What Is Scotland's Post-Brexit Future?

How would an independent Scotland fare economically as a small country in a globalized world? No matter where Scotland is by the end of the 2020s, transitions are expensive for companies, as Brexit has shown. They add costs and create uncertainty, making long-term decisions difficult. Now is the moment for CEOs to review the risks and opportunities of investment in Scotland, starting with this examination of the political and economic complexities of the situation and its possible evolutions.

Insights for What’s Ahead

• Business leaders should prepare for the serious possibility of an independent Scotland by 2030. CEOs should start regarding Scotland as a separate geography now. Companies need to assess their exposure on how markets and suppliers would be affected in case of a new border between Scotland and the rest of the UK. Another related scenario to consider is what opportunities could be created in the event Scotland rejoined the EU or accessed the Single Market. A major question mark is what currency independent Scotland would adopt: keep circulating the pound, adopt the euro or create a new currency. Future use of the pound is the most likely option right now, but other options are still quite likely.
• The path to an independent Scotland will be complex and lengthy. A political stand-off between the government of the United Kingdom in London and the Edinburgh-based Scottish Parliament, run by Scottish National Party in coalition with the Greens is likely in the short term. Anticipate two to three years of dispute about whether a referendum can be held, and under what terms. If a referendum is agreed, expect a fractious campaign with an uncertain outcome. If no referendum is agreed, expect other changes to the current relationship between Scotland and the rest of the United Kingdom.
• The most likely scenario is that Scotland will still be part of the United Kingdom in 2030, but an independent Scotland remains a strong possibility. Our assessment based on current analysis is that a new referendum would end up in similar proportions as the one in 2014: 55 percent of Scots opted to stay in the UK, and 45 percent voted for independence. Different scenarios generate different economic impacts. At the macroeconomic level, the Divided United Kingdom scenario is the most advantageous for Scotland and for the UK in the medium term as it would bring the benefits of trade liberalization with the EU without the shock of trade disruption resulting from secession from the UK.
• Don’t base your assessments on rational expectations. This was a common mistake made prior to the Brexit referendum in 2016, when most observers underestimated the chances of Brexiters winning. The lesson from Brexit is that choices may be guided by emotions more than estimates of gains and losses. Campaigns that lead to a vote would surely create a vivid but also noisy debate in which finding trusted sources of information will be difficult.
• CEOs planning major capital investments in Scotland should factor in political risk but take in to account a difference between trade in services and in goods. Under any scenario, future trade agreements for the exchange of goods are easier to make than agreements for the exchange of services. However, it should also be noted that investment to expand financial services can generate major returns in case Scotland joins the EU.
• The capacity to attract talent will be different in each scenario. Brexit has exacerbated labor shortages in the UK. Currently the UK has a million job vacancies throughout the country, with businesses struggling to fill open positions. EU membership would grant Scottish firms easier access to a pool of talent from 27 countries. If Scotland were to stay in the UK, it could argue for more autonomy on immigration policies.
• Financial firms and universities would flourish if Scotland joined the EU. In the Scoxit from the UK and Scot-In the EU scenario, ease of doing business with the EU might increase opportunities in this much larger market. Scottish financial firms and universities could fill the gap left by the London financial and education sectors. At the micro level, any transition creates opportunities. For example, were Scotland to become independent, a Scottish defense sector could develop. However, the time scale for this scenario is longer than most corporate planning horizons.