Albert Edwards, the Societe Generale strategist best known for his resolute pessimism, has warned that the rest of the U.K. would face a “calamitous sterling crisis” if Scotland votes for independence.
Edwards says that a break-up would significantly worsen the UK’s already dire current account deficit, which could blow out to nearly 8.5% of GDP. This, he envisages, would put heavy downwards pressure on sterling as investors rush to pull capital out of the country.
Below are his charts showing the current account deficit and what it looks like if you exclude North Sea oil, which the pro-independence campaign is hoping to gain a significant share of:
Never knowingly understated, Edwards goes for the jugular suggesting that Scottish independence would almost inevitably lead to Britain leaving the European Union (emphasis his):
The vulnerability of sterling in a rUk world is made much worse as investors come to grips with the increasing prospect that the rUK will be leaving the EU. Capital will not be moving from north of the Scottish border to the south. It will be moving out of the UK altogether. And, with the rUK needing to attract capital at an unprecedented avaricious rate for this point in the cycle, this ain’t going to be pretty.
More sanguine commentators might point out that the SocGen strategist is making a lot of assumptions about investor behaviour that are open to question. With the prospects for the eurozone still looking bumpy and the U.K. currently experiencing the fastest growth rate in the G7, it seems something of a stretch to imagine sentiment evaporating so quickly — especially if you believe that the rather modest falls in sterling reflect the market’s view on its likelihood.
In a note on Monday Bank of America Merrill Lynch strategist Nick Bate thinks the hit to U.K. GDP from a Yes vote would be somewhat less apocalyptic (emphasis mine):
Uncertainty around a range of Scottish issues – perhaps most notable the currency – could prompt some caution from a range of consumers, businesses and financial market participants, thus dampening demand in the UK. But overall, if the 2012 Euro area crisis hit UK GDP by around 1ppt, we think there are reasons for Scottish Independence to have more moderate impacts than that: perhaps closer to 0.25-0.50pps, notwithstanding the significant uncertainties around any such estimates.
Even if there are minor, the idea raises the problem that people in England, Wales, and Northern Ireland who will not be given a vote on Thursday could nevertheless suffer an economic impact from the referendum. With the leaders of all three major parties in Westminster currently promising to devolve more powers to Scotland in the event of a No vote without having sought the approval of the British public, it seems the political landscape of Britain will be changed no matter which way the vote goes.
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