A NEW ECONOMIC STUDY FROM THE ROYAL BANK SETS OUT THE SEVERE COST OF ANY QUEBEC SECESSION
BANKING ON UNITY
A NEW ECONOMIC STUDY FROM THE ROYAL BANK SETS OUT THE SEVERE COST OF ANY QUEBEC SECESSION
Edward Neufeld has been sitting on a political bomb for two years. As the chief economist for Canada’s largest bank, the Montreal-based Royal Bank of Canada, he has been the driving force behind a controversial study that paints a bleak portrait of the Canadian economy if Quebec secedes. But last week, just over a month before Canadians vote to accept or reject a new constitutional blueprint in a national referendum, Neufeld dropped that bomb at a news briefing in Ottawa. Despite the obvious political implications of the bank’s scorched-earth economic scenario, Neufeld insisted that he is trying to inform Canadians—not to influence their vote on Oct. 26. Later, sitting in his wood-panelled office in Toronto, Neufeld told Maclean ’s that he and Royal Bank chairman Allan Taylor have been “appalled at the inadequacy of the economic discussion surrounding the constitutional debate.” Still, he said that the bank, as an institution, is not supporting either side in the campaign. But he added: “If a more informed public will influence the vote, then this is an attempt to influence the vote.”
With the release of the Royal Bank study, the Canadian business establishment clearly signalled its willingness to jump into the partisan political debate over the Constitution. Just two days after the Royal Bank issued its stark warning about the economic consequences of Canadian political disunity, Alvin Flood, chairman of the Toronto-based Canadian Imperial Bank of Commerce, echoed the same theme in an address to a Canadian Chamber of Commerce convention in Victoria. Casting aside the traditional reluctance of Canada’s chartered banks to become embroiled in political controversy, the message from both financial institutions was clear: a vote against the Charlottetown constitutional accord would threaten Canada’s economic stability. “Political stability has always been a key factor behind Canada’s economic success,” said Flood. “The slightest hint of instability can send global financial markets into disarray.”
The Royal Bank study outlined, in detail, the economic chaos that would result if Quebec were to separate from the rest of Canada (page 48). The document predicted that without Quebec the average Canadian family’s income would be $10,140 lower at the turn of the century than if the country stayed united. As well, unemployment would climb by 720,000 from its current level of 1.5 million—and that Canada’s standard of living would be 28 per cent below that in the United States.
Royal Bank chairman Taylor said that those compelling figures convinced him to speak out. “It is a bread-and-butter issue,” Taylor said at his Ottawa news conference. “We are talking about losing jobs, about devaluing pensions and savings. Assessing the costs of disunity with care is not fear-mongering. It is facing reality.”
The leader of Quebec’s No campaign, Jacques Parizeau, swiftly disputed Taylor’s view of reality, however. He immediately denounced the bank’s study as an effort by the Toronto financial community to bully the country into accepting what he called a hopelessly flawed constitutional deal with “scare tactics.” Until last week, most Canadian business leaders avoided such criticism by cautiously sidestepping the constitutional debate altogether. For one thing, some are still stinging from the widespread denouncement of their role in promoting the Canada-U.S. Free Trade Agreement (FTA) in 1988.
Along with Brian Mulroney’s government, the business community painted the agreement as the key to Canada’s future prosperity.
But since then, the economy has plunged into the deepest recession since the 1930s, and many Canadians blame the FTA for the downturn. Said one former corporate lobbyist who requested anonymity: “There is a definite backlash against business by all the people who perceive it as a bad deal. The business community is much more circumspect about jumping into the fray this time around.”
The severe financial problems confronting corporate Canada have also preoccupied senior executives throughout the constitutional crisis. Richard Woodward, a professor of finance at the University of Calgary, noted that business has been “under siege for the last 2lh years” and, as a result, the debate on constitutional issues has been a relatively low priority on the business agenda. Added Woodward: ‘Handing out pink slips to hundreds of people is a wrenching, intense process. For many companies it has been all-consuming.”
As well, the complex Charlottetown accord has taken some time to
analyse. As details have been released, however, several national industry associations have stated that they will not take a stand because they are unable to reach a group consensus. Especially in Quebec, concerns about alienating customers and clients who are polarized on the unity issue have contributed to an especially cautious tone. The Quebec arm of the Canadian Manufacturers’ Association, for one, will not take a formal position on the Constitution because of the deep split in its ranks. And
among those in the Quebec business community who support the separatist campaign organized by Souveraineté Québec Inc., most have requested anonymity.
As well, executives on both sides of the issue acknowledge that overly strident pronouncements send a dangerous signal to volatile international capital markets. Last week, Peter White, chairman of Toronto-based media conglomerate Hollinger Inc., issued a statement urging Yes and No proponents to be circum-
speet and restrained in the language they use to discuss the issues at hand. White, a former principal secretary for Mulroney, emphasized that a vote against the constitutional proposal will not necessarily lead to a breakup of Canada. He added: “There is a very real danger that foreign investors in particular will be more impressed by the campaign rhetoric than by the post-campaign explanations.”
