The British existential crisis that spooked investors and corporations is over, but that does not mean Scotland will quickly emerge as an investment hot spot.
The failure of Scottish nationalists to secure a Yes vote in Thursday's independence referendum triggered a market relief rally, halted the threat of Scottish banks bolting to England and ended fears that a standalone Scotland would be cast out of the European Union.
At the same time, Scotland was promised new taxation and spending powers with the potential to reshape its entire investment climate. Until foreign and domestic corporations find out whether the newly devolved Scotland is to become a high-tax region such as Scandinavia, a low-tax region such as Ireland, or somewhere in the middle, corporate investors will be wary.
The unionists won the No vote by a margin of 55 per cent to 45 per cent, a compelling turnaround from the early September polls that either put the two sides neck and neck or the Yes side marginally ahead. But there was a consolation prize for the vanquished. Afraid of a Yes vote ahead of the referendum, the three main Westminster parties, eight months ahead of a national election, pledged to give Scotland more fiscal and political power if it voted to stay put.
Scotland has had its own parliament, known as Holyrood, since 1999; the new powers will give it considerably more sway over taxation, welfare spending and perhaps even allow it to raise its own debt. The negotiations will be fraught and potentially divisive, since England, Wales and Northern Ireland are bound to demand similar treatment. But the broad outcome is all but certain: Scotland will enjoy vast control over its economic destiny in the same way that Canada's provinces, through their own tax rates, R&D spending, employment rules and the like can shape their attractiveness, or lack thereof, for investment.
Investors have already registered their approval for the Scottish No vote. Currency traders drove the pound to a two-year high against the euro, British sovereign bonds rose and the FTSE 100 index climbed, driven by the banks, such as Royal Bank of Scotland, which no longer face losing the pound and the backing of the Bank of England.
While no corporation, British or international, announced after the referendum that it would plunge into Scotland, it was broadly known that investment was being held back before the vote. Research from Ernst & Young showed that inward investment projects into the United Kingdom rose by 15 per cent in 2013, overtaking Germany, Europe's largest economy. But inward investment into Scotland rose by only 8 per cent last year.
The slower pace could in part be blamed on the referendum vote, even if no company went public with any plans to halt or slow investment in Scotland for fear that it would leave the U.K. and possibly the EU. (Struggling with its own independence movement in Catalonia, Spain said it would resist an independent Scotland's application to join the EU).
Before the referendum, the chief executive officer of one of the North Sea's biggest oil companies, who did not want to be identified, told The Globe and Mail that he was holding back new exploration and development spending until he knew whether Scotland would remain in the U.K. The chairman of another oil company, which is based in Scotland, said it would move its headquarters to England if Scotland voted to leave the union.
In a note released Friday, ING Financial Market said the No victory would probably unleash some pent-up investment spending, noting "the reasonably conclusive No vote signals a rapid return to some sort of normality, with the potential for some pick-up business investment in the coming months as postponed investments are implemented. It could all have been so different."
The question now is the level of tax to be imposed by the quasi-independent Scotland. It seems likely, though far from certain, that Scotland would be more tempted to drop corporate tax rates, as Ireland did, instead of personal tax rates.
Diverging corporate tax rates could create healthy, or perhaps destructive, battles for U.K. jobs, depending on the tax-rate differentials.
Scotland and the Westminster parties want a new deal on devolved powers soon, to remove the investment and political uncertainty. The timetable would see the draft devolution law – the new Scotland Act – published in early 2015.
An internecine battle among the U.K. regions cannot be ruled out. Alex Salmond, the leader of the Scottish National Party, on Sunday said that Westminster was already reneging on its commitment to bless Scotland with new powers; he said Scottish voters had been "tricked" into voting No to independence. But Prime Minister David Cameron was equally quick to say that the government would make good on its pledge.
Britain is the healthiest economy in the 28-country EU, with a growth rate of 3 per cent and a plunging unemployment rate. It is the EU's leading destination for inward investment and removing any uncertainty about the fiscal agreement between Scotland and the rest of the U.K. could preserve or break Britain's high-flying status.
Eric Reguly