This Thursday 18th of September will see Scottish people flood polling stations in order to vote on the upcoming referendum for Scotland to become Independent from the UK. A campaign that stayed relatively quiet has gained momentum over the past weeks as pro-independence campaigners vie with Westminster for the majority vote. As a result the FTSE and the pound have both suffered, with both reflecting the results of early polls. It is generally accepted that a ‘Yes’ vote would work against the UK economy. However, with so many conflicting arguments being presented, from understandably biased sources, how will the result – whatever it may be – affect the relative economies and financial markets.
    
Oil and Energy

Alex Salmond and the Scottish Nationalist Party have put a great deal of effort into highlighting the many ways in which an independent Scotland can prosper. At the top of that list is the much publicised oil revenue. Indeed, over 98% of all of the UK’s own oil supply comes from the North Sea. Business for Scotland claim that there is up to 24 million barrels of oil – worth £1 trillion to the Scottish economy – still to be extracted from the North Sea. In fact, with a plan to use around 90% of the tax revenue from these stockpiles to re-invest back into an independent Scotland, it’s easy to see why many believe the country can prosper on its own.

However, there has been much opposition to this key argument. In fact Sir Ian Wood, Billionaire oil tycoon and publisher of the official review that is being used by the SNP to promote taxable energy potential, disagrees. In fact, according to Wood’s report, there is closer to 15 billion barrels of extractable oil left in the North Sea. The official survey also states that annual tax revenue from oil and gas is only projected at £3.5bn and will drop as supplies dwindle. Wood goes on to make the point that, ‘Possible oil tax income to an independent Scotland features strongly in the Scottish government’s predictions, not as a bonus but as a means of balancing the books. Without it, it cannot pay for promised improvements to healthcare, education and social services.’

   
Oil production in Scotland is forecast to be almost halved by 2030
  
With the potential for oil production in Scotland to all but dry up by 2050 Scotland will have to make different plans for the long-term. Fortunately, Scotland has 25% of all of Europe’s wind and wave power potential. In fact, the Scottish Nationalist Party set a target (back in 2011) to generate the equivalent of 100% of their energy from renewable sources by 2020. Although this target wasn’t necessarily unrealistic – given the renewable energy potential in Scotland – it may be scuppered by a ‘Yes’ vote. Analysts have warned that Scottish Independence would ‘slam the brakes’ on renewable energy investment and that it would take many years to re-negotiate subsidy schemes.

If the Scottish Nationalist Party’s claims to the energy (mainly oil) potential of Scotland are true, it isn’t necessarily a golden ticket to prosperity. Many of the projections for oil revenue are based on a steadily increasing oil price reaching up to $130 per barrel by 2016. However, oil prices have dropped by around $20 per barrel since 2011. This doesn’t necessarily mean that the SNP’s forecasts are wrong; it simply means that oil is a very volatile commodity, heavily influenced by geopolitical conflict, global politics and economics generally.
      
Currency wars
Whether or not Scotland will be able to retain the pound, if the referendum passes, has been a topic of much debate and confusion. The Scottish Government’s preference would be to keep the pound as creating a new currency would be costly and time-consuming. Joining the EU would also be a time-consuming task that would require the creation of a central bank in Scotland – not to mention the inherent volatility that goes hand-in-hand with joining such an economically diverse and volatile union of countries. Where many ‘No’ campaigners have claimed that Scotland would lose the pound the Better Together campaigns leader, Alastair Darling, has said that they would be able to continue using the pound as part of a ‘currency union’.
  
A volatile Euro has weakened significantly vs. the pound
   
In fact, a currency union between the rest of the UK and Scotland would be the most mutually beneficial in the short-term as it would allay the fears of taxpayers and investors alike – the prospect of losing a significant contributor to the pound is not a positive one. However, in the long-term a currency union could still spell trouble for both the UK and Scotland. In its current form, the UK is able to balance local economic risk across the whole country, making the pound relatively stable. Should a currency union be formed, each country would be affected by the fortunes of the other. Seeing as there would be, to begin with, a great disparity in the size of the relative economies, a sharp downturn in the UK would severely affect Scotland also.

So, in the case of independence, currency is a big issue. In fact the financial interests of Scotland would still lie heavily with the rest of the UK. This means an argument for a prosperous, independent Scotland (compared to its current state as a UK nation) doesn’t hold water as the fortunes of the rest of the UK will weigh in heavily on the pound for both nations. Additionally, the pound would still be regulated by the Bank of England. This would inevitably remove much of the influence the Scottish government would have over interest rates and monetary policy, which would be regulated by the BoE and be consistent for the pound, regardless of the nation it is traded in. Seeing as one of the major arguments for an independent Scotland is the nation’s ability to dictate policy, they would have very little power in this regard.
    
What ‘Yes’ means for the FTSE
Many companies have already been very vocal about their opposition to the ‘Yes’ vote; none less so than Scottish-based banks. Royal Bank of Scotland (RBS), who are currently based in Scotland, have already announced that should the referendum pass they would relocate to England. This opinion was mirrored by Standard Life and Lloyds Bank, both of whom are based in Edinburgh.

Company concerns stretch much further than banking as retail supermarket and home wares chain John Lewis also spoke out, claiming that prices north of the border would have to be increased if a ‘Yes’ vote passes. Should a new currency be adopted this would be an even more significant rise, with retailers having to account for the costs of accepting and exchanging an entirely new currency. Finally, telecoms providers, such as BT, O2, Vodafone, EE and 3 (Three Mobile) also claim that costs will increase for its Scottish users. This would be down to the, as of yet unknown, regulations that would be imposed on cross-border communication and the radio spectrum as a whole. Yet, it wouldn’t just be the Scottish consumer to suffer. UK consumers would inevitably be victim to an increased price as companies attempt to spread additional costs across their entire network.

The over-arching effect of increased prices at a consumer level would no doubt be felt in the FTSE. If retail prices should rise as predicted there may be an increased chance of increased custom for local or ‘value’ providers not listed. This would potentially lead to a drop in stock prices for companies individually – then the FTSE would suffer. A falling UK Index would lead to a lack of confidence from investors who would flood into more prosperous emerging or U.S. markets. The pound, which is closely entwined with the FTSE, would also feel the pinch and both the UK and Scotland could suffer from its devaluation. This may lead to investors buying into markets such as gold, inflating its price. An increased gold price would be beneficial to the UK. That is to say it would have had Scottish born former Prime Minister Gordon Brown not sold half of the UK gold reserves in 1999 – ironically.

In Conclusion, although a ‘Yes’ vote would be significant, and perhaps negative in the long-term for the rest of the UK, a ‘No’ vote will not end the matter. There is a possibility of another referendum which would cause ongoing uncertainty in the UK economy. In fact, as long as Scotland is not independent from the UK there will always be the potential for a split in the minds of long-term investors. The amount of damage already done by the referendum being considered in the first place may be irreversible. An Independent Scotland may be inevitable, perhaps not when the polling stations close this Thursday but eventually.
    
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