A disunited kingdom: The promise and perils of Scottish independence

Share

It is already turning into the ugliest custody hearing in history. As in every acrimonious divorce, all is up for grabs: the house, the money, the debts and the nuclear-armed submarines.

Yet the split-up might not happen at all, and would be at least two years away. When Scotland's separatist premier Alex Salmond announced last month that he would be holding a referendum in 2014 to ask Scots if they want independence from the United Kingdom, everyone expected a battle over the wording of the referendum, its legality and Scotland's right to hold it.

Few, except some jaded Canadians, expected the beginning of a two-year battle over how, in the hypothetical event of a secession, to divide up all the stuff north of Hadrian's Wall. They should have known that nations, and their assets, do not split neatly along dotted lines.

It turned even uglier last Thursday, when British Prime Minister David Cameron went to Edinburgh to offer Scots more powers and rights in exchange for a referendum that falls short of separation. He was bluntly rebuffed by Mr. Salmond.

Of course, there's the possibility that the very ugliness of the custody dispute will embitter Scottish voters. That's exactly what Mr. Salmond wants: He has warned several times that London, by playing hardball, is driving voters into his party's hands.

The Queen

At the heart of Mr. Salmond's bid for a "Yes" vote is his claim that Scots will be able to keep most of their favourite British institutions: the pound, the BBC, and the Queen. Mr. Salmond insists that the Queen would remain the head of state in an independent Scotland.

This would be possible, but not certain. Her Majesty has not commented on her role in a separate Caledonia, and likely won't. There has not been an instance of a Commonwealth nation splitting up and keeping the Queen (Pakistan held onto the monarchy briefly after Partition).

More controversial is Mr. Salmond's insistence that Scots won't really be leaving the United Kingdom, but will stay in a "monarchical union" with England and Wales. He has said the referendum ballot should ask Scots if they want a vague "independence" and not, as Mr. Cameron prefers, to ask them if they want to leave the UK.

It's unlikely that Westminster will allow that to go unchallenged: By making it clear that a Yes vote will signal a total split, Mr. Cameron will be more likely to win a No. Mr. Salmond's logic has been mocked in Westminster: Lord Foulkes, a Labour member of the House of Lords, told the BBC that keeping "the Queen, the pound, the Scots Guards and EastEnders" is a "funny idea of independence."

The Pound

Until very recently, Mr. Salmond's Scottish National Party was ardently in favour of abandoning the British currency and becoming the 18th country to join the euro zone, should the referendum succeed. For obvious reasons, given the euro-zone crisis, the party's view has suddenly changed.

Now Mr. Salmond tells voters that Scotland will "keep sterling until such time as the people of Scotland have said otherwise." Specifically, he wants a "currency union" with the Bank of England.

But that may not be quite so simple. George Osborne, Britain's Chancellor of the Exchequer, strongly hinted last week that Britain will not allow Scotland to remain a formal part of the currency. When asked if he'd allow Edinburgh to keep the pound, he made threatening noises. "All these issues are going to be fleshed out now and flushed out," he said, adding, "The SNP is going to have to explain what its plans are for the currency of Scotland."

Indeed, the National Institute of Economic and Social Research notes in a report that it is "doubtful" that the Bank of England would want to become a formal part of an independent Scotland by extending lender-of-last-resort facilities to Scottish institutions. The Scottish economy, the report notes, will face a high risk of default because of its debt, its political instability and its singular reliance on petroleum.

Mr. Salmond, in response, says Scotland will keep using the pound anyway. As a freely tradeable currency, its circulation can't be controlled by London. "Sterling is not owned by George Osborne," he said in a TV interview. "Our position is, let's use sterling until we're able to take a decision on the euro."

This, however, means that a "free" Scotland would have a currency whose value would be based on a very different foreign economy. This could hamper Edinburgh's ability to gain an export advantage and to borrow on the bond market at reasonable rates.

The Oil

Mr. Salmond's core case for an independent Scotland has always been the North Sea oil fields: "It's Scotland's Oil" has long been a slogan of his Scottish National Party.

Indeed, it is fairly clear that a sovereign Scotland would have access to the 80 per cent of British oil and gas that are within its territory – although severing the contracts with international oil companies could involving tricky and time-consuming negotiations.

This would hurt London. An estimate by Oil and Gas UK estimates that petroleum boosted Britain's trade balance by £32-billion, cutting its trade deficit in half. And Britain could lose as much as £54-billion in tax revenues over six years.

But Scotland would be very dependent on this single resource. It generates about £22-billion from other exports, £3.3-billion of them from whisky alone.

And the oil will not last forever. Mr. Salmond claims he'll be able to set up a Norwegian-style oil fund to save for the future – he'd put aside 10 per cent of revenues (Norway saves more than 90 per cent). But that dream may be dissolved by the caustic reality of Scotland's debt.

The Debt

Scotland would certainly have to take on its share of Britain's substantial national debt. Given that Scotland has a tenth of Britain's population, and a similar share of the economy, it might be expected to take £140-billion of debt in 2014.

That would burden the new Scotland, whose government expenditures, at current levels, would still cost more than the revenues it would receive from North Sea oil and from taxation.

One Scottish report concludes: "With a pro rata transfer of existing U.K. public debt, Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK. … Even with a favourable settlement on future oil revenues, its fiscal balances are likely to be volatile with large deficits in some years as a result of its dependence on oil revenues."

But it could be worse. What if Scotland is made to assume the toxic assets from Britain's rescue of the Royal Bank of Scotland, which total £187-billion? It was Mr. Salmond, London officials like to remind everyone, who urged RBS chief Sir Fred Goodwin to make the deals that led to his downfall, and who promised lax regulation. That debt could give Scotland a very rough beginning.

The Weapons

Scotland is home to several of Britain's most famous army regiments, to major Air Force and Special Forces bases, and most famously to Britain's nuclear arsenal, Trident, which is housed aboard submarines in Faslane.

Mr. Salmond says he'll hold onto a rump "Scottish Defence Force" consisting of one naval base, one air force base and one infantry brigade. Even that is mocked by the British forces, who say their force is far too integrated to split apart so simply, and that Scotland could never afford their sophisticated weaponry.

But more controversial is Mr. Salmond's long-standing policy of ridding Scotland of nuclear weapons, which have long divided voters. Closing the Faslane submarine base is easier said than done: It is a huge facility, employing 11,000 people.

Even conservative British military estimates say it would take upwards of 10 years and cost tens of billions to relocate the submarines. And that may not even be possible at all. When the British Navy began the Trident program in the 1960s, they concluded that no other British port was capable of hosting the huge submarines and their dangerous arsenal.

Some British military leaders are now quietly hinting that, in the event of separation, they may end up keeping the subs in Scotland, and paying the newly independent country rent. That would not be a comfortable outcome for either English or Scottish voters, though the Scots could use the money. It would not be the first divorce to end in an awkward, loveless cohabitation.