Most experts on constitutional issues agree that it is essential to emphasize that a rejection of the current package does not signal an automatic end to a united Canada. Thomas Courchene, for one, a professor at Queen’s University in Kingston, Ont., and author of the
C.D. Howe Institute’s study In Praise of Renewed Federalism, claims that a No vote will not unleash economic mayhem in Canada. “It’s dangerous to link a No vote with the breakup of Canada,” he said, “and there is no evidence to support that view. What it means is that we are telling the politicians we prefer the status quo to the accord.”
Activists campaigning for a No vote in the Oct. 26 referendum echoed those criticisms following the release of the Royal Bank study. Reform Party leader Preston Manning told Maclean ’s that there would be more severe economic consequences if the Yes side prevailed. Manning argued that because the Charlottetown accord is what he called vague and open-ended, a Yes vote will only defer existing constitutional problems. He said that when international investors realize that fact, “the uncertainty that results will be far worse.” He added: “If the Royal Bank did half as thorough an analysis of that, it might come to a different conclusion” about the negative economic impact of a Yes vote.
But even those who find fault with the Royal Bank’s study would have to concede that it is a thorough analysis. Over the past two years, 20
economists have worked to develop new assumptions for their existing financial models of the Canadian economy. They were not the first team to tackle that task, but Neufeld says that their approach was more hardheaded than others. “The real problem in all the other studies is that they didn’t say what happens to the economy of a country that’s breaking up,” he said. “We started with a blank slate. We threw out the fundamental assumption that the institutional framework surrounding the economy was stable.”
One of the main differences between the Royal Bank study and others done in the past by the Economic Council of Canada, the C.D.
Howe Institute and other policy analysts is their assumption that a country that is breaking up can continue to share a single currency. Regardless of how amicable the split may be, Neufeld says that it is an unrealistic expectation because the maintenance of a single currency unit requires the co-ordination of government spending, taxation and interest-rate policy. And that degree of co-operation, in turn, compromises sovereignty.
Certainly the ardent sovereigntists who are spearheading the No campaign in Quebec have little desire to co-operate with Ottawa in any area of policy. Jean Campeau, chairman of the Montreal-based pulp-and-paper maker Domtar Inc. and the president of Souveraineté Québec Inc., said that unless Quebec severs its ties with Canada, “we will be condemned to build our future without complaining, and to do it with an incomplete toolbox.”
Despite the compelling emotional tone of those arguments, many analysts say that the Royal Bank study, as well as active campaigning by pro-federalist Quebec business leaders, could soon tilt the balance in favor of the Yes side in that province. Donald Savoie, a professor of political science at the University of
Moncton, said that even hard-core sovereigntist voters, who make up about 40 per cent of the Quebec electorate, are worried about economic issues. Said Savoie: “You get beyond an elite of 2,000 and people are concerned about where their next meal is coming from.”
By contrast, Savoie and other experts express concern that voters in Alberta and British Columbia have less of an economic stake in the outcome of the referendum. Savoie said that those two provinces have stronger economic links with the United States than with the rest of Canada, and would suffer less than other provinces if the country broke up. “When push comes to shove, they can fly on their own wings,” he said, adding that western voters have seldom refrained from voicing their discontent with central Canada. Declared Savoie: “They have the ability to stick their finger up at the rest of us.”
Because economics and politics are so closely entwined in the constitutional debate, the Royal Bank has taken elaborate pains to establish the legitimacy of its commentary. In the introduction to its study, the bank carefully outlines the national scope of its operations, which employ 55,351 Canadians. The study also explains that business thrives in an environment of stability. It underscores the fact that uncertainty about Canada’s future has already caused some businesses to postpone strategic decisions. And in addition, it forcefully points out that the widespread expressi sions of concern have made foreign g investors suspicious of the Canadian ïï market.
2 Outside of its carefully constructed role as a concerned corporate citizen, Neufeld insists that the Royal Bank has no plans to take on a leadership role within the business community or among its employees. The study will be sent only to those who request it, even among the bank’s own ranks. Other companies, including Imperial Oil Ltd. of Toronto, Nova Corp. of Calgary and Westcoast Energy Inc. of Vancouver, whose high-profile executives have taken a strong stand in the Yes camp, are also cautious about influencing their employees.
One senior oil-industry executive, who spoke on condition of anonymity, said that his company’s board of directors has been agonizing for weeks over the public stance that management should take in the debate. “Obviously we’re not indifferent to the outcome of this debate,” he said. “But no one around here wants to be seen to be in the government’s pocket.” And as the Royal Bank’s Neufeld and Taylor came under political fire for their decision to join the increasingly heated constitutional debate, it was clear that those companies that choose to follow their path will find it just as perilous.
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