Fragmented U.K. Induces Long-run GBP Pessimism

The U.K. is currently encountering several political and economic troubles besides the pandemic. In terms of politics, Brexit and Scottish independence are waiting for its solution; while in terms of economics, the largest recession in 300 years is raging on it. As troubles never come singly, another negative news shocked the U.K. on July 16, which was Welsh parliament debated a motion on independence for the first time in its history.

According to the report, the debate in the Senedd has been called by nationalist party Plaid Cymru, which sought the right for the Senedd to legislate for an independence referendum. In many opinion polls, Wales has dealt better with Covid-19 compared with the U.K. government. Thus, the people of Wales are increasingly unsatisfied with the government, pushing the calls for independence stronger and stronger.

The latest survey found a record high of 25% backing for independence—well short of the 54% reported in Scotland but 4% up since January. Judged by this trend, support for Welsh independence is up to 30% in the next year. The main reasons are U.K. economic downturn and the stimulus of Brexit.

Similar to Scotland, Wales was originally an independent kingdom. It culminated in the invasion by King Edward I of England in 1282 and became a part of the United Kingdom. Today, 738 years later after the integration, the power of the British Empire is declining, encouraging Wales to secede from the U.K. following Scotland and Northern Ireland. Despite the Welsh independence movement lags far behind the Scottish version in terms of the severity, the consequences could be disastrous once a binding referendum is held because polls show over half of Welsh voters now support secession.

Optimists argue that the referendum on Scottish independence won‘t be approved by Johnson. In Cameron’s term, however, the referendum was accepted amid public pressure, which is greater than all in Western democracies. In this regard, Scotland is possible to hold a second referendum, thus I will never take it lightly. According to Scottish Daily Record published on July 13, the support for Scottish independence has surged during the Covid-19 crisis. Some members of the Scottish Parliament (MSPs) who are dissatisfied with Sturgeon, leader of the Scottish National Party, called for the establishment of a new party as soon as possible, so as to accelerate the independence referendum. As the transition period after Brexit comes to an end this year, it is expected that support for Scottish independence may grow to 60-70% in 2021. At that time, huge public pressure may urge the U.K. government to approve a second referendum .

Scotland itself still insists that it can hold the referendum ahead to the Scottish Parliament elections in May 2021. According to the report of Scottish Daily Record, the Scottish National Party, which advocates the secession, continues to grasp an absolute advantage in the elections. It is expected to win seats at a record-breaking number next year. Since the U.K. is fragmented now, I firmly believe that GBP will be punished in the long term. However, there may be an exceptional case. If strong U.S. stock markets weaken USD, GBP is possible to climb. On this account, investors can take the opportunity to sell pounds at a high price.