Ottawa Dodges A Bullet But More Are On The Way

The night of Oct. 30 is one most Canadians will never forget. From remote fishing villages in Newfoundland to coffee bars in Vancouver, citizens anxiously watched the see-saw battle for the future of Canada unfold in Quebec. Tensions soared as the Oui vote for a sovereign Quebec surged to an early lead that it held until nearly two-thirds of the vote had been counted. Then--as the Non vote to keep Canada united finally pulled ahead for good--supporters of a united Canada erupted in downtown Montreal, shouting, "Canada! Canada! Canada!" as they twirled Maple Leaf flags.

Outside Quebec, there's almost universal relief that Canada has averted what would have been the worst crisis in its 128-year history. The stock, bond, and currency markets rebounded after a week of scarifying losses. And the Clinton Administration was glad that it didn't have to contend with the possible breakup of the U.S.'s largest trading partner. That would have plunged Canada into recession and severely disrupted the working of the North American Free Trade Agreement, at a time when Mexico's economy is already suffering.

BADLY SHAKEN. But the closeness of the vote left Canada's leadership badly shaken. Prime Minister Jean Chretien is already being widely condemned for nearly losing the biggest fight of his life