The referendum polling stations are closed. By now, some three
million Scots will have had their say on whether Scotland should be
an independent country. There will be no exit polls and the votes
will be counted by hand. But sometime between midnight and 2 a.m.
Eastern Daylight Time, we should have a result.
The outcome is genuinely too close to call. The latest poll,
published this morning by The Times of London, has the
“Better Together” campaign up by four points, 52–48 percent, with
four percent still undecided. But that, like most opinion polls in
recent days, is well within the margin for error. An upset is still
very possible.
But why would Scotland vote for independence, when 307 years of
union with England has served them—and the United Kingdom as a
whole—so well? What are the practical implications of a “Yes” vote?
And which side should libertarians be on? These questions bear some
examination, so read on if you want to know more.
Why would Scotland vote for independence?
First and foremost, it is worth remembering that Scotland
existed as a (mostly) independent country for more than 800 years
before its union with the Kingdom of England in 1707. And while the
English often use “English” and “British” interchangeably, there
has always existed a separate, distinctly Scottish sense of
national and cultural identity. As long as Britannia ruled the
waves, this identity was subsumed into a larger imperial project:
“wider still and wider, shall thy bounds be set.” But as Empire
crumbled and Continental threats faded, so too did that sense of
shared national purpose. Scottishness reasserted itself.
Natural resources played a role. Scottish nationalists claim
that the vast majority of the oil and gas in the North Sea
rightfully belongs to Scotland; “It’s Scotland’s Oil,” as the
campaign slogan goes. And, indeed, were the United Nations
Convention on the Law of the Sea’s “median line” approach to
dividing territorial waters adopted, around 80
percent of the U.K.’s hydrocarbon production would fall under
Scottish jurisdiction. Wind turbines may be all the rage nowadays,
but black gold still has a powerful allure.
A third factor is political estrangement: Scotland has, for many
years, been drifting away from the rest of the U.K. The decline of
heavy industry hit Scotland hard, and Margaret Thatcher’s
Conservative government took most of the blame. Today,
Conservatives hold more than half of England’s parliamentary seats,
and the U.K. as a whole has a Conservative-led government. But
Scotland sends just one Conservative (from a total of 59
constituencies) to Westminster. The establishment of a Scottish
Parliament, responsible for most domestic policies and around 60
percent of public spending north of the border, has only hastened
this political detachment.
But perhaps the biggest factor driving the campaign for
independence is something that isn’t unique to Scotland—or even the
UK—at all. And that is deep distrust of a political elite that is
seen as venal, distant, and uninterested in the concerns of
ordinary people. Scottish nationalism is benefitting from the same
political forces boosting UKIP in England, the far-right in France,
the far-left in Greece, and the tea party in the United States.
Alex Salmond, Scotland’s nationalist first minister, has managed
to frame this referendum as one in which the people are facing up
against the political machine. The three Westminster
parties—Labour, Liberal Democrat, and Conservative—haven’t helped
matters by running a cynical, lackluster campaign in which
continued Union has seemed about as inspirational as a high-school
economics textbook. The nationalists are selling freedom, protest,
and self-determination; the unionists have fear and funding
formulas on their side.
What are the implications if Scotland does vote for
independence?
Most commentary on the prospects for an independent Scotland
have focused on the economic adjustment that Scotland will have to
make if it decides to go it alone. Given that it would start life
with one of the highest levels of gross domestic product (GDP) per
capita in the world, few doubt that Scotland could eventually
thrive on its own. But there is equally little doubt that the
transition would be a difficult one.
An independent Scotland’s first challenge would be fiscal.
The country’s 2012-13 budget deficit would have been 8.3 percent of
GDP, compared with 7.3 percent of GDP for the UK as a whole. And
while British budget deficits are on a downward trajectory, and
would be lower by the time Scotland officially became independent,
there would still be an awkward fiscal hole to fill.
What’s more, that 8.3 percent deficit figure depends on Scotland
receiving significant North Sea oil and gas revenues. If such
revenues are excluded, the deficit balloons to 14 percent of GDP.
This matters, because the North Sea hydrocarbon industry has been
in
decline for some time, and such buoyant revenues may not last
for long. When you consider that Alex Salmond has promised to use
at least some of those revenues to create a sovereign wealth fund,
and also accept that Scotland faces a more rapidly aging population
(and correspondingly faster-rising welfare burdens) than the rest
of the U.K., it is clear that things could get worse, fiscally
speaking, before they get better.
Then there’s the issue of debt. Britain’s National Institute of
Economic and Social Research has
suggested that Scotland’s share of the U.K. national debt would
amount to around 81 percent of GDP. That is bad, but by no means
unmanageable. But the issue is compounded in Scotland by
uncertainties about what currency the country will use after
independence.
