Financial shock avoided: Scottish voters say No

Sep 19, 2014 | News

By Ari Salas

Bankers everywhere sighed in relief Friday morning as markets opened to an intact United Kingdom.

London Stock Exchange

London Stock Exchange

The uncertainty of a Scottish independence referendum had sent financial markets into a deep fear, said Pierre-Pascal Gendron.

Gendron is a Professor of Economics and Program Coordinator for the Bachelor of Commerce in International Business at Humber College. He said financial fear played a significant role in the achievement for the No side.

“The no forces and large banks really primed the public into a fear camp. The Royal Bank of Scotland, Lloyds, all the big banks threatened to move to London if Scotland voted yes,” he said.

This is a standard tactic in independence referendums. In the 1980 referendum in Quebec the Bank of Montreal moved to Toronto before the vote was even held, said Gendron.

The fear tactic worked. Voters in Scotland decided to keep the 307-year union going with 55 per cent answering no to independence.

The Euro Zone may have the most to celebrate. Struggling European countries are not prepared for the shock and uncertainty of an economic transition period in such a close neighbor, said Gendron.

But global markets may not have fully ducked the threat of financial response. The long-term impact of the referendum is what is most important, said Gendron.

“This is going to be disruptive no matter what happens because now that they’ve tried and the Yes forces came relatively close there will be a lot of uncertainty over the coming years. The Yes forces will want to try this again,” said Gendron.

Gendron is optimistic about the next time a Scottish referendum rears its head. Bankers will be more confident because they survived this succession attempt.

“They aren’t going to do this in the next two or three years so perhaps the surprise element will no longer exist,” said Gendron.

If Scottish voters had passed a yes decision, worldwide markets would have responded to the referendum with an immediate fall. The Canadian economy would have suffered a bit, but not directly, said Gendron. Slower trading due to uncertainty would have cut Canada’s international trade, but only slightly.

The biggest effect would be independence seekers in Quebec, said Gendron.

“It could give some new energy to the Yes forces.”

In Scotland the biggest question would be whether the new country would remain attached to the British pound or break away, establishing it’s own central bank and adopting a different currency.

“There’s always an adjustment. If the government of an independent Scotland wanted control they would have to create their own currency. If they had used the British pound for a while they would have zero control over monetary policy: interest rates, creation of money,” said Gendron.

Detaching from the pound would have immediately caused a downward adjustment of living. But only during a transition period, said Gendron.

“That’s the shock of going on your own and being off the social safety net of the United Kingdom,” he said.

Public fear of this sudden shock was a major reason the no campaign was ultimately successful. Aside from oil exports Scotland does not produce very much, making financial services all the more important. The threat that banks might move to London caused a panic, said Gendron.

Donna Wolff owns The Caledonian, a Scottish Pub in Toronto. She said the decisive factor was economic.

“There’s too many unanswered questions. A lot of stuff like the pound, pensions and healthcare,” said Wolff.

The referendum excitement has ended but the long-term impact is still to come.

“They are emboldened to run another referendum down the road. I think this is the beginning,” said Gendron.