What happens after a Yes vote will shock the Scots

However amicably a divorce begins, that is rarely how it ends. Talks will be bitter and prolonged

The Union Jack flag and the flag of St Andrew's Cross

The nightmare could begin on Friday. Imagine a narrow vote in favour of independence. Down south, Conservative prime minister David Cameron will be held responsible for allowing the fracturing of a union on which national stability has rested for 307 years. But his party has a better future in England than in the UK. The opposition Labour party, which holds 40 constituencies in Scotland, has no such consolation. Scottish nationalism will also surely awake its English counterpart. That will, alas, be good for Nigel Farage, leader of the UK Independence party, which wants to take Britain out of the EU and is gaining ground in England. This divorcing couple will remain neighbours. The English, at least, are sure to be sullen ones.

From the moment of a Yes vote, the UK government will have next to no interest in the welfare of the Scots. But, until Scotland has become independent, the UK government will represent it in international negotiations. At the same time, it will be negotiating on behalf of the rest of the UK’s interests, against Scotland. Divorces are always difficult. But rarely is the abandoned party asked to represent the interests of the departing.

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MARTIN WOLF

A Yes vote will launch Scotland, and to a lesser extent the UK, into years of uncertainty. Among the biggest doubts are those hanging over the currency. Financial businesses that must be regulated and supported by the UK will flee. Scottish deposit insurance would be as worthless as the Reykjavik-run scheme that failed to cover Icelandic banks in 2008. Cautious Scots must already recognise that the pounds in their bank accounts may end up as something else. Far safer to move the money south.

Confronted with currency uncertainty, banks will need to balance their books within Scotland. This will surely force them to shrink the supply of credit to the Scottish economy. The UK government could try to prevent money from leaving Scotland, but this would require draconian controls, which it will not impose. Either Westminster or the Scottish government could offer to indemnify lenders against currency risks. The UK government will not do that. It will let the credit squeeze happen, blaming it on the Scottish decision. It will be Scotland’s choice, if it can meet the cost.

Scotland can promise that the pound will remain the currency of Scotland. It cannot promise a currency union, however. That takes two parties. Even if the government of the remaining UK is prepared to countenance such a union, there should be a referendum. The only satisfactory termsfor the residual UK will be ones that impose very tight limits on the fiscal deficits Scotland can run. It must also insist that financial regulation will be run by the Bank of England, which would nonetheless remain accountable to the UK state alone.

Scotland can adopt the pound without a currency union, and so without the back-up of the Bank of England. But this, too, is highly problematic. Scotland would need to build a reserve of sterling that can serve as its monetary base – by attracting capital inflows or exporting more than it sells abroad for many years. And it would need more than that. If the eurozone crisis has taught us anything, it is that countries without central banks cannot, in a crisis, stabilise the markets for their public debt. Scotland’s share of UK public debt would amount to more than 90 per cent of its gross domestic product – a perilous position for a country whose debt is denominated in a currency it cannot create freely. Ireland, Portugal and Spain all had far lower public debt ratios before the crisis. Scotland will need a substantial reserve cushion . Accumulating it will be costly.

Alex Salmond, Scotland’s first minister and head of the Yes campaign, will say that if the rest of the UK will not grant Scotland a currency union, Scotland will not take on its share of the UK debt. Not so fast: the negotiations launched by that Yes vote will cover everything. The oil, for example, is not Scottish until the UK agrees. If Scotland repudiates its share of the debt, who says it will get “its” oil?

All this ignores the little fact that Scotland wants to be in the EU. If it does enter (which Spain will surely seek to prevent lest it encourage Catalonian separatists), it might be forced to join the exchange rate mechanism from the beginning. It would then need its own currency and central bank. It could not persist with sterling. Any such shift away from sterling raises big questions. In what currency will existing assets and liabilities be denominated? How will any redenomination occur? What will happen to the currency denomination of the pensions and all other state payments due to Scots?

These negotiations will be complex, bitter and prolonged. However amicably a divorce begins, that is rarely how it ends. It is the safest possible bet that when this process is over, the English will resent the people who repudiated them and the Scots will resent the people who did not give them independence on the terms to which they believed they were entitled. A United Kingdom will give way to a deeply divided island.

The Scots will discover the taste of austerity. Scotland cannot sustain higher taxes than the residual UK; that would drive economic activity away. It will pay a higher interest rate on public debt because its government will be unfamiliar and dependent on unstable oil revenues (almost certainly smaller than Mr Salmond imagines). Fiscal fibs will be exposed.

By then it will be too late. If the vote is a Yes, it will be forever. But what about a narrow No? That too will be a nightmare. We could then look forward to more referendums. I would have preferred a clean break to that. If Scotland cannot decide firmly in favour of union, let it choose “independence”. And then, enjoy!

martin.wolf@ft.com