PQ leader Paul St-Pierre Plamondon with his wife, Alexandra Tremblay, in Sherbrooke, Que.Thomas Laberge/The Canadian Press
Oh God. We’re really going to do this, are we: Repeat the same old psychodrama, rehearse the same preposterous fantasies, repeat the same extravagant lies? Thirty years after the last secession crisis, having averted a disaster by the narrowest of margins, we’re going to do it all again?
Well, it’s not a certainty. But if the election scheduled for next year in Quebec were to be held today, the polls suggest the Parti Québécois would win a majority. It would do so, it is true, with about a third of the vote, but in Quebec’s crowded political field – five parties, each with at least 8-per-cent support in the polls – that could well be enough.
The leader of the PQ, Paul St-Pierre Plamondon, has pledged to hold a referendum on secession within the life of that government. He may or may not keep that promise. Support for secession is also at less than a third; presumably not even the PQ is suicidal enough to want to endure a third straight referendum defeat.
But a lot can change between now and then. It’s entirely possible that we might be plunged back into the maelstrom. Which means we need to take seriously the PQ’s ideas for how it imagines secession would take place, and what it imagines a postsecession Quebec would look like. I say “take seriously.” I do not say these are serious ideas.
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Take, for example, the party’s latest proposal, on the thorny question of what currency an independent Quebec would use. In the past the party has waved this away with a breezy “why, we would continue to use the Canadian dollar, of course,” apparently unconcerned by the contradiction this implied: an ostensibly sovereign country, subordinating itself to the monetary policy of another country – the very country, indeed, whose intolerable rule it had just thrown off.
They have done this, of course, because the perils of the alternative – a fragile new state, heavily laden with debt, launching a new currency onto the markets, only to see its value plummet, and with it the value of Quebeckers’ savings – have seemed too great. And yet, as various leading figures within the movement – Jacques Parizeau among them – have insisted over the years, that would undoubtedly be the better option in the long run, and the only sustainable one.
The party’s new proposal is an attempt to straddle the two. Quebec would keep the Canadian dollar immediately after secession, and for the 10 years or so after that. But then it would replace it with a new currency. Or not: It would depend on the recommendations of an expert panel, the Independent Commission on Quebec Monetary Policy, as would such details as what parity it would trade at initially, how long it would remain pegged at that rate (and to what currency) before it began to float freely, what institutions would underpin it, and so on.
The party presents this as the best of both worlds: combining the stability of the dollar with the freedom of a separate currency. In fact it is the worst of both: all the constraints of dollarization, all the instability of a new currency – and not just in the immediate aftermath of secession, but for years and years.
No breakaway country has ever pulled off what the PQ have just proposed: continuing to use the former partner’s currency for several years without any common monetary authority, then introducing a new currency, under first a fixed peg and then a float. Possibly there is a reason for this.
The PQ is right about one thing. If a separate Quebec wanted to use the Canadian dollar, it could. There would be nothing Canada could do to stop it. But neither would Canada be under any obligation to facilitate it.
Only a small part of the money supply of any country consists of money directly created by the central bank: currency in circulation, plus the reserves (“settlement balances”) it requires private banks to hold with it. The rest is credit, created by the private banks lending against deposits from the public. In fact they lend out rather more than is backed by those deposits, and only a fraction of deposits are backed by their central-bank reserves.
That’s potentially highly unstable. In the days before central banks, credit expanded and contracted wildly, leading to huge fluctuations in prices and output. The only reason the system, called fractional reserve banking, works today is that the central bank stands behind it, providing liquidity in crises, acting as a lender of last resort, ensuring access to the payments system, and so on.
But there would be no reason the Bank of Canada would continue to do that for an independent Quebec, and every reason why it wouldn’t. No central bank is going to backstop the banking system of another country, over which, for example, it has no regulatory oversight. It’s not a matter of “punishing” Quebec. It just wouldn’t be in Canada’s interest.
So Quebec would suffer all of the drawbacks of a common currency, of which Péquistes now complain – locked into an overvalued dollar when, say, commodity prices in western Canada are high, unable to set its own interest rates – with none of the stabilizing benefits. It has limited say over Canadian monetary policy now. It would have none at all as a separate country.
It’s difficult enough when two countries share a currency under a monetary union, that is, with a common central bank. Witness the ordeal of Greece a few years back, priced out of export markets at the then-prevailing value of the euro but unable to devalue. But a dollarized Quebec would be more in the position of a Panama or El Salvador, monetary vassal states that pay for their use of the U.S. dollar in higher interest rates, greater financial instability, and periodic bank crises.
