Why has the Referendum debate been misunderstood?

What will the Scottish Referendum leave in its wake? A re-energised or a divided Scotland? And will the threat of divorce leave the UK scarred? Many outside observers have misunderstood the debate, triggering misplaced advice. The divisions are deep, and unlikely to be resolved in a single vote.

A yes vote may not just hit the Pound, but could strike at the root of Westminster’s authority, making it hard to hold a UK election until a settlement is reached. Little thought seems to have been put into the potential for a constitutional crisis, with Parliament as presently constituted impossibly conflicted.

Investment analysts typically find it hard to factor politics into decisions. The perception of risk could quickly swing from being underestimated to overwhelming. The shock to the UK economy could cut growth for a period, although in an era of competitive devaluations, a lower pound might be welcomed.

In Scotland, the referendum’s binary choice is forcing a polarisation of views that were once much closer. It may be that most do not fancy either outcome much. The divisions will not be quickly healed. And each side has gathered unlikely coalitions that will not outlast the vote. For each, a short term goal has temporarily bound contrasting views on personal liberty, the role of the state and the boundaries between the public and private sectors. It defies conventional political analysis.

It is unhealthy for a single issue to become so all-consuming, seen as a panacea for a myriad of perceived ills. In psychological terms, independence represents a form of magical thinking. Without understanding the precise mechanism, this single change represents a cure-all for widely conflicting aspirations ranging from growth to redistribution.

Unrest has been driven by the slow growth and internal devaluations of the past five years: a feature of nations across Europe, as far apart as Greece and Russia. In many nations there is a growing perception of a democratic deficit, with money printing helping financial assets rather than wage growth.

The wish list is complex, but it is not as much about identity or wealth as those outside Scotland imagine. Nor is the debate helped much by fear – a self-confident nation tends not to retreat under attack. These misunderstandings are the root of much of the international surprise at the polls, and the belief that a mix of facts and threat will make the Scots jump the right way. Misunderstandings abound.

Those in Scotland who think that the downside is limited – “Could we really be any worse off!” – may simply not have travelled round the periphery of Europe recently. The debate is a mainly clash of beliefs – much less of facts, or even of emotion.

Most of the financial sector has made little preparation for change, preferring to wait till after the vote. In a politicised atmosphere, little is gained by public comment. Businesses, universities, and all dependent on public funding or licence have typically sat on the sidelines. These rules of engagement make it hard for those outside to gauge the balance of opinion.

After the vote, either way, there will be statements to reassure clients. But investors’ attention will move on quickly to the UK’s relations with the EU, and whether Eurozone banks will lend after the EBA stress tests. After a No vote, international media attention would quickly move on; Scotland will fade from view after its brief period on the world stage.

What will actually happen on the 18th? Analysts tend to view the bookmakers as having more skin in the game than pollsters, politicians or pundits. It may be cynical, but bookies’ odds are what matter in the City, at least until proved wrong. Betting favours No, so the Pound, shares and business behaviour currently mainly assume an unchanged United Kingdom. If the exit polls confound the odds, that will be when we see just how investors react to fear of the unknown.

A version of this article was published on the Financial News website on 17 September 2014

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