An independent Quebec might benefit from its own currency: report
An independent Quebec might be better off with its own currency rather than following Parti Québécois Leader Pauline Marois’s suggestion that it keep the Canadian dollar, a report says.
A Quebec currency and separate monetary policy could bring “potential benefits” in the long term to Quebec, Paul Ashworth and David Madani of Capital Economics said in a research report.
“The basic problem Quebec faces is that it is a manufacturing-orientated province tied to the resource-rich provinces in the west. The energy boom has boosted the economic performance of those western provinces, saddling Quebec’s manufacturers with a high exchange rate and higher than needed interest rates.”
A Quebec currency would pre- sumably depreciate against the Canadian and U.S. dollars, particularly if interest rates were lower than the rest of Canada. The resulting boost to Quebec competitiveness should trigger a rise in exports and a reduction in imports, the report said.
But a referendum on separation would have negative consequences — including on investments in Quebec and higher yields on Quebec provincial debt — while a new Quebec currency would bring additional challenges, the economists noted.
“If the Quebec currency depreciated in value against the Canadian dollar, then it would make it harder for the new government to repay any debt still denominated in Canadian dollars. The same goes for Quebec households and businesses that had borrowed Canadian dollars.”
Separation would bring the loss of equalization payments — $9.3 bil- lion this year, equivalent to about 2.5 per cent of Quebec GDP — while contending with higher debt servicing costs.
“The bigger problem is the legacy of provincial debt, equivalent to 49 per cent of Quebec GDP. Assuming that an independent Quebec assumed responsibility for a per capita share of federal debt, too, we estimate that its overall debt burden would rise to 89 per cent of GDP. Under those circumstances, Quebec might find its borrowing costs rising, which would only add to the budget deficit and, in conjunction with the loss of equalization payments, force the new government into a sizable fiscal consolidation.
“The risk of default would also be greater if an independent Quebec allowed the Bank of Canada to control monetary policy, since it couldn’t resort to printing more currency.”
On the campaign trail last week, Marois said an independent Quebec would accept the loonie, along with Canadian monetary policy, and consider asking for a seat at the Bank of Canada.
Her comments sparked discus- sion over the economic costs of sovereignty even though polls show support for independence running well below 50 per cent.
Capital Economics, known for its bearish views of the Canadian housing market, weighed in on Wednesday.
“Politicians who are striving for independence, whether it is in Scotland or Quebec, know that talk of adopting a new currency makes the electorate very nervous, so they have a tendency to argue that the new sovereign state would be able to keep its existing monetary arrangements,” the economists wrote.
In any event, Quebec should be looking to adopt a looser monetary policy than the rest of Canada, the report’s authors said.
“The evidence is overwhelming that interest rates should be set lower in Quebec, to provide more support to the depressed economy.”