The people of Scotland have had their say on independence and decided to stay in the UK. It was a pretty close vote (55% for the UK, 45% for independence) but in the end the margin was perhaps bigger than some had expected. Irrespective of political leanings, many UK businesses, including those in the automotive sector, will be breathing a sigh of relief today.
Late on in the referendum campaign, the emerging prospect that the ‘yes’ campaign for Scottish independence had momentum and could actually win after two years of being consistently behind in the opinion polls, started to generate jitters in the markets. There were a number of significant uncertainties concerning macroeconomic impacts – not least the currency that the newly independent nation would adopt – and investors don’t like uncertainty. It may have been short-term and have quickly dissipated, but there was certainly a risk that the birth of the new nation would be an economically difficult one with major implications also for the economy of the remainder of the UK. And those worries perhaps gave the ‘no’ campaign a late surge.
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Conversations I had with senior people in car companies on the topical ‘what if’ question brought straight bat responses. “We’ll deal with the situation whatever the Scottish people decide and, let’s face it, there are very big uncertainties over what might happen to the economy that need to be resolved before we reorganise” sums up the prevailing attitude. However, I did get the impression that recently businesses were becoming much more concerned about how the business landscape could be impacted more generally. What could happen to the exchange rate, interest rates? Would the UK’s economic growth rate suffer? If so, for how long would there be an adverse impact? How would taxes change in Scotland? Would a new government offer all kinds of new incentives to attract industrial investment? Would an independent Scotland continue to be in the EU or not? But let’s get all that in perspective. Many car companies’ sales organisations in the UK also have territorial responsibility for the Irish republic. Ireland, remember, is a foreign country and uses the euro currency, so an independent Scotland on a different currency – if that were to happen – would not exactly have been the end of the world. I also had the feeling that if the vote had gone for independence, a deal may well have been struck with London for Scotland to carry on using the pound, despite the campaign claims from unionist politicians that it would not be allowed to. The currency question was a very big card for them and they had to play it that way in the campaign, but afterwards it really would have been a very different set of issues to deal with.
The debate in Scotland over the possible economic impacts of independence has certainly been interesting to follow and it raises a number of issues for the future that the business community in the whole of Britain will want to be aware of – particularly in the context of the UK’s membership of the EU. Firstly, the ‘family of nations with shared institutions, huge trading relationships and a powerful single market for the benefit of all’ argument used to promote the UK is a phrase that could also have a resonance in the evolving debate on the UK’s relationship with the EU. Where are the best interests served for the UK’s population? Is it in a reformed and better EU as some politicians suggest? If so, then the strategy to get that in place needs to be happening and clearly explained to voters (who will likely get a referendum on that in the next parliament). And there’s another issue here that is analogous to the devolution of powers and accountability from London to Edinburgh. How does democracy work in practice and what powers and responsibilities are right for Brussels and what should remain firmly with EU member states? There are no easy answers there and getting the agreement of 27 countries may be a bit more difficult than 4.
The run-up to the UK’s (likely) referendum on EU membership could be characterised by major uncertainties on the economic front. It may be another close call. It’s not difficult to imagine markets getting jittery if it is a close call. The EU is not a very popular institution in Britain. Some car companies have already been publicly saying that it would be best for the UK to remain in the EU. That’s not surprising. They are among the world’s biggest multi-national companies who trade in huge volumes across borders and like to do that as easily as possible, tariff-free and with common standards and so on. The economic effects of leaving the EU could be far ranging if it turned out to be an acrimonious break-up. Important trading relationships could be upset. An association agreement governing trade would have to be negotiated. The common external tariff (CET) on cars imported to the EU’s customs union area is 10%, a number that could strike fear into automotive big volume exporters from the UK to continental Europe. Add in exchange rate uncertainties and that’s potentially a rather bleak scenario for OEMs currently shipping vast quantities from UK to continental Europe. It could go further than that. A board member in a major European automotive OEM hinted to me in a private conversation that London’s status as a major international financial centre could be threatened in a future scenario if European investment banking business was directed, say, to Frankfurt.
For the UK, there are many more questions ahead on how democracy works, how our economy functions and how we govern ourselves. Today, we can see that there are still big questions surrounding how things like that work on this island of ours. Over the next few years, there will also be many more similar questions for our relationship – and shared interests, or not – with our European partners across the water. The debate needs to get going sooner rather than later. The stakes, once again, are high.
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