year-old union with England but also the stability of a currency – sterling – that is still ranked by the International Monetary Fund (IMF) as the world’s third most important reserve money after the dollar and the euro.

The debate on Scotland’s fate gets fully into its stride this week with political rhetoric heating up on both sides of the border and opinion polls suggesting that the Yes campaign for a go-it-alone Scotland has narrowed the ground significantly against opponents of independence.

Gordon Brown, the former UK chancellor of the exchequer and prime minister, a Scot, this week breaks cover to argue for the first time against a Scottish-English split. In a speech today at Glasgow University, Brown will state that an independent Scotland would struggle by itself to cover rising pension costs. This is the latest volley in a sustained broadside of pro-union economic arguments that has so far signally failed to have any effect (judging by opinion surveys) on Scots’ sentiment.

Brown has kept a low profile since losing the 2010 general election against David Cameron, who became his successor. He has so far refrained from taking sides in the pre-referendum skirmishing. This is the result of a somewhat puerile squabble with the leader of the pro-union Better Together grouping, Alistair Darling, chancellor of the exchequer under Brown’s lack-lustre prime ministership – when the two men fell out badly.

Of much greater global importance than the internecine divergences within the Opposition Labour party are question marks over sterling.

The British currency has been riding high, trading around a three year high of $1.68. This is the result of a more rapid than expected UK economic recovery, likely to lead the Bank of England to raise interest rates more quickly than other leading central banks.

In what could herald possible volatility for both sterling and UK government bonds, a survey by pollsters ICM survey for the Scotland on Sunday newspaper revealed a decline in the anti-independence, No vote from 46% to 42% over the past month, while the Yes vote remained steady at 39%, greatly narrowing the gap between the two sides. Excluding ‘don’t knows’ from the findings, the Yes-No divide is now down to just 48-52, the highest level of Yes support yet recorded in an independently-commissioned opinion poll.

Up to now, financial markets in the UK and abroad have embraced conventional wisdom that the traditional majority of Scots favouring union with England will automatically prevail, so the referendum will pass without fundamental disruption.

However, if the Yes bandwagon gains further momentum, both sterling and the gilts market could be affected by uncertainty over future political and economic arrangements. The outcome could start to look less benign if financial operators start to take seriously warnings on the consequences, such as that from Lord (George) Robertson, another leading Scottish Labour party politician, a former UK defence secretary and Nato secretary general. Robertson said earlier this month that the effects on global stability of Scotland and England breaking up could be ‘cataclysmic’, leading to a torrid, complex divorce that would take years to resolve.

At the heart of the contentiousness about independence is the position, expressed by all Britain’s main parties, that an independent Scotland could not use the pound in a continued currency union with England if political union were severed.

The experience of the euro bloc has shown the extreme risks of countries joining in a monetary union when they lack deep-seated political underpinnings. The UK authorities have made clear that any Scots government that breaks free from the union would have to make its own currency arrangements. This raises potential for considerable instability in Edinburgh – particularly as a separate Scotland would have no right automatically to join the European Union.

Yet the drawback for the pro-union lobby is that repeated economic arguments in favour of preserving the status quo have had little effect on Scottish voters. The line taken by many experienced English economists and politicians may even have proved counter-productive by increasing the anti-English mood of defiance among many nationally-minded Scots irritated by lecturing from south of the border. This may have been one big reason for the narrowing of the opinion poll gap in recent months.

David Marsh is Managing Director of OMFIF

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