October 30 1995


October 30 1995


There are no precedents for breaking up Canada



It is Halloween, scant hours after a majority of Quebecers have voted Yes to sovereignty. And while children put last-minute touches on their trick-or-treat costumes, it is clear that the day’s scariest moments have already occurred as the world’s financial markets and political capitals woke up to the implications of that decision. The clock is ticking, perhaps irrevocably, towards sovereignty. And no one can confidently predict what will happen—because there has never been a secession in an advanced, capitalist, industrial democracy.

Nothing will be easy for either party, Quebec or the rest of Canada. They are on a collision course. If the size of the Yes vote is not substantial—that is, less than 60 per cent of the population—the rest of Canada will be reluctant to enter even minimal negotiations with Quebec before it makes another effort to determine the will of its people. If the vote is initially substantial or if Quebecers clearly confirm their will to secede through a federal referendum or an election, negotiators face a mind-boggling array of complex issues that would daunt Solomon. The tangled implications of a Yes vote:

If the Yes forces win a slim majority, Maclean’s has learned that Ottawa will ask Quebec Premier Jacques Parizeau and his allies, Bloc Québécois Leader Lucien Bouchard and Mario Dumont of the tiny Parti action démocratique, to state clearly what Yes means. That demand may seem silly since the referendum ballot begins with a flat question: “Do you agree that Quebec should become sovereign?” But the rest of the question dangles the possibility of a “new economic and political partnership” with the rest of Canada, leaving the impression that Quebec might remain in Canada. In fact, that is not the case: even the socalled partnership would be between sovereign nations.

Ottawa is betting that most Quebecers, including many Yes supporters, will recoil in horror when they grasp that essential point. There could be enormous internal dissension inside Quebec. Parizeau will push, undeterred by anyone else’s second thoughts, towards a unilateral declaration of independence (UDI). His cohorts, especially Dumont, will demand negotiations with Ottawa. Those may not be easy to start. As a senior federal strategist told Maclean’s-. “If the margin is close, [Bouchard, Parizeau and Dumont] have got to make a fundamental decision: do we remain in the federation or not? If they start to negotiate with the rest of Canada for renewed federalism, they obviously have to agree that they will remain within the federation and follow its rules.” Under such strain, the uneasy triumvirate of leaders may break apart. Although Ottawa has not yet settled its game plan, senior strategists indicate that it will probably hold its own referendum with a flat, simple question: Do you agree that Quebec should become an independent nation?

If the Yes margin is large, there will likely be bigger trouble. The will of Quebec would be clear. The leader of the negotiating team, Bouchard, would be ready. But who would, or could, speak for the rest


of Canada? Ottawa has no mandate to negotiate the breakup of the country. Prime Minister Jean Chrétien, Finance Minister Paul Martin, Foreign Affairs Minister André Ouellet and Intergovernmental Affairs Minister Marcel Massé are all from Quebec. They would have to distance themselves from the talks because of their perceived conflict of interest. Ottawa would likely call a federal election. Meanwhile, the provinces would want seats at the negotiating table. Aboriginals would want a voice. Given Canada’s past constitutional track record, it could take months before the rest of Canada even figured out who could talk, let alone what they could say. Whatever happens, it is unlikely that the rest of Canada would accept Quebec’s offer of partnership since it is based on the notion that the two sides would have equal power.

In the interval, whatever the margin of victory, whatever the state of the rest of Canada’s team, Parizeau could simply declare independence. The referendum legislation sets a deadline of Oct. 30,1996, for the conclusion of negotiations. But Parizeau has declared that if talks do not proceed smoothly, Quebec will proclaim independence “after a couple of months.” If Quebec secedes unilaterally, there could be unrest, particularly among the natives of northern Quebec. The new country would be unlikely to receive widespread international recog-

nition until the rest of Canada assented. And that recognition would likely be withheld until the two sides reached agreement on such vital matters as sharing the national debt.


Financial markets will not wait patiently while Quebec and the rest of Canada tussle for power. The Canadian dollar has been relatively high and interest rates relatively low lately—largely because investors believed that the No forces would win. A Yes vote would badly rattle them. Overnight, the dollar would tumble as investors scurried to safer currencies. Canada would be forced to raise interest rates to stabilize the currency and to attract lenders.

