This Thursday the people of Scotland will vote whether to break away from the United Kingdom. While the latest polls show greater support for remaining part of the U.K., the vote is close and the possibility of secession has unnerved many.
Some of the apprehension comes from the fact that Scotland and the rest of the U.K. get along quite well, so a breakup seems illogical. Scots are represented in the U.K. Parliament and control much of their own affairs. Additionally, Scots receive a large share of British tax revenue more than they contribute. But pro-breakup groups argue an autonomous Scotland will be more prosperous in charge of areas like foreign policy, state benefits, corporate regulations, and energy policy. While we harbor doubts on the economic merits of secession, many Scots have desired full autonomy for many years, if not for centuries.
The biggest issue for now is the uncertainty of the split. Would Scotland continue to use the pound currency? Scotland says yes, England says not so fast. How would the loss of all that Scottish land and natural resources affect England? (While Scots are only 10% of the U.K. population, Scotland is about 30% of the total land.) The Scots have already said they will ban English nuclear armed submarines from Scottish waters.
Without using the pound, Scotland would have to establish its own currency, which likely would be quite weak. Membership in the EU and adopting the euro is a possibility, but by no means assured. Spain might veto Scottish membership so as not to encourage the Catalan succession movement popular in the Barcelona area.
Added to all this is the prospect of the U.K. itself withdrawing from the EU. In 2013, British Prime Minister David Cameron promised to hold a referendum in 2017 to decide if Britain should leave the EU. Scotland withdrawing adds some strength to Britain itself seceding. This worries many financial analysts, as they see much of the U.Ks economic success coming from its place as a central point for EU commerce, which would be a stretch without EU membership.
Scotland seceding threatens the slowly improving status quo in Europe. The euro is in relatively good shape, Greek debt was recently upgraded and the ECB is introducing asset-backed securities purchases and implementing pro-growth policies. While secession, if voted for, would not occur immediately (not until March of 2016), it brings another challenge to Europe when Europe already has its share of difficulties. However, from an investors standpoint, with European shares relatively cheap and various signs of economic improvement, European stocks remain attractive, despite the short term bumps that may lie ahead.