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Franklin Templeton Thoughts: Amid Brexit Stalemate, Could a New Scottish Referendum Be on the Cards?

Issues still remain unresolved between the United Kingdom and the European Union, with continued posturing on both sides. David Zahn, Franklin Templeton’s Head of European Fixed Income, weighs in on the latest developments, and ponders whether we could see some disharmony within the United Kingdom—potentially leading to another Scottish referendum. 

The United Kingdom’s self-imposed October 15 Brexit deal deadline has passed, and with no trade agreement between the European Union (EU) and the United Kingdom, World Trade Organization rules would seemingly come into play. Despite some tough rhetoric on both sides over the past couple of weeks, the negotiations aren’t dead yet. Getting an agreed-upon deal is dependent on a lot of nuances—fishing rights in UK waters remain a big sticking point—but the EU seems to be softening its stance a bit.

Now there is a new deadline of mid-November for a deal, but we would not be surprised to see it pushed out further into year-end. We think the odds that a deal will be reached are currently around 50-50, and it could even be midnight on 31 December until we know the answer. We’ve seen sterling rally and gilt yields rise in reaction to the news that a deal might be forthcoming, but there are still a lot of sticking points to get through. And lest we forget, once the deal is agreed, it has to make its way through 27 European parliaments and the UK parliament to obtain approval.

At the moment, the United Kingdom seems to be showing signs of willingness to walk away with no deal. We think that would have real ramifications for the financial markets; UK gilts would likely rally and sterling would likely sell off. And conversely, if a deal is agreed and everybody thinks it’s a reasonable deal, we will likely see the reverse dynamic.

The COVID-19 Divide

COVID-19 has brought an interesting dynamic into play within the United Kingdom itself—a fractionalisation amongst the devolved nations. England, Wales, Scotland and Northern Ireland are following different rules or protocols in regard to the virus and lockdowns; there isn’t a unified response or agreement.  The size of this split may be finalised depending on which COVID-19 protocols seems to be the most successful.

The idea of the United Kingdom as a homogeneous group seems to be weakening, which could be an issue going forward. We would not be shocked to see another Scottish referendum on independence from the United Kingdom in the coming years, and it seems like the stage is being set with the Scottish National Party increasing their rhetoric in favour of a new referendum. We will be following developments closely, but the COVID-19 response may embed itself into politics well after it is no longer top priority.

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