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Our World => Regions => Europe => Topic started by: jujyjuji on September 15, 2014, 15:26:11 PM

Title: If Scotland Goes, Bankers Fear Britain Could Exit European Union
Post by: jujyjuji on September 15, 2014, 15:26:11 PM
If Scotland Goes, Bankers Fear Britain Could Exit European Union

 By Jenny Anderson   
September 11, 2014 8:30 pm

Cup cakes showing, yes, no and undecided are displayed in Cuckoo's Bakery in Edinburgh, Scotland.Credit Matt Cardy/Getty Images

LONDON — Tremors over a possible breakup of the United Kingdom have been felt here in recent days, as markets gyrate and banks make contingency plans.

Yet as Scotland nears its vote on whether to be an independent nation, bankers here worry that a split might unintentionally set in motion a push for what could be a much uglier divorce: an exit of Britain from the European Union.

“There’s a sense of, ‘If it could happen in Scotland, it could happen in the U.K.,’ ” said Chris Cummings, chief executive of TheCityUK, a lobbying group for the financial sector.

If an independent Scotland would be complicated, a Britain alone in Europe would be a complete mess, financial executives say.

“Certainly the more important of the two is the potential of Britain leaving the E.U.,” said Brian Hilliard, the chief British economist at Société Générale in London.

Britain, for many businesses, particularly financial services, is a gateway to the rest of the 28-nation European Union, a market of 500 million people, more than the United States and Japan combined. For businesses like Citigroup or Goldman Sachs, having a London office means having a passport for nearly all of Europe. Without that unfettered access, the free flow of capital, talent and goods and services would have to be renegotiated.

“It is hard to be the gateway to the E.U. if you are not in the E.U.,” Mr. Cummings said.

A diminished gateway status would hurt the financial industry, which accounts for 7 percent of Britain’s gross domestic product and nearly 4 percent of jobs. Finance attracts more foreign direct investment than any other sector, and Britain attracts more foreign direct investment than any other member of the European Union, according to TheCityUK.

Bankers worry that without the promise of all of Europe behind it, London — rivaled only by New York as the world’s leading financial center — would not attract the same interest, and neither would Britain.

“This is the worst possible time for Britain to consider leaving the E.U. or for Scotland to break with the U.K.,” wrote George Soros, the billionaire financier, in The Financial Times on Thursday.

The calculus behind how Scottish independence could drive an exit by Britain from the European Union — known as Brexit — is political.

Prime Minister David Cameron, responding to calls from the right, including members of his own party, to get out of the European Union has agreed to hold a referendum in 2017 on Britain’s membership in the union.

Voters in Scotland have been more supportive of the European Union than those in the rest of Britain, meaning an independent Scotland removes a significant bloc of pro-Europe votes in a referendum.

“The absence of the Scottish voters in the referendum in 2017 would clearly shift the balance against Europe,” said Graham Bishop, a consultant on European integration based in London.

Complicating matters is the composition of the Labour Party. Forty-one of the 59 Scottish members of Parliament are Labour, and if they leave upon independence, the balance of power tilts toward the Conservative Party.

There will be political cost to the Conservatives in the event of a “Yes” vote, however. Mr. Cameron, who offered Scots a referendum on independence, would lose, at the very least, much of his authority as head of a party technically called the Conservative and Unionist Party. He could even lose his job, and any successor might seek to placate fury in the party’s ranks by encouraging skepticism over the European Union.

Nigel Farage, the head of the U.K. Independence Party, or UKIP, has made the strongest case for leaving the European Union. He contends that Britain has sacrificed its independence to European bureaucrats who have let in a flood of immigrants and stolen the reins of power. Beyond UKIP, there is a sense that Britain has lost its sway.

“It’s the loss of sovereignty, which is embedded deep in the British psyche,” Mr. Bishop said. “It is the loss of empire and influence that is still nagging.”

Britons also see a Continent that is plagued by deflation and stagnation while their economy has staged a fiery comeback from the financial crisis.

Still, for those in business and finance, the effects of a British exit from the European Union would overshadow those of losing Scotland.

“Brexit, in my view would be a far bigger issue for the E.U. and for this country than the already large issue of Scottish independence,” said Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute.

So much of Britain’s legislative and regulatory systems are now bound by European Union law, he noted.

“You have to unpick that and you have to unpick financial service issues like regulation, which are already quite challenging.”

“Business planning will be very complicated,” he added.

Business leaders and bankers, of course, don’t like uncertainty and tend to complain when events threaten profits.

Still, Mr. Hilliard of Société Générale says he believes there is a 20 percent chance that Britain will leave the European Union. If so, he predicts a triple whammy: Foreign direct investment into Britain from the rest of Europe will fall 5 billion pounds (about $8 billion) a year, while economic growth will decline 0.5 percent as net exports tumble 5 percent over 10 years.

Perhaps in an effort to stunt any momentum toward Brexit, the incoming president of the European Commission on Wednesday named Jonathan Hill, a former lobbyist and member of the House of Lords, to oversee financial services for the commission.

Under the Lisbon Treaty, any member country can exit the European Union. Britain could depart whenever it wanted, but if it did so without a negotiated agreement, it would still be subject to the terms of other European treaties for two years after the date of announcing its intention to leave.

Though many see Brexit as calamitous, few would argue that Scottish independence would in any way be trouble-free.

Credit Suisse has predicted that Scotland would enter a “deep recession.” Deutsche Bank said an independent Scotland could “easily derail the U.K. economic recovery.” Uncertainty and instability would prevail as a currency would have to be established and everything from Britain’s nuclear weapons to its debt would have to be negotiated.

While Alex Salmond, the First Minister of Scotland, has said a currency union was viable, Mark Carney, governor of the Bank of England, said that it was out of the question. “A currency union is incompatible with sovereignty,” he said.

Soon after Mr. Carney’s comments, the Royal Bank of Scotland and Lloyds Bank, both of which were bailed out by British taxpayers during the financial crisis, said they would move their domicile to London in the event of a yes vote for independence. The move, while technical, would let the Bank of England remain a lender of last resort and allow for certain deposit protections.

Scotland has an unusually large financial sector. A government analysis in 2013 estimated that bank assets as a percentage of the economy would be an astounding 1,250 percent in an independent Scotland, compared with 500 percent for all of Britain and about 100 percent in the United States.

Steep as the figures may seem, some London bankers are watching Scottish independence with a bit of equanimity.

“Small countries and big countries can survive just fine,” said one banker who cannot speak publicly about the issue. “And golfing in Scotland will be a lot cheaper.”

A version of this article appears in print on 09/12/2014, on page B1 of the NewYork edition with the headline: If Scotland Goes, Then Britain Too?.