Buttonwood’s notebook | Scottish referendum

Friday morning quarterbacking

The consequences may be longer-lasting than the markets think

By Buttonwood

SO the markets and the gamblers were right. Despite the closeness of the opinion polls and the anecodotal evidence of vast enthusiasm for the Yes campaign, Scotland voted No by a margin of 10 percentage points.

As a result, the market reaction has been restrained. Sterling jumped briefly and has since fallen back. The FTSE 100 is up a modest 0.8%. On the plus side, a potential period of uncertainty and disruption has been avoided; on the downside (for Footsie, if not for sterling), the way is now clear for the Bank of England to start increasing interest rates.

Things are hardly settled, however. That 45% of Scots want to leave the UK (with polls suggesting that such voters were in the majority amongst those aged under 54) suggests the level of voter dissatisfaction; resentment towards the English and the Westminster parliament runs high. And the Friday morning quarterbacking has begun, some of which may case a significant amount of trouble. Post hoc ergo propter hoc reasoning is in full flood.

Argument 1. It is all Cameron's fault for not putting more devolution as a third question on the paper. We can't possibly know whether this is true. Had devo max, as it is known, been on the paper, it might have won. Then critics would have argued that Cameron was a fool for including it, when it was obvious that Scots would have easily rejected outright independence. A devo max option would have involved a lot of negotiations, either pre- or post-poll, during which Alex Salmond could have run rings around the British parties, claiming they were arrogantly ignoring the will of the Scots.

Argument 2. The Westminster parties were spooked by a single poll into offering more devolution at the last minute. The No campaign would clearly have won anyway. Again, we can't know. Maybe Gordon Brown's eloquence won it, maybe it was the "shy Noes" who balked at the financial implications of independence. One can just as easily argue that Salmond made the crucial mistake by insisting on sticking with the pound; the financial constraints this would have placed on a future Scottish government were not compatible with the spending and tax promises the nationalists had made, as I argued earlier this week.

Looking forward, it is important to remember that there may be two highly significant polls ahead - the May 2015 general election and the possible referendum on EU exit in 2017. The outcome of both is highly uncertain, especially now that the Scottish result has sparked a drive for a new constitutional settlement within the UK. This may involve new powers for Wales and the English regions and cities; it may also involve restricting the rights of Scottish MPs to vote on English affairs. All solutions could be messy; one could end up, for example, with Labour having a UK majority and forming the government but unable to command a majority on English issues. Or one could end up with competing English and UK parliaments. As for regionalisation, voters show very little enthusiasm for an extra tier of government.

Mr Cameron faces negotiations not just with Alex Salmond and the SNP, but a Labour party battling to hold on to its Scottish heartland, and his own Tea party faction, who dislike him personally and feel under threat from the populist challenge of UKIP.

Several scenarios could result.

1. A failure to deliver sufficient reform in Scotland will cause voters to flock to the SNP in the general election next year, making it impossible for Labour to win a majority. The Conservatives squeak home, meaning the EU referendum takes place, creating two more years of uncertainty.

2. The same as option 1, except that the failure to grant Scotland extra powers is the result of a backbench Tory revolt. A weakened Cameron resigns and Labour wins the poll. No EU referendum but higher taxes and a more dirigiste policy from Ed Miliband upsets business and the markets.*

3. An English backlash against the extra powers granted to Scotland could cause a surge in votes for UKIP, denying the Conservatives a majority. Another hung Parliament (and more uncertainty) results. Another election may be required.

The key point to remember is that it is not just the Scots who are divided. The latest poll-of-polls shows the Conservatives on 33%, Labour on 35% and UKIP on 13%. Britain may have moved into an era in which overall majorities are much harder to create.

* UPDATE: The resignation this afternoon of Alex Salmond and SNP leader and First Minister only adds to the potential for confusion. Mr Salmond indicated his fears that David Cameron was backtracking on his devoliution pleges and Ed Miliband has thrown his own spanner in the works, with the suggestion for a constitutional convention (a move that would damage the swift timetable promised Scottish voters). Chaos ahead.

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