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Ontario better off if sovereign Quebec stayed in monetary fold

The notion that an independent Quebec would want to keep using the Canadian dollar is pretty galling to many people in the rest of the country. But should it come to that, Ontario would have some good reasons to want Quebec inside a Canadian monetary union – including a seat at the Bank of Canada's monetary policy table.

Quebec's separatist Premier Pauline Marois stated Wednesday that she would want to be part of a Canadian monetary union, should she get her wish and lead Quebec to nationhood. She said Quebec would use the dollar (which it would be free to do without Canada's approval) and seek a seat on the Bank of Canada's rate-setting governing council.

In the best-case scenario for Quebec, this would look something like a mini-euro, with two countries sharing a currency and having joint input on monetary policy at the Bank of Canada. Details are scant, but Ms. Marois is quoted as saying "Obviously we may wish to get a seat at the Bank of Canada, but we would accept the Canadian monetary policies."

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That led to plenty of jibes. Postmedia columnist Michael Den Tandt wondered on Twitter what planet she lived on. Political commentator David Frum joked that she wanted a pony, too. Commenters on the Globe and Mail story asked what she was smoking.

The easy answer from a spurned Canada is to say Quebec would deserve no place at a Bank of Canada meeting.

However, consider the plight of Ontario in a Quebec-less Canada. The monetary policy dynamic that exists between the slower-growing centre of the country in Ontario and Quebec, with its heavy manufacturing base and higher unemployment, and the commodity-driven West would change – with power shifting west. At the moment, the Quebec and Ontario economies together account for about 60 per cent of Canadian gross domestic product.

Like it or not, Ontario and Quebec share a lot of interests in monetary policy thanks to their manufacturing sectors, which need a good goosing from easy monetary policy and a low dollar.

However, Western Canada is growing more quickly and has much tighter economic conditions. On their own, western provinces would warrant a tighter monetary policy. Ontario has a 7.5-per-cent unemployment rate and Quebec's is 7.8 per cent. Saskatchewan has a 3.9-per-cent jobless rate, Alberta's is 4.3 per cent and British Columbia's is 6.4 per cent. Retail sales are hotter in the west. Inflation is higher.

A Quebec-less Canada would grow more quickly, and, once post-secession jitters abate, might even have a stronger currency over the long term than a Canada that includes Quebec.

For example, in 2013, Canada's manufacturing output shrank by 1.6 per cent. Oil and gas, agriculture and mining were the three main goods-producing industries that drove economic growth, according to Statistics Canada. Ontario and Quebec both grew more slowly than the nation's economy as a whole in 2013. Alberta and Saskatchewan were leaders.

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In years when economic growth is more closely aligned across the country, as forecasters at Royal Bank of Canada expect in 2014 and 2015, it would not be as much of an issue. But given the vastly different structures of the economies of western and central Canada, there will be times when their interests will diverge. Ontario might want to have Quebec around then to tip the scales.

For the rest of Canada, there's also the consideration of liquidity and importance of the Canadian dollar on the international scene. Losing Quebec, with its significant population and economy, would raise the risk of a decline in the Canadian dollar's importance.

As for Quebec, the arrangement only really works if there is a seat at the Bank of Canada's table, in the same way the European Central Bank is supposed to work. That way, there is at least some hope of influencing monetary policy to benefit Quebec's economy.

Should it break away, Quebec would have every right to use the Canadian dollar and Canada would have no say. But without any input in policy, Quebec would risk being at the mercy of monetary conditions increasingly set to reflect realities of Western Canada.

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