Quebec-Ontario Relations: A Shared Destiny?

9. Quebec, Ontario, and the 2008 Economic Crisis

9. QuEBEC, onTARIo, AnD ThE 2008 EConomIC CRIsIs from generous Counter-Cyclical Policies to an Austere Exit Approach mokTAR LAmARI and LouIs CôTé As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind . I know it’s over the top, but here it is anyway: the policy elite—central bankers, finance ministers, politicians who pose as defenders of fiscal virtue—are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods . PAUL KRUGMAN (Nobel Prize in Economics recipient, 2008) in the New York Times, May 22, 2009 Triggered in the loftiest spheres of the U .S . finance world, the recent economic and financial crisis spread almost instantaneously to the Canadian economy, forcing provincial governments to act quickly and often with little forethought . These spur-of-the-moment decisions did not all have the same effect on controlling the crisis . The particularities of each province’s economic fabric and political culture were compounded by political contingencies, ruling-party ideologies, legislative deadlines, etc . This chapter provides a specific comparative analysis of the actions taken by the Quebec and Ontario governments to counter the crisis . Both provinces stand out from their peers for the weight they carry within the Canadian economy; 190 Quebec–ontario Relations –A shared Destiny? together, they supply three-quarters of Canada’s manufacturing output and are home to two-thirds of the country’s active population . They also share extensive economic and financial ties with the U .S . economy and ship the majority of their exports to the American market (72% for Quebec and 84% for Ontario), putting them on the front lines every time a crisis rocks the U .S . economy . Our analytical interest in the two provinces extends beyond their economies’ strong ties to that of their southern neighbour . Quebec and Ontario are also representative of the diverse socioeconomic and politico-cultural contexts present across Canada . In addition to possessing different industrial structures, both provinces champion relatively different models for economic development . This chapter will examine three complementary topics: 1) the impact of the recent crisis on each of the provinces, 2) government response and public policy instruments employed, and 3) the challenges and issues faced by each province as it emerges from the crisis . To investigate these issues, we will employ chronological and comparative analysis tools and draw on three sources of data . The first consists of statistical data on financial variables and economic aggregates describing the progression of the crisis (growth, unemployment, exportation, debt, investment, etc .) . The second is made up of government documents on the crisis: arrival of the crisis, government reactions, perspectives on issues related to exiting the crisis . The third consists of analyses produced by the media, stakeholders, and researchers . 1. sIgns of ThE CRIsIs To begin, we must return to the origins of the crisis and its spread into Canada . A product of a number of latent and interdependent factors, the recent crisis was essentially a financial crisis caused by insufficiently regulated financial actors . Its origins stretch back to the start of the decade, when it rode in on the heels of the storied dot-com bubble (2001–2003) at a time when declining long-term interest rates in the U .S . became the norm . The rate of return on 10-year U .S . Treasury bonds followed the trend, sliding progressively from 7% to 4% . Far from being the result of a deliberate monetary policy issued by the U .S . Federal Reserve, this downward trend followed the flooding of the American market with lendable funds from developing and oilexporting countries, which reached previously unheard-of heights . The U .S . market had become the darling of investors seeking high returns and who were willing to assume high levels of risk, attracted by high levels of deregulation uncommon in other developed countries 9 . Quebec, ontario, and the 2008 Economic Crisis 191 and designed to generate returns at any cost, leading to the creation of questionable and risky finance innovations . Seduced by a dizzying range of loan options at a time when real incomes had stagnated for years, American households turned increasingly to credit—credit granted freely and without a true evaluation of risk . The bubble at the immediate source of the crisis originated in the real estate sector, where risk taking had reached unimaginable proportions . This...