Scottish Independence Creates New Uncertainties for Business—Report Examines Implications of Three Potential Scenarios

BRUSSELS, October 25, 2021...The current relationship between Scotland and the rest of the United Kingdom is unlikely to persist, according to a new report from The Conference Board – What Is Scotland’s Post-Brexit Future? It concludes that Brexit has sparked new fervor for Scottish independence—Scoxit—which adds to business uncertainty for the decade ahead. 

“Business leaders should prepare for the serious possibility of an independent Scotland by 2030,” said Ilaria Maselli, Senior Economist at The Conference Board. “CEOs should start regarding Scotland as a separate geography now. Companies will need to assess their exposure on how markets and suppliers would be affected in case of the advent of a new border between Scotland and the rest of the UK.”

The report evaluates three possible scenarios, all of which present formidable political and business challenges. Our current assessment (October 2021) is that the likely outcome of a future referendum would be similar to the last, with a majority supporting remaining in the United Kingdom, but this could change quickly.

The Divided United Kingdom: The referendum fails, but devolution advances

• This scenario envisions a further devolution of powers from London to Edinburgh after voters reject full independence. In this case, the Scottish government could decide to adopt a similar rule to what applies to Northern Ireland since 2021: Join the European Single Market without being part of the EU.
• At the macroeconomic level, this scenario is the most advantageous for Scotland and for the UK in the medium-term. It would bring the benefits of trade liberalization with the EU while eliminating the shock of trade disruption from UK secession. However, this scenario requires a delicate balance to avoid the border controversies that have proven so problematic for post-Brexit Northern Ireland. Government procedures should be clarified in advance, as last-minute fixes put the burden of implementation on businesses.
• The path to this scenario is somewhat safer from the economic standpoint than Scott-In, but dense in political tensions. For instance, it would reinstate a Hadrian’s Wall between Scotland and England, something that is currently causing tensions in the case of Northern Ireland and the UK and would likely be an untenable situation.

Scoxit/Scott-IN: Pro-independence camp wins referendum and leaves the UK to join the EU

• In this scenario, Scotland leaves the UK and becomes the 28th member of the European Union., greatly expanding Scotland’s ability to trade with the single market.
• Financial and insurance activities, as well as the education sector, would have a chance to flourish, filling the gap left from London with Brexit. Manufacturing exports could also strengthen with further integration into EU value chains, although exports to the rest of the world would remain largely unchanged. At the same time, trade with the rest of the UK—the majority of Scottish exports—would suffer a major shock.
• The path for this scenario is narrow as many institutional actors have a say in this decision: the UK government, Scottish citizens, 27 European heads of state.

Status Quo Skirmish: Scotland remains part of the United Kingdom

• A rejection of independence that maintains the status quo would have the benefit of avoiding additional shocks to economies still adjusting to Brexit. Total exports from the UK to the EU have already suffered enormously in the first half of 2021.
• With businesses on all sides of the Channel and Irish Sea still adjusting to Britain’s exit, another shock would create new uncertainty and require an even bigger kickstart to the economy.
• One lesson from Brexit shows that when it comes to a decision about leaving or remaining, the Scottish people may be guided by political considerations rather than estimates of output losses or gains for the economy. The political campaign which may lead to such a vote will create an intense and loud debate making it difficult to find sources of trusted information.

“CEOs planning major capital investments in Scotland should factor in political risk,” said Maselli. “The key challenge is for businesses with five-to-ten-year investment horizons, which need to prepare for very different futures. The status quo is the likely outcome for the short term but is unlikely to last.”

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