Worse, lenders would take another long, hard look at Canada and, in particular, at Quebec. And they would not like what they saw. Compared with other large industrial nations, Canada has the worst combination of debt and deficit after Italy. And 40 per cent of that public debt is owed to foreigners. If Quebec seceded, Canada would be responsible for 100 per cent of

Whatever the margin of victory, Parizeau could simply declare sovereignty

that debt—an estimated $581 billion by March 31, 1996—with less than 80 per cent of its former tax base. Investors would stampede to dump the Canadian dollar and securities. The Bank of Canada would be forced to draw on international lines of credit, including, perhaps, conditional financing from the International Monetary Fund, before the situation stabilized.

Quebec’s position would be even worse. If it did not assume its share of the federal debt, it would become an international pariah: no

reputable investor would buy its bonds or securities. And the province is heavily dependent on foreign borrowing. But it is not clear how Quebec could assume its share of the federal debt since, on March 31, 1996, the province itself will owe an estimated $78 billion. Montreal economist Marcel Côté, senior partner in the consulting firm Groupe Secor, has calculated that if Quebec had assumed a 25-per-cent share of the federal debt at the end of 1994 (based on its population share), its net debt would have hit $180 billion: that is, almost $25,000 per citizen or 108 per cent of gross domestic product. Foreigners would have held more than 45 per cent. Even if both the rest of Canada and Quebec went to great lengths to reassure investors, the sheer size of that debt would panic most of them.

In the months after independence, the situation would worsen. Ottawa transfers about $3 billion more to Quebec each year than it collects in taxes. Meanwhile, unemployment would increase as sectors such as the dairy industry lose their markets and head offices close. Quebec would face diminished revenues, astronomical debt service costs and the likelihood of a severe recession. “The numbers just do not add up,” says Côté. “The crisis will be terrible.”


o matter what the Yes forces promise, it is likely that sovereignty will mean big changes in currency and trade. If Quebec separates through a UDI, it could continue to use the Canadian dollar. But it would have no control over monetary policy: for example, it would not have the ability to let its exchange rate drift downward in order to make its exports more attractive to foreign buyers. Even if Quebec and Canada try to preserve the currency union, the obstacles are daunting.

There must be an integrated system to clear financial transactions. There must be a lender of last resort, such as the Bank of Canada, or Quebec must have a formidable re serve of dollars to withstand a run on its banks. The rest of Canada might simply decide that Quebec is not worth such a risk. Meanwhile, if investors lose confidence in Quebec’s decision to use the dollar, they might switch their money into the rest of Canada to preserve their savings. In short, because Quebec will probably be forced to adopt its own currency anyway, it might be easier to do it from the start.

Trade is equally fraught with uncertainty. Quebec wants to join the World Trade Organization and the North American Free Trade Agreement. Without Canada’s consent, it would have great difficulty with the WTO. But it could not join NAFTA—because that treaty requires the consent of all current signatories to admit new members. If Canada does consent, WTO membership would likely come within a couple of years. To enter NAFTA, however, Quebec would have to make significant changes in its domestic policies. As a national signatory, rather than a socalled sub-government, Quebec would have to open up its public sector procurement programs to its partners. Its subsidized exports, including lumber and steel, would face countervailing duties. Its 47-per-cent share of the Canadian industrial milk market would shrink—if only because the rest of Canada would likely refuse to pay higher dairy prices to protect Quebec farmers. As well, the United States would probably use the talks as an opportunity to water down clauses that protect Quebec’s cultural industries and financial institutions.

Worse, it would be extremely difficult to maintain even a customs union between Quebec and Canada—because the two parties would have to make so many decisions in common. They would need common tariff and non-tariff barriers, common quotas on such products as textiles and a common competition policy. Some provisions such as an integrated banking system might even run afoul of NAFTA provisions. Instead, there may be customs officials, anti-dumping regulations, countervailing duties and rules of origin. As Gordon Ritchie, one the architects of the CanadaU.S. Free Trade Agreement, told Maclean’s: “Only one thing is clear: having broken up the country, it is clearly and unequivocally unthinkable that Canada and Quebec could re-establish the economic union.” □