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What a Scottish ‘yes’ vote would mean for Australian markets

By Richard Holden  September 17, 2014

A “yes” vote to Scottish independence on September 18 would mean a great many things for Scotland, and also for the remains of the UK. But what would it mean for Australian business and financial markets?

It’s tempting to say “very little” — what do internal politics half a globe away have to do with us? Yet the Australian dollar strengthened markedly against the pound last week, almost surely due to a poll suggesting that the “yes” vote was ahead 47% to 45%.

To begin to understand what Scottish independence might do to Australian firms and markets, it’s important to understand what it would do to Scotland and the remains of the UK. The key economic question here is what currency the Scots would use.

The pro-independence team has been pretty clear about this. They’ll keep using the pound. And it’s true that the UK can’t stop them — just as Australia can’t stop New Zealand from using the Aussie dollar.

At first this sounds sensible — the pound is a big, liquid currency. The haggis — or whatever a Scottish currency would be called — would not be. Case closed, right?

Actually, no. Having a common currency without economic and political integration is a very, very dangerous thing. Monetary policy would be set by the Bank of England, presumably without reference to Scottish economic conditions. So if there was a recession in Scotland one would want lower interest rates, but unless the UK was also in recession of a similar magnitude the Bank of England would be unlikely to cut rates.

Worse, losing control of the ability to print money means that if Scottish debt got out of control it could not be inflated away. Ask Spain how that works out.

Worse still, Scottish banks would no longer be implicitly guaranteed by the UK. This is a huge deal.

The events of 2008 taught us how quickly modern-day bank runs can happen, how devastating the effects can be, and how only overwhelming credibility can prevent disaster. Scotland wouldn’t have that — and the remains of the UK would have no incentive to help out. Even if it wanted to, markets would have to believe it, and that’s far from a sure thing.

So it’s clear Scotland would be in a dangerous economic position — not obviously in trouble right away, but without any macroeconomic fire extinguishers if trouble arose.

This is a potential worry for major Australian exporters to Scotland — but there just aren’t very many of those. Australian companies with operations in Scotland could be affected.

A notable example is National Australia Bank (NAB), whose subsidiary Clydesdale Bank is located in Scotland and could face higher borrowing costs under independence. NAB has said it would seek to shift Clydesdale bank’s corporate registration to England in the event of a “yes” vote. But even in that case it’s a small part of the NAB.

The bigger concern would be if independence affects the remains of the UK in a significant way, since this is a bigger trading partner for Australia. As we saw last week, markets have rightly been concerned. At the very least there would be an 18-month-plus process of “demerging”, a process that would be complicated and distracting.

Yet, whatever the impact on the remains of the UK, it’s hard to see how it would materially impact Australian business. The pound might weaken relative to the Australian dollar, potentially hurting Australian exporters. Having said that, we would all do well to heed former treasury secretary Ken Henry’s advice on Tuesday to be less focused on the real exchange rate in this country. The impact of a modest devaluation of the pound just won’t make much difference.

Could independence lead to a major blow-up of the UK’s economy? As we learnt in 2008, a major problem in any significant economy can quickly reverberate around the world. We are all interconnected now. A big problem in the remains of the UK could be a big problem for world financial markets, Australia’s among them.

This is possible, but it seems highly unlikely. The UK is a very large economy with its own currency and a broad web of international economic connections. Scotland is close, historic, and important – but independence is not likely to lead to an economic meltdown in the remains of the UK.

Perhaps it could change politics in the UK in a big way and this could have an effect. Perhaps a more conservative Tory leader would emerge. And perhaps that would lead to different economic policies. But that’s a lot of perhapses.

Demerging Scotland from the UK would be wrenching. It would affect both entities — especially Scotland — in lots of ways, including economically.

Whatever the pros of a “yes” vote for Scotland, it would bring with it huge economic risks. And some for the remains of the UK, too. For Australia and Australian businesses, the risk is small.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

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