Which would not be lost on Quebec’s financial institutions. Would federally chartered banks currently headquartered in Quebec – National and Laurentian – remain there, if it meant giving up the protections of the Bank of Canada? Presumably Desjardins, the province’s largest credit union, would stay – but without access to the payments system or other system-wide guarantees from which it currently benefits.
There’s a reason central banks were created. They have a unique ability to provide – indeed, to create – liquidity in a crisis: they don’t literally “print money,” but the metaphor is accurate in spirit. Governments that do not have access to the printing press, as a dollarized Quebec would not, are not in remotely the same position to backstop their financial systems. A Quebec central bank could, but only after a new currency was introduced, not before.
And this is where things get really hairy. A dollarized economy is unstable enough. But a dollarized economy that has announced it intends to switch currencies in 10 years? Insanity.
Consider the position this puts investors in. You are told that at some future date the assets you hold in Quebec – government bonds, corporate shares, what have you – may be redenominated in some new currency. You aren’t told at what parity, but you can guess that whatever it is, it is not going to remain there for long. All of history tells you it will likely be devalued, quickly and sharply, meaning that a portion of your investment will effectively be confiscated.
Are you simply going to wait until it happens, and swallow the loss? Are you even going to wait until others have begun to move their investments out, and risk being caught in the capital controls the new country would impose then? Or are you going to take action, now, to protect your capital – to sell bonds or shares you currently own, and to demand a lower price (or a higher interest rate, in the case of bonds) before you will buy them again?
Much else about the plan would remain to be determined. That, indeed, is part of the plan. These institutional-arrangements-to-be-named-later would presumably be the subject of intense debate, not only within the government of the day, but between, and within, the other parties. So factor in several more layers of uncertainty, beyond the exchange rate.
Some would be urging the government to move faster to a new currency, some urging it to go slower. Some would be demanding the whole project be scrapped. There would be at least two and probably three elections during the 10-or-so-year transition period, any of which might result in an abrupt change of course. Try to imagine how financial markets would react.
Well, we don’t have to completely imagine it. The PQ plan may be unique in several respects, notably the absence of a monetary union. But that does not mean there are not near-parallels.
In the largely amicable breakup of Czechoslovakia, the so-called “Velvet Divorce,” the two successor countries, the Czech Republic and Slovakia, were supposed to continue using the Czechoslovak koruna for six months, before introducing their own currencies. In fact the arrangement lasted just 33 days.
The Czech economy was not only much larger than the Slovak, but widely known to be more diversified, liquid and stable. Accordingly, capital immediately began fleeing Slovakia for Czechia. Slovaks opened bank accounts across the border. They rushed to convert their koruna balances into Czech assets, anticipating that the new Czech currency would hold its value more than its Slovak counterpart.
This, note, was under a monetary union. Or a union of sorts: rather than a common central bank, each country set up its own. They were supposed to jointly oversee the old currency, while preparing for the new, separate currency regimes to come. But co-ordination proved impossible. The Czech authorities were suspicious of their Slovak counterparts, fearing, with reason, that they would try to borrow and inflate their way out of their difficulties. As Slovak banks came under pressure, the Czech authorities became alarmed at the risk to their own financial system, and pulled out.
Sharing a currency is a difficult trick to manage even with a common central bank, let alone with two. But the PQ is proposing to do so with neither: the central bank it proposes to create would have none of the powers of a real central bank, to create liquidity and the like, until after the new currency was created. Which means a new currency would be forced upon it, willy-nilly – not in years but probably in days. There would be no need for Canada to lift a finger to end the experiment. Markets would do the job.
So the PQ plan is de facto a proposal for a new currency, only under the most chaotic possible conditions, improvised on the fly in the middle of a financial crisis. And that’s the best-case scenario! It assumes, for example, that Quebec and the rest of Canada could first agree on a secession plan. That’s highly unlikely, indeed more or less impossible, when you think it through. (Among other difficulties: there is no duly constituted body representing the “rest of Canada,” and no way to duly constitute one.)
If secession comes, it can only realistically be via a unilateral declaration of independence – a coup, in other words. Which would make the chaos described above, over the single issue of the currency, look positively benign.
All of this was thoroughly hashed out 30 years ago. But apparently we have forgotten. Apparently we are going to have to go through this all over again. Oh God!