Audra Diers Lawson, lecturer in Marketing at Manchester Business School, discusses the upcoming vote for Scottish Independence and the impact that this could have on businesses across the UK.
Let me preface this by saying that the Scottish referendum isn’t about the BBC weather map, rooting for two football teams (the Scottish team and whomever is playing England), and it is also not about business. The Scottish referendum is about self-determination and national identity and though it affects and is affected by these factors and much more, it is really important that when we reflect on the implications of the referendum on all of the British nations, that we put it in that perspective.
To that end, we also have to separate ourselves from the political brinksmanship and fear-mongering that has pervaded the conversation about the referendum and its implications – especially in the last week, since the poll was released showing a relatively even split among potential voters. The reality is that in the long-term the politics and business of an independent Scotland offers no credible threat to either the Scottish people or the remainder of Great Britain and could offer benefit to both. I think it’s also important to acknowledge that in the event of a Yes vote, the political brinksmanship that we have seen from all of the major political parties and corporations will have to be set aside because it is in the best interests of Great Britain to share a currency and maintain strong economic ties with an independent Scotland.
With that, let’s take a look at some of the business-related questions surrounding this debate:
What is the likely timeline for UK businesses experiencing negative effects of Scottish independence and how will it likely manifest itself? (Question by www.startups.co.uk.)
If we think about the financial markets, like a giant casino that’s driven on the confidence of the gamblers, uncertainty is going to cause the gamblers to get nervous and start hedging their bets. So, in the short-term, a Yes vote is going to have some negative effects for two reasons.
First, the period of negotiation between 18 September and 2016, when full independence would be a reality, is likely to cause a lot of market fluctuations, affecting mostly the financial sector. The operational reality for regular businesses with operations in both the Great Britain and Scotland seems unlikely to change significantly.
Second, one of the reasons that the short-term financial effects are likely to be greater is that, as Oliver Harvey, currency strategist at Deutsche Bank states, on the part of the rest of the UK, there has been a ‘basic failure to prepare for the economic and constitutional consequences of an independent Scotland’. I am guessing that’s why in the last week we have seen all of the political parties and several companies making brash statements about what they will do in the event of a Yes vote. The operational realities will get sorted out very quickly because it is simply in each large business’ interest to do so. For example, of course RBS would have to move a headquarters to England – EU banking rules require member states to have headquarters in member countries. That also means that they would have to maintain a strong presence in Scotland if they want to continue to do business there.
Until the operational realities get worked out, analysts have suggested several potential negative outcomes – all of which seem clear that they will be short-term (i.e., up to 2-4 years, excluding the process to become an EU member).
The financial markets will experience a lot of fluctuation, meaning that the pound is likely to lose some of the strength against other currencies that it has enjoyed. Moreover, there is likely to be a pause in investment in Scotland while the details of independence are sorted. However, once the question of the currency gets settled, the markets will also settle down. And let’s be frank – it would be daft and self-destructive for Great Britain not to want a currency union with Scotland. If a British sour grapes attitude persists as it has in recent months with regard to this discussion, the short-term effects would shift to long-term effects as the pound would likely be permanently devalued. A currency cannot lose 10% of the annual revenues that support its position on the world market and expect that it would remain as strong. That’s why most non-British analysts (i.e.. people who can be more objective because they don’t have vested interest in the identity of the UK) argue this is going to be a ‘velvet divorce’ because both Scotland and Britain gain value with a currency union.
Uncertainty is also likely to cause some ‘business shifting’ with some Scottish businesses shifting their production south of the border and as Scotland would be able to introduce fiscal policy to attract businesses in ways it never could, it would be naïve to ignore that other businesses would move their facilities north of Hadrian’s Wall. Again, we can anticipate this kind of uncertainty and job shifting to be short-term because it is in both nations’ interests to maintain a single market for their goods and services. It is the same logic that drives the EU as well as the North American Free Trade Agreement – nations sharing borders or in the same region all benefit in the long-term by ensuring that barriers to trade remain low.
Similarly, uncertainty is likely to cause concerns about the supply and distribution chains currently in place, but the same point as I made above would apply to suppliers and distribution chains as well. Until 2016, when Scotland would become independent, the same supply and distribution chains would remain in place. However, that would give 18 months to build agreements and develop plans to ensure that these chains remained unbroken. It just isn’t sensible to assert that this process wouldn’t be worked out – the need for supplies is going to remain as is the interest in the goods and services produced in Scotland.
In the short-term, while these negotiations are occurring, we can also expect the costs of some goods to increase because of changes in transportation and trade arrangements—not necessarily because the real cost will go up, but because of the confidence in the process is likely to be a bit tenuous. I know there has been speculation as to whether an independent Scotland would be able to gain entry into the EU because nations like Spain and Belgium wrestle with their own issues of separation. Again, this conflict has been amplified by media coverage; however, the overall values of the EU and the economic position of an independent Scotland would suggest that these issues would not keep Scotland out of the EU. However, even if Scotland did not gain entry into the EU, we need only to look at Switzerland for an example of a small nation that is not in the EU and enjoys strong trade relationships with the EU and is able to set their fiscal policy to keep them a strong small nation. It would be naïve to assume that Scotland would not be able to develop its own economy to be a strong small country over the next five to ten years regardless of EU membership. This is only going to strengthen both Scottish and British business interests.
What are likely to be the most positive outcomes for Scottish businesses and how quickly might they experience them?
In the short-term, as I noted above, the markets – especially the currency markets – are likely to weaken for the pound; however, some analysts outside of the UK argue that because about 75% of the sales and revenue for UK-listed companies comes from abroad, UK equities in the short-term might actually benefit from stronger foreign sales if a Yes vote leads to weaker currency. This would help minimise some of the short-term negative effects to both Scottish and British businesses identified above.
An independent Scotland would minimise the wealth drain existing in the current system. Most of the wealth distribution maps in the UK show that while Scotland and parts of northern England generate similar amounts of wealth as the south-east because of current policy, much of that wealth – with estimates ranging as high as 25% for Scotland – causes underperformance in Scotland’s economy. Even with only a fraction of ‘reclamation’ of the wealth drain, opportunities for business and public sector investment would certainly grow in the short-term.
Because an independent Scotland would have the freedom to set its own fiscal policy, Scottish business would directly benefit from proposed plans to cut corporation tax to attract more investment from companies that countries like Ireland, Luxembourg, and Switzerland have enjoyed for years. Naturally, this kind of investment over the course of the next five to ten years would have positive knock on effects for Scotland and certainly for British businesses seeking to enjoy the same benefits.
In a competitive business market, and from a more objective position, comparing Edinburgh and London, there are some unique long-term benefits for companies from all over the world to consider Edinburgh versus London, including: consistency in an English-speaking population, a highly educated populace who are cheaper to employ than Londoners (mostly because the overall cost of living and food is already cheaper in all of Scotland than England), favourable fiscal policy, and an already established financial centre.
In short, neither British businesses nor the British populace should be worried about long-term negative impacts of an independent Scotland. There will be short-term uncertainty that will cause overall market fluctuations. However, these fluctuations seem likely to improve investment in British and Scottish firms in both the short and long-term. Genuinely, the only fear that British businesses should have about the independence referendum is a failure on the part of the British government to maintain a currency union and single-market. We know the SNP’s objective is to maintain both of these; it would be incumbent upon British constituents to make it clear to their MP’s and government that they demand the same because it is in everyone’s best interests in both the short and long-term.