As voters in Scotland head to the polls next month for a referendum on independence, it is relevant to assess the economic impact that the sovereignty movement, as it is called in Quebec, has had in that Canadian province over the years.
While Canada and Quebec and the United Kingdom and Scotland are obviously jurisdictions with their own particularities, there nonetheless exist interesting parallels between them.
Those who wish to see Quebec become an independent country tend to dismiss talk of any negative economic impact from the push to separate from Canada, which in 1980 and again in 1995 led to referendums on the question, with the “yes” side very nearly carrying the day in the second of these. Conversely, those who oppose Quebec’s separatist movement tend to attribute quasi-apocalyptic consequences to its efforts.
Like many things in life, the truth probably lies somewhere in between. Yet it is undeniable that the uncertainty engendered by certain disruptive political events does have economic repercussions.
‘Uncertainty can prompt bond rate rise’
For one thing, such events can have an effect on financial markets. In particular, bond markets can respond to political uncertainty by raising the interest rates that the relevant jurisdiction must pay in order to finance its public debt.
During Quebec’s provincial election this past spring, when it looked like the separatist Parti Québécois (PQ) had a good chance of forming a majority government and calling a third referendum on independence, the province’s 10-year bond yields rose to 17 basis points above those in the neighbouring province of Ontario, from a gap of just 10 basis points a few weeks before.
Given that Quebec is the province with the highest debt-to-GDP ratio in the country at nearly 50 per cent, interest rates on government bonds are a serious matter. Thankfully, by early July, the spread with Ontario had shrunk back to less than five basis points, although in fairness, this rebound could have as much to do with the two provinces’ diverging budgetary policies as it does with the PQ’s election loss.
Stock market indices can also suffer from political uncertainty, as can the stocks of specific publically traded companies. According to equities research specialist David Doyle, the 1995 referendum in Quebec hurt the performance of Canadian financials and industrials, and was especially bad for Quebec-based companies whose activities were limited to local markets and that had fewer growth opportunities.
Political uncertainty can also have an effect on the economy in general, as individuals decide to emigrate and companies decide either to invest less or to uproot their headquarters altogether.
Before the election of the Parti Québécois in 1976, the populations of Canada’s two largest cities – Montreal, Quebec and Toronto, Ontario – were growing at about the same rate. Subsequently, Toronto’s population exploded while Montreal’s entered a period of stagnation.
Economic activity in the two cities was formerly comparable as well. For example, the gap in their unemployment rates between 1966 to 1976 was just two percentage points. However, from 1976 to 1985 – years during which the PQ was in power – that gap climbed to six percentage points. Political uncertainty seems like one plausible key factor for this change, as some 700 companies left Quebec to relocate to other Canadian provinces during this period.
More modestly, the PQ’s latest stint in power corresponded with a drop in the level of confidence of Quebec’s small business owners. From August 2012 to December 2013, an index measuring such confidence fell from 61.6 to 53.8, while rising everywhere else in Canada, which indicates a large amount of uncertainty in the province of Quebec.
‘Neverendum could hurt business’
In short, it is rational to assume that financial markets and economic growth in Scotland could be adversely affected by a “neverendum” in which a close vote begets another, and then another, every fifteen or twenty years. However, the magnitude and duration of these negative economic impacts are literally impossible to quantify with precision. Not that these impacts should, for that reason, be ignored.
Yet there is something more fundamental than whether or not Quebec, or Scotland – or any other political unit, for that matter – becomes an independent country, and that is the core public policies such a country would adopt.
For instance, an independent Quebec with high taxes, a heavy regulatory burden and a government that intervened readily in the private economic sphere would not be able to achieve the same level of overall prosperity as it would if all of its key macro-policies were designed to make it “the Switzerland of North America.” Much the same considerations probably apply in the Scotland debate.
Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.