The “Yes” campaign says Scotland will get a currency union with
the rest of the U.K. And while all three Westminster parties, along
with the Bank of England, have ruled that out during the referendum
campaign, it remains a practical possibility. Given that any
currency union would have to come with a fiscal pact placing strict
constraints on Scotland’s ability to run a budget deficit, and a
banking union ensuring that Scotland’s banks were closely
supervised by the U.K.’s financial regulators in return for
liquidity support from the Bank of England, it is unlikely that
Scotland’s borrowing costs would rise significantly in such a
scenario. The downside is that it may take the imposition of
unpopular austerity policies to keep an independent Scotland within
the boundaries of a fiscal pact with the U.K. Left-leaning “Yes”
voters who have been promised independence from a more conservative
England might be in for a nasty surprise.
And that assumes an independent Scotland would get the currency
union it desires. But let’s imagine the three Westminster parties
are true to their word, and Scotland is forced to adopt some other
currency arrangement. The events of the last few years have made
the euro a non-starter, and an independent Scotland wouldn’t
immediately be part of the European Union anyway. As a result, the
“Yes” campaign has said that, first, they would refuse to take any
share of the UK’s public debt if denied a currency union; and
second, they would continue to use the pound sterling unilaterally,
just as Panama, El Salvador, and Ecuador use the US dollar.
There are a couple of problems with this. For starters, refusing
to accept a share of the U.K.’s public debt could be viewed as an
effective default by the bond markets. That would mean an
independent Scotland would be forced to borrow money at very high
rates, or not at all. And whether that was the case or not,
Scotland would still be forced to accumulate significant foreign
exchange reserves to make “sterlingization” viable. Either of these
prospects would require an independent Scotland to make deep and
rapid cuts to public spending, so that they ran a budget surplus,
rather than a deficit. Once again, this is not the future that
independence supporters are voting for.
One more problem: under the “sterlingization” scenario—the
unilateral use of pound sterling as currency—Scotland wouldn’t have
a central bank to provide lender-of-last-resort facilities to its
banks, or to print money in the event that these banks needed to be
bailed out. This is hardly idle speculation: Scotland’s two biggest
banks—the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland
(HBOS)—almost collapsed in 2008; saving them required a £65bn
bailout by the U.K. government. And that’s just the tip of the
iceberg: if you add in central bank liquidity support, government
guarantees for wholesale borrowing, and promises to protect
deposits, the government’s total exposure ran to the hundreds of
billions. The financial crisis would have sunk an independent
Scotland—especially one with no control over its currency.
This point may be moot, of course, since Scotland’s biggest
banks would probably relocate their headquarters to London at the
earliest opportunity if Scotland became independent and currency
union with the U.K. did not come to pass. But this raises yet
another unsavory possibility: bank deposits might follow the big
banks south of the border, as people try to escape the financial
uncertainty that independence could bring; this would force what
remained of the banking sector in Scotland to rapidly shrink its
balance sheet—that is, to scale back loans to businesses and
households—sparking a severe credit crunch that would surely plunge
Scotland into a painful recession. This doomsday scenario is by no
means beyond the realm of possibility.
Do libertarians have anything to say on Scottish
independence?
So far, this analysis has painted a pretty grim picture. And yet
libertarians might read it and wonder whether a wealthy,
independent country, which was forced to run a balanced budget,
which couldn’t print money, and which couldn’t bail out its banks,
would really be such a bad thing. In the long run, this may be
quite astute: most of the economic arguments against Scottish
independence stem from the fact that they impose hard constraints
on the size and scope of government, and from the libertarian
perspective, that is no bad thing.
Indeed, independence may be the best thing that could possibly
happen for the free market cause in Scotland. As things stand, any
tax cuts, spending reductions, or market-oriented reforms to public
services are seen as irredeemably foreign—something those dastardly
Tories in England might force on Scotland, but never something the
country would choose for itself. The existing, devolved Scottish
administration spends money, but doesn’t have responsibility for
raising it. Every incentive it has points in the direction of more
government, and those incentives matter.
Independence would change this dramatically: Scotland would be
forced to restructure its public sector, not just to reduce costs
in the short term, but also to deal with the prospect of an aging
population. It would have to adopt the most business-friendly
policies available to it, both to encourage enterprise at home, and
to bring in investment from overseas. And it would have to put in
place measures to ensure the stability and sustainability of its
financial sector, eliminating moral hazard in the process.
Sterlingization could even end up being a boon to an independent
Scotland. As my former colleagues at the Adam Smith Institute have
pointed
out, it could usher in a new era of competitive free banking,
one in which the market—and not the central bank—spontaneously
adjusts the supply of money to ensure macroeconomic stability. This
is the stuff libertarian policy seminars are made of.
The effects of such a political turnaround would be felt beyond
Scotland. Their most immediate impact would be on the rest of the
U.K., which would be forced to up its game, but the lessons learned
in an independent Scotland could end up traveling far and wide. The
country that gave us David Hume and Adam Smith could once again be
a beacon of liberty, a case study in free minds and free markets.
Is that the most likely scenario? Perhaps not—and let there be no
doubt, if Scotland votes for independence tonight, there might be a
very rocky road ahead. But maybe, just maybe, it’s worth the
risk.