Parti Quebecois leader Pauline Marois recently suggested that an independent Quebec would keep the Canadian dollar, and would try to keep a seat on the Bank of Canada.
It was seen as a move designed to quell fears that Quebec could experience economic upheaval in the wake of separation.
But a new report from Capital Economics suggests keeping the loonie, rather than ditching it, could be the move that leads to economic crisis in Quebec.
Economists Paul Ashworth and David Madani suggest that the fledgling country could find itself in a similar mess to Greece or other “peripheral” European nations struggling through a debt crisis.
What Marois is suggesting is essentially a copy of Europe’s monetary union, the euro, Ashworth and Madani argue, and in this scenario Canada would play the role of the wealthy, stable part of the union while Quebec would play the role of the poorer part of the union that has struggled to balance its books.
Ashworth and Madani write:
It would make little sense for Quebec to seek to replicate the monetary arrangements in the euro-zone. While the euro-zone has a single currency and a common monetary policy, those arrangements have backfired spectacularly for many of the smaller peripheral nations, which were plunged into economic and financial chaos.
A one-size-fits-all monetary policy and a common currency is always doomed to fail without offsetting fiscal transfers. The framework is fundamentally flawed. Monetary union must be supported by a fiscal union.
In other words, if Quebec wants to avoid economic crisis caused by keeping the loonie, it will have to hand over control of its national budget to Canada. And that is almost certainly a non-starter for a newly independent PQ government.
And Quebec would be starting out with an already-high debt burden. Assuming Quebec takes a per-capita share of Canada’s national debt, the country would start off with a debt load of 89 per cent of GDP. That’s relatively high, but well short of Greece’s peak of 170 per cent of GDP. (Of course, it only took Greece's debt about seven years to soar from under 100 per cent to its crisis peak.)
“An independent monetary authority and currency might offer Quebec the best opportunity to improve its long-term economic performance,” the report from Capital Economics states.
And Quebec’s “depressed” economy would benefit from (even) lower interest rates than the rest of Canada enjoys, the report argues.
In the midst of the global financial crisis, Greece — and to a lesser extent Spain, Portugal and Italy — found themselves in a debt spiral that many economists blamed on the European monetary union.
Unlike countries that control their own currency, the Eurozone’s poorer nations could not simply print more money to cover expenses during the recession, Ashworth and Madani (and many others) argue. That lack of ability to set their own monetary policy made investors wary of the countries, forcing borrowing costs up.
With borrowing costs rising, the countries found themselves in a debt spiral, threatening national governments with default. Although bailouts funded by German money have reduced the risk of default, the Eurozone’s peripheral countries continue to struggle with astronomical unemployment.
The Capital Economics report notes there are risks to Quebec minting its own currency as well. For one thing, investors expect a Quebec currency to decline in value relative to the U.S. and Canadian dollars. While this would help Quebec's global competitiveness, it could cause people who have assets in Quebec to take their wealth out of the jurisdiction ahead of the switchover, dragging down the economy.
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