“Well, I have a message for the Scots: Be afraid, be very afraid. The risks of going it alone are huge. You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.” - Paul Krugman

This week Scotland goes to the polls. Recent opinion polls indicate it is very close — maybe too close to call. A “Yes” vote would create considerable economic and political uncertainties for the UK. This drama played out in my country of origin, Canada, many years ago. In this case Quebec was hoping to split from Canada which was narrowly averted. The outcome, however, resulted in a shuttering of the Quebec economy where many large corporations relocated head offices to Toronto — even the Bank of Montreal left for Toronto. So what may the effect be on the markets if Scotland voted “Yes”?

— A “Yes” vote could potential pose headwinds to UK equities — especially financials. Markets despise uncertainty — more so in some cases than negative certainty. The uncertainty increases perceived risks built on the confusion that would follow on how it will all work out. RBS has assets in excess of 400% of Scotland’s annual GDP while banks with major operations in Scotland have assets more than 1000% of Scotland’s annual GDP. Scotland’s neighbour to the West found out during the financial crisis that the situation can be devastating when the banking system runs into problems. RBS has already suggested that independence “could significantly impact the Group’s costs and would have material adverse effect in the Group’s business, financial condition, results of operations and prospects”. It is likely that Scottish banks would move to London and their shares could be negatively impacted.

— “Yes” would likely lead to a weak pound. This in itself would actually be somewhat supportive of UK equities which would benefit from a currency as about 75 percent of total sales/revenues/profits are from overseas. Companies with large overseas earnings would see beneficial translation effects, especially if they are exposed to countries or areas of significant growth. At the same time, dollar based investors would be negatively impacted by the translation losses. For Scotland, without any underlying banking and/or fiscal union, sharing a common currency with a large, dominant neighbour is very dangerous. An independent Scotland wouldn’t have its own currency, thus it wouldn’t be able to bail out its banks if necessary and its government could run out of money (at least until it did have a new currency). If Scotland ultimately adopts an independent currency, then the banking industry and those having assets denominated in a new currency would be subject to the risk of devaluation relative to sterling. Obviously Scottish companies would be subject to huge uncertainties as around two thirds of Scotland’s exports go to the UK.

— Certain industries will elect to move their operations from Scotland. For example, UK defence companies that are major employers in Scotland would likely be forced to move their facilities south for national security reasons.

— “Yes” would likely be bad for economic growth. Uncertainties over the details of the separation would likely place many firms in a holding pattern. They are unlikely to make major investment decisions within the UK or Scotland until they truly understand what will happen. Scotland would become the UK’s biggest trading partner — it’s roughly four percent of GDP. A weaker pound would also tend to be inflationary for the UK. It is hard to see what economic benefit Scotland would gain as they are a net consumer of taxes.

— A “Yes” vote will also have far reaching implications within Europe. It is likely to embolden the separatist movements in Catalunia (Spain) and Belgium, creating even larger uncertainty for Europe. Furthermore, Scotland is a large Labour bulwark, and its exit could shift the UK to the right politically. This would heighten the risk that the UK votes to leave the EU.

Independence and separation movements are often born on legitimate social and emotional constructs. Unfortunately, they are often impractical, if not outright dangerous, in economic terms. Independence is not an easy question. There is often much more than pride at stake — in fact there may even be the viability of a nation.

Nathan Kowalski is the chief financial officer of Anchor Investment Management and the views expressed are his own.