Too Much Scotch?

2007 marks the 300-year anniversary of the Treaty of Union between England and Scotland. Normally, something of such historical magnitude would be celebrated with pomp and circumstance. But in an ironic twist, this year could mark the break-up of the United Kingdom. At the very least, it is likely to cause a major headache for the region and represents a potential market risk.

What could cause such a momentous change? First, support for Scottish independence has grown steadily for decades, and opinion polls show more Scots favor independence than oppose it. In fact, a recent ICM poll (in the Sunday Telegraph) found an outright majority (52%) favored independence. It is clear Scots view themselves as fundamentally different from the rest of Britain.

But perhaps more important are elections for the devolved Scottish Parliament in May, two days after official celebrations. Based on present trends, it is likely the separatist Scottish National Party (SNP) will be the biggest party in parliament and dominate the executive branch. And the party's leader, Alex Salmond has promised to publish a bill setting a date for a referendum on Scottish independence within 100 days of taking office. Were Scotland to gain independence, Labour (the current ruling party of the UK) would be in trouble. Labour holds a parliamentary majority because of Scottish votes; it is but a minority party in England. In addition, a fair number of Labour's top talent—its Cabinet ministers, in particular—are Scots, including Tony Blair and the prime minister in waiting, Gordon Brown.

Even if secession does not occur, the situation is likely to pose political problems. The growing sense of nationalism may stir discord and misunderstanding among parties and hamper the country's ability to properly govern. Whether the push towards independence comes to fruition in 2007, a later date, or never at all is unknown. But it has the potential to remain a material risk to UK investments for some time.