UK: Probability rising for a second referendum on Scottish independence - Natixis

René Defossez, Research Analyst at Natixis, suggests that there will probably be a second referendum on Scottish independence as Scotland’s First Minister Nicola Sturgeon wants a vote to be held between the autumn of 2018 and spring of the following year.

Key Quotes

“She said, announcing that she will ask the Scottish Parliament to request a Section 30 order. For Nicola Sturgeon this is needed to protect Scottish interests in the wake of the UK voting to leave the European Union (EU). The referendum on EU membership and the British exit change things altogether for Scotland, which voted overwhelmingly to “remain”. For the First Minister, leaving the EU will be negative for the Scottish economy.”

“It is unlikely that the British government, or more precisely Westminster, will oppose the holding of a second referendum. If it were, this would merely strengthen the position of the pro-independence movement. What the British government will want, however, is to delay the referendum until after Brexit, that is until March 2019 at the earliest. The reason is that they do not want a referendum on Scottish independence to interfere with the negotiation over the UK’s EU exit.”

“It is difficult to predict the outcome of this second referendum.”

“Opinion polls published since 23 June 2016 had generally given a lead to the “No” campaign. However, this lead has whittled away, the “Yes” campaign moving slightly into the lead in the latest poll to have been published. It is therefore difficult to predict the outcome of a second referendum. It is likely that the outcome will ride notably on the negotiations between the UK and EU over a trade agreement. If there is no deal or a “bad” deal, this is likely to play into the hands of the “Yes” campaign. A “good” deal (in which the UK preserves access to the single market) would probably be favourable to the “No” campaign.”

“The fact that the outcome of the Scottish independence referendum could ride on what type of trade agreement is reached with the EU means that the British government will have to take this into account during the negotiations, as failing to do so would increase the risk of Scotland leaving the UK. That is the reason why, paradoxically, the market reacted rather well to Nicola Sturgeon’s announcement.”

“Strictly in economic terms, it is difficult to see what Scotland would gain from being independent.”

“Of course, the economic impact of Scotland’s independence would depend on exactly what trade relations are negotiated between Scotland and the UK in its new configuration. If there is an agreement to create a free trade area with no customs tariffs and no borders, the economic impact will be much less. Otherwise, the impact could be significant.”

“Another problem for the “Yes” campaign is that Scotland’s economic situation has not improved since the first referendum: the fiscal deficit is running at around 10%, when it is “only” 4% for the UK. In Q3 3016, GDP growth reached only 0.7% year-on-year, which is in stark contrast with the rest of the UK.”

“Scotland’s independence is being fought for political and emotional reasons rather than economic reasons. However, the prospect of a second referendum is a thorn in the side of the British government, coming just as it is about to trigger Article 50.”