With polls tight on Scottish independence, rest of UK worries about risks of breakaway

BERWICK-UPON-TWEED, England – All Gavin Jones has to do is scan the shelves of his impossibly quaint shop on England’s border with Scotland to know he’ll have a big problem if the Scots declare independence next week.

There are teddy bears in Campbell clan tartans and shelves of shortbread from Scotland — just above the red jams made in England. After independence, the Scottish goods could be subject to import duties, and customers might start paying in two different currencies. Business in Berwick-upon-Tweed, England’s northernmost town, could soon be crushed by bank transaction costs.

“If Scotland chooses independence, it changes our concept of local,” he said. “There are then barriers put in place.”

Berwickers like to think of themselves as neither English nor Scottish. Little wonder: this enclave has changed hands 13 times over the centuries. But there is no getting away from the fact that the locals in Berwick (pronounced BEAR-ick) could be dramatically affected by the Sept. 18 referendum.

In that way, they are like the rest of Britain. While the vote may alter the balance of power in British politics, increase the likelihood that the U.K. will leave the European Union and weaken the nation’s economy and currency, the people of England, Wales and Northern Ireland will have no say in the outcome. Only residents of Scotland are eligible to cast ballots.

constitutional CHAOS:

Britain’s left-leaning Labour Party would be the biggest political victim of independence — it is often joked there are more pandas in Edinburgh’s zoo than there are Conservative Party lawmakers in Scotland. Scottish voters elected 41 Labour members of Parliament in the 2010 election and only one Conservative. There are two pandas in the zoo.

If the next general election due in May were held today, eliminating Scottish votes would give Prime Minister David Cameron’s Conservatives a 37-seat majority win.

That could drag Britain toward yet another high-stakes vote — on whether the country as a whole should leave the EU. Cameron has promised a referendum to appease voters concerned about immigration and meddling by bureaucrats in Brussels. Scotland has been very pro-EU, so losing its votes would weaken the camp that wants Britain to stay.

Leaving the EU could have huge consequences for Britain. The EU guarantees freedom of movement for people, goods and money, a big advantage for companies that want to do business across the bloc, which with its 500 million people is the world’s largest combined economy. If Britain were to leave the bloc, multinational companies that have their EU headquarters in London — from Starbucks to many of the world’s biggest banks — may seek to relocate, taking money and jobs with them.

“These are very crucial times for the U.K.,” said Patrick Dunleavy, a professor of political science at the London School of Economics. “The U.K. has been united for 300 years and it’s been in the European Union since 1973. These two referenda, plus the general election all coming very close together, one way or another, we’re going to have five years of constitutional chaos.”

FINANCIAL UNKNOWNS:

More immediately, the loss of Scotland could hurt Britain through the amount of financial uncertainty it would generate over the next 18 months — the time it would take Scotland to sever its ties with Britain. During that period, policymakers would have to agree on whether Scotland would continue to use the pound as its currency as well as how to split British public debt and North Sea oil revenue.

“It would be a fairly long 18 months,” said Monique Ebell, an economist at the National Institute of Economic and Social Research.

Scotland accounts for almost 8 per cent of Britain’s gross value added, a measure of economic value created in a year, according to official figures. It also has 84 per cent of British North Sea oil reserves in its waters.

An independent Scotland would take with it some 7 billion pounds ($11.6 billion) a year in revenue from the oil. That would roughly balance out with transfer payments it gets from the central British government. For Britain, however, it would mean a drop in the amount of energy supplies it could rely on.

The currency question is the murkiest. While independence leaders say they will continue to use the pound, politicians in London have ruled out a currency union.

Because the result of the 18-month separation talks would affect the value of the pound, foreign investors in Britain could delay big decisions — opening a factory, for example, or hiring new staff — until a time when they can better gauge the risks and costs.

Investment bank Goldman Sachs last week warned that while there was no reason an independent Scotland couldn’t prosper in the long-run, “in the short-to-medium-term, the consequences of a surprise ‘Yes’ vote for the Scottish economy, and for the U.K. more broadly, could be severely negative.”

Kevin Daly, Goldman Sachs’ chief U.K. economist, said uncertainty about the pound’s future value could even trigger a run on the currency. The Bank of England is working on contingency plans to manage the pound in the event of a Yes vote.

The potential for trouble was made clear this week, when the pound nosedived after a poll showed the No campaign had lost its lead. The pound shed two cents to trade at $1.6100, the lowest since November.

“Clearly the market will be watching for the polls,” said Bill O’Neill, the head of the U.K. investment office at UBS Wealth Management.

The people of Berwick, meanwhile, are increasingly concerned. What would happen if there were suddenly a border between them and their Scottish neighbours? What happens if you need a passport to get across the few miles separating the town and Scotland?

In his shop, surrounded by items inspired as much by “Braveheart” as English icons like London phone booths, Gavin Jones can’t help but worry.

“It adds complexity and cost, for no additional revenue” Jones said of separation. “We’re Berwickers. We’re neither English, nor Scottish.”

That is true for now at least.