An independent Quebec might actually be better off with its own currency rather than using the Canadian dollar, a new report says.
Quebec's basic problem is that it is a manufacturing-centred province locked in step with the resource-rich provinces in the West, Capital Economics' Canada economist David Madani said in a research report Wednesday.
"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," he said.
"The upshot of that is evident in Quebec's above-average unemployment rate and below-average economic growth."
Quebec adopting its own currency would presumably result in the currency being depreciated against both the Canadian and the U.S. dollars, especially if interest rates were set lower than in the rest of Canada, he said.
The resulting competitive boost should support a rise in exports and a reduction in imports, Mr. Madani said.
However, he added that there is a risk of capital flight and of depreciation making existing debts harder to repay.
Quebec Parti Québécois Leader Pauline Marois has said during the current election campaign that a separate Quebec would continue using the loonie and even possibly hold a seat on the governing council of the Bank of Canada.
That scenario has its pitfalls, Mr. Madani said.
Sovereignty would result in the province forgoing the benefits of equalization payments while seeing its debt-servicing costs increase, particularly if Quebec assumes its share of the federal debt.
There is no guarantee the rest of Canada would agree to such a proposal and it would make no sense for Quebec to try and replicate the euro zone with a "one-size-fits-all monetary policy and a common currency" without offsetting fiscal transfers, Mr. Madani said.
With an estimated overall debt burden of 89 per cent of gross domestic product, Quebec might see a rise in its borrowing costs, adding to the budget deficit.
"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," Mr. Madani said.
A locally set, looser monetary policy would work better for Quebec, he added.
"The evidence is overwhelming that interest rates should be set lower in Quebec, to provide more support to the depressed economy," he said.