Column

A sensational study no one is discussing

Two economists predict a massive economic crisis for all Canadians if the separatists win the next referendum

Diane Francis January 26 1998
Column

A sensational study no one is discussing

Two economists predict a massive economic crisis for all Canadians if the separatists win the next referendum

Diane Francis January 26 1998

A sensational study no one is discussing

Two economists predict a massive economic crisis for all Canadians if the separatists win the next referendum

Diane Francis

Column

A recent report by economists Marcel Côté and Michel Demers documents, in frightening detail, exactly how Quebec separatists would destroy the living standards of all Canadians if they win the next referendum. The 26-page study, sadly, was ignored by most of the national media as well as by most politicians since its release in October.

Côté is a founder and senior partner of the Montreal economic strategy and marketing consultancy Groupe SECOR, and Demers is an associate professor of economics at Ottawa’s Carleton University. The two were asked by a grassroots organization, the Quebec Committee for Canada, to analyze what would happen to the economy in the hours and days following a unilateral declaration of independence (UDI) by Quebec separatists.

The issue of what happens is important because former Quebec premier Jacques Parizeau admitted in his autobiography last year that he planned to announce a UDI within days of a Yes victory. This contradicted referendum campaign promises that a UDI would not occur until talks were held with Ottawa for at least one year. But Parizeau wrote that plans were already set to wrest the province from the country, and that France was lined up to legitimize the breakaway province by recognizing it as a sovereign country.

The Côté-Deniers report contains chilling conclusions. After such a UDI, it says, Canadians would be crippled by a gargantuan monetary and banking meltdown. Within hours, the country’s automatic teller machines would seize up as nervous Quebecers rushed to take out cash. Mortgages and demand loans would be called in by lenders.

The report conservatively estimates that $30 billion of the total $120 billion in deposits from individuals, RRSPs and businesses would flee the province of Quebec and probably end up in another currency. The result would be “chaos.” “A $30-billion movement of liquidity would situate the Quebec crisis as the largest crisis in modern banking history,” the report concludes.

This fleeing of capital would put pressure on the Toronto-based Canadian banks, which control 30 per cent of the Quebec market for deposits, to inject $8 billion to $10 billion into their Quebec branch systems, but might hesitate to do so because of the political uncertainty. The Bank of Canada, whose assets total $31 billion, would likely require international assistance greater than the recent $40-billion rescue operation of Mexico and which could approach that of Korea.

The crisis would also be fuelled by employers’ likely refusal to remit sales or income taxes to either government until the legitimacy dispute was resolved. “A UDI would create two conflicting claims of legitimacy in Quebec,” the authors say. “The Quebec government will demand that all taxes heretofore paid to Ottawa be paid to Quebec. The Quebec government would in all likelihood not be able to obtain any net revenues.”

The economists then ask the basic question: “How much of the $30 billion presently collected by the federal government in Quebec could a separatist Quebec government collect?”

For the purposes of the study, the two made the conservative assumption that 30 per cent of federal income taxes and Employment Insurance contributions would be put into trust. They also assumed that 60 per cent of corporate income taxes payable and 20 per cent of GST owed would be put in trust. Quebec’s biggest employer is the provincial government with 455,000 workers, so the federal portion of income taxes deducted would stay in separatist hands. (But Ottawa would surely withhold provincial income tax for its 104,000 workers in Quebec as well as transfer payments to individuals.) The total held in trust, according to this model, would be $11.9 billion, enough to prevent the new breakaway regime from financing deficits, borrowing money or shoring up its collapsed bonds.

Still, the capital flight poses the largest threat. “In the climate of uncertainty surrounding a possible UDI, many Quebecers will want to shelter their savings from political risk and the risk of a potential devaluation if a Quebec currency is introduced,” they write. “The desire to shield assets from the turmoil will be even more accentuated for savings registered in RRSPs. Their transferability out of Quebec could also be subject to a tax after the UDI or be outright prevented if, as suggested by former provincial finance minister Jean Campeau, capital controls are imposed.”

Fearing such controls, a majority of anglophones would likely transfer their RRSPs, roughly 15 per cent of the $29 billion total in Quebec, to another province. Another 15 per cent of this RRSP pool would be transferred out by well-heeled francophones. Some 10 per cent more would be transferred by the elderly who vote 3 to 1 against secession. “Some sovereigntist leaders have claimed that a 50-per-cent-plus-one Yes vote on a referendum would be sufficient,” the report says. “A clear conclusion that emerges from our study is that a Yes victory by a narrow margin is bound to lead to a legitimacy debate and an ensuing financial crisis of major proportions.” Côté told me in an interview that the fallout was indeterminate because “we have never seen a revolution in the middle of a complex modern economy before in history.”

Despite such dire consequences, nary a minute of debate in the House of Commons transpired as a result of this landmark study. When asked, the banking community refused to comment on the study’s merits and other think-tanks have not picked up the ball. More’s the pity.