It’s no surprise that Quebec Premier Pauline Marois would want to keep the Canadian dollar and influence monetary policy after independence.
Keeping the dollar has been official Parti Québécois policy since before the first sovereignty referendum in 1980. Eager to calm edgy nerves, former Quebec premier Jacques Parizeau made a similar claim in the lead-up to the 1995 referendum.
Ms. Marois and Mr. Parizeau are partly right.
There is no good reason why Quebeckers could not continue to use the dollar. Dozens of other countries don’t have their own currencies, choosing instead to use another country’s money.
The reality, however, is a whole lot more complicated and potentially very messy, particularly when the Canada and Quebec economies and financial systems are so intertwined. Sharing a currency means a shared – though perhaps not matching – interest in setting interest rates, divvying up government debts, thwarting bank failures, clearing payments and managing the money supply.
“Anybody and their dog can use the Canadian dollar if they want to,” said McGill University economist Christopher Ragan, a monetary policy specialist and former visiting scholar at the federal Finance Department. “But there is no reason to expect that an independent Quebec would have any influence over the Bank of Canada.”
Quebec, for example, might seek a seat on the Bank of Canada Governing Council – made up of Governor Stephen Poloz, senior deputy Tiff Macklem and four other deputies. But the legal power over monetary policy rests with the governor alone. So having a Quebec-appointed deputy would have little practical effect, beyond annoying Ontario, Alberta and other provinces, which have no special representation at the bank.
The Canadian government might well deny Quebec a role at the bank and access to the dollar – as the British government and Bank of England Governor Mark Carney have threatened to do if Scotland votes for independence in the upcoming referendum.
Without control over monetary policy, the early economic life of the Republic of Quebec could be very difficult, and financially painful – for taxpayers, savers and investors.
Canada without Quebec would become a much more pronounced petro-dollar economy. And monetary policy decisions would likely reflect that, forcing interest rates higher when the oil patch is booming.
Policy would be more centred on Alberta’s energy-dependent economy and less on Quebec’s more traditional economy, explained Sébastien Galy, senior currency strategist at Société Générale. “That is unlikely to favour Quebec,” Mr. Galy said.
The Bank of Canada’s job would also be more difficult if a large share of Canadian dollars were beyond its control. The bank would have to work much harder to tame inflation if economic conditions and policies differed in Quebec and Canada.
In the end, an independent Quebec might be better off abandoning the Canadian dollar in favour of its own currency, McGill University’s Prof. Ragan argued. “I think it would be a bad choice for Quebec to use the Canadian dollar. They would give up their monetary policy entirely,” he said.
Denied a say over monetary policy, Quebec could adopt a monetary policy board to peg its own currency to the Canadian dollar – as Hong Kong has done with the U.S. dollar for the past three decades.
The euro crisis underscores that countries need to do more than just share a currency. They also need to match fiscal policies, bank regulation and the like.
“The developments in Europe with the euro have reinforced my view that you have to have a high level of co-operation and co-ordination to make a monetary union work,” said Ottawa economist Patrick Grady, who wrote the 1995 book, Dividing the House, with former Globe and Mail reporter Alan Freeman. “It doesn’t happen automatically. It would have to be negotiated, and it’s a very fragile thing if one of the parties doesn’t want to abide by some of the conditions.”
In their book, Mr. Grady and Mr. Freeman said the greatest challenge would be sharing government debts. “No discussion over continued use of the Canadian dollar can be held in isolation from this, the biggest financial issue of all,” they wrote.