THE BLOG
09/08/2014 04:43 pm ET Updated Nov 08, 2014

If Scotland Leaves the UK

ANDY BUCHANAN via Getty Images

On September 18, 2014, Scotland nears a landmark referendum on whether to secede from the United Kingdom (UK). The vote on independence, which requires a majority to pass, will determine the shape of the country's political environment for years to come.

The Scottish National Party (SNP) envisions an independent Scotland where a more robust social welfare system lies at the heart of its domestic political system; the economy would increasingly turn to the energy sector to anchor future prosperity; and foreign policy would more closely match that of the country's Scandinavian neighbors. Scotland could become one of Europe's wealthiest countries, with an economy based on a highly educated population, large North Sea oil reserves, and the development of a renewable energy-exporting industry.

Critics contend that an independent Scotland would face irrevocable financial, economic and security risks. It would face legal and financial challenges when redefining political and economic relationships with the UK, the European Union (EU) and NATO. Neighbors, especially Russia, could also challenge it economically and militarily. Fundamental issues such as currency, trade relations, economic unions and collective security would have to be hammered out during the two-year time span between the referendum and independence.

Considering these risks and opportunities, Wikistrat evaluated four scenarios for charting Scotland's emergence as an independent country by the year 2020 -- if it gains independence within the next five years. The following scenarios, presented from worst to best case, shows that Scottish independence offers only modest rewards and many risks, including the risk that its situation could deteriorate so badly that it would be forced to seek reunification with the UK.

Lost in the Weeds: Scottish voters took a great leap of faith when they voted for independence from the UK. None of the major issues affecting a sovereign state -- how to pay its bills, how to defend itself and who to make friends with -- were worked out in advance. Scotland did not expect that following the 2008-2009 financial crisis, there would be little support to allow countries to join NATO and the EU on favorable terms. Britain followed through on its threat to prevent Scotland from using the pound as its currency. While negotiations for currency union and membership with the EU dragged on, Scotland limped along on its own weak currency and no trade agreements. To the international community, Scotland looked more like Kosovo than Denmark. By 2020, nullification had wide support in Scottish society.

A Weak Link: Despite the UK, EU and NATO welcoming an independent Scotland as a new member of the international community, Scotland's economy did not take off as the SNP had predicted. A lag in establishing government institutions caused GDP to drop below expectations and business investors sought opportunity elsewhere. Imposing border controls and taxation between Scotland and the UK proved costly, as did EU membership, which needed Scottish wealth to provide financial transfers to peripheral member states. Tax revenues declined as falling global energy prices, coupled with diminished investment caused by an uncertain investment climate, produced lower energy-based tax revenues than the SNP had anticipated. Foreign control of Scotland's money supply put a chokehold on Scottish economic development, as its fiscal policy remained beholden to British or European austere monetary policies.

Golfing Alone: Although the economic transition after independence went surprisingly smoothly, Scotland faced security challenges on multiple fronts. For instance, Iceland poached its territorial fishing waters, while a newly confrontational Russia probed the North Atlantic for weaknesses. Scotland's offshore drilling platforms no longer seemed secure. Scotland's new security institutions also struggled to protect its citizens from terrorist attacks. The country learned that Britain and Europe were willing to let it bear the costs and suffer the consequences of independence to extract a reasonable price for reentry into NATO. Left without strong alliances and unable to gain a free ride with NATO protection, Scotland was faced with paying dearly for NATO membership and contributing to military engagements abroad, both an anathema to the SNP.

Hole-in-One: Despite holes in the SNP platform, most of what the SNP predicted came true. Separated from the UK, Scotland became one of Europe's richest countries with one of the most robust, dynamic economies. Unshackled from parliamentary interference, Scotland engineered new institutions that proved responsive to Scottish needs. Popular support helped the SNP enact its economic agenda. Edinburgh now rivals London as a financial, energy and tourism hub, attracting economic immigrants who learn at Scotland's premier higher education institutions and stay to help Scotland develop its new industries. Scotland's smooth transition to independence and rapid economic success eased the way for its entry into the EU and NATO on favorable terms. In light of Russia's hostility to Europe, NATO kept Scotland safe to avoid providing Russia with an opportunity to exploit European defense solidarity. As the SNP promised, Scotland became the new Denmark, a small prosperous nation with a robust economy and a generous social welfare state.

For many, an independent Scotland is a life long dream, but independence rests on certain debatable assumptions. Can Scotland use the British pound as its currency? Will Scotland be accepted into the EU rapidly and under favorable terms? Can Scotland benefit from NATO protection with a minimal military contribution while maintaining a non-nuclear policy? Can Scotland build a government and economy quickly and efficiently enough without scaring off investors and workers? If the answer to any of these questions is no, an independent Scotland will face serious challenges.

Even if all goes well, Scotland faces a future where its monetary policy is controlled by London or Frankfurt, both of which are likely to pursue austere monetary policies that impede Scottish growth. Also, much of Scotland's economy depends on protecting its maritime interests, especially its offshore energy extraction and fishing industries. Protecting its Exclusive Economic Zone will be costly, unless worsening ties with Russia cause Europe and NATO to embrace Scotland at any cost. All things considered, the Scottish independence vote is fraught with high risks and only modest rewards.