UK fund manager Neil Woodford says the debate around the referendum on independence could trigger a “fragmentation of governance within the United Kingdom” even if the country votes to remain part of the union.
Woodford believes that the Devo Max powers on offer to Scotland if it votes to stay in the UK could actually be what the Scottish National Party “originally wanted” for their country without some of the other “headaches” involved with becoming wholly independent.
He says: “Devo Max should deliver all the powers and control over spending, taxation and social policies that the SNP originally wanted, but it removes the headaches around currency and the Scots retain the air cover provided by the Bank of England and its deposit guarantee scheme.”
By comparison Woodford argues that independence would have entail “significantly greater near and long-term economic uncertainty”, particularly for the Scottish economy.
However implementing Devo Max may not prove a totally smooth transition, according to Woodford, with “protracted and potentially acrimonious” negotiations required between Westminster and the Scottish Parliament that could last “well beyond the next General Election in May 2015.
Woodford goes further to argue that Devo Max could also trigger a more negative and permanent impact on the UK government and other UK constituents who may begin demand their own devolved powers.
“If there is a No vote, once the terms of Devo Max for Scotland are settled (unlikely until well into 2016), another rump UK (rUK) general election will probably be required because the previously elected government should no longer have a legitimate mandate,” he says.
Woodford continues: “I believe that it is now probable that we are about to witness the fragmentation of governance within the United Kingdom – effectively, the federalisation of the UK regardless of who wins on Thursday.”
These political events are also likely to carry “considerable economic ramifications” across the UK too, according to Woodford.
He adds: “Clearly, this is profoundly important from a social and political perspective but, as a fund manager, I am also concerned about the considerable economic ramifications.
“As far as the economy is concerned, this creates a new dynamic of complexity and uncertainty which is already reflected in a weaker pound. Inevitably, this uncertainty will have a dampening effect on consumer sentiment, business confidence and investment intentions. I believe the UK economy is already losing momentum, as I have been anticipating, and these latest political developments can only accelerate and prolong this slowdown.”
International investors could also become temporarily “reticent” about investing in the UK due to the increased likelihood of a referendum on EU membership, according to Woodford, something which may put additional pressure on the pound.
Although Woodford reassures that he is confident in his current portfolio when considering this potential shift in the political and economic backdrop of the UK, he adds that “it is prudent to start preparing our investors for a period of extraordinary economic and political uncertainty here in the UK.”