Scottish independence and the Quebec effect: Risks in Yes and No

While the Canadian province eventually voted No, the years of uncertainty caused banks to move elsewhere and damaged GDP. Mark McSherry ponders a similar fate for Scotland

The experience of Quebec shows that there may be risks to the Scottish economy whatever the result of Thursday’s referendum.

Many Scots have dismissed as scaremongering the threats by major companies such as Royal Bank of Scotland that they could move company registrations and some operations to England if the referendum returns a Yes majority.

However, if the Canadian province is any guide, even a narrow vote to remain part of the United Kingdom, leading to prolonged constitutional uncertainty in Edinburgh, could still be bad for business and jobs in Scotland.

The rise of Parti Quebecois, two referendum votes in 1980 and 1995, and uncertainty over Quebec’s future coincided with a fall in the province’s share of Canada’s gross domestic product to less than 20 per cent from about 25 per cent in 1971, and more than half a million Quebecers moving to other provinces, according to Bloomberg data.

Further, Montreal, Canada’s second-biggest city, saw its share of the top 500 Canadian companies fall from 96 in 1990 to 75 in 2011.

Sceptical Scots argue that, decades ago, companies including the pensions giant Standard Life threatened that they could move operations to England if Scots ever voted for devolution and a Scottish Parliament – but when those became a reality they didn’t move. They stayed and they thrived.

However, independence on the terms currently on offer from Alex Salmond would be a new ball game.

Prolonged uncertainty over which currency and which central bank an independent Scotland would use – and how quickly it could get back into the European Union – raise the stakes too high for many Scottish companies, according to some economists. “Until there is clarity over the currency arrangements and the banking system, Scotland is likely to suffer some degree of a credit crunch,” economists at the Swiss bank UBS said. “Scottish GDP would suffer a one-off contraction of somewhere between 4 per cent and 5 per cent as half of the banking sector moves to Britain before independence.”

Inward investment – so crucial to the Scottish economy – might also suffer from the uncertainty. David Folkerts-Landau, Deutsche Bank’s chief economist, said: “Foreign investors come to Scotland because they rely on a predictable investment environment. All of this comes from a united Great Britain.”

Concerned Scottish companies are citing possible implications for everything from borrowing costs and credit ratings to serious fiscal, monetary, legal and regulatory issues in the immediate aftermath of a Yes vote or a narrow No decision.

“Uncertainty over the currency arrangements Scotland would adopt and its extremely large financial sector would create a disequilibrium that financial markets would seek to balance through capital flows and distress,” Credit Suisse analysts said.

The potential for years or even decades of uncertainty is a massive burden that many businesses say they could do without. These companies say their responsibilities are to their stakeholders, shareholders and their customers – most of whom are in England, Scotland’s biggest market.

The sceptics also point out that not all business leaders are worried about independence – far from it.

Martin Gilbert, the chief executive of Aberdeen Asset Management, said Scotland would prosper whatever the outcome of the vote.

The former RBS chairman Sir George Mathewson said independence was “an opportunity, not a threat” for Scotland’s financial sector.

One thing is for sure: pro-independence politicians seriously underestimate the amount of extra work and costs they are causing for Scottish businesses big and small which have to prepare for all eventualities.

Read more: A nation divided against itself
Who gets Jim Naughtie and will pillar boxes be blue?
The Quebec effect: Risks in Yes and No
Faced with slew of warnings, City takes a step back

The hours and money Scottish employers have spent preparing for something that may or may not happen has driven many of them to distraction.

They say they simply can’t run the risk that they will have to go through this again.

The danger for former RBS oil economist Alex Salmond is that these major employers may well decide – as companies such as Royal Bank of Canada, Bank of Montreal and Sun Life did in Quebec – that enough is enough.

“Certainly the banks relocating from Scotland is a real possibility in a Quebecois scenario” where multiple referendums are held, UBS economist Paul Donovan told Bloomberg.

“If you look at Quebec, bank deposits never recovered – if people wanted a bank account they didn’t even consider opening one there, they’d open it over the border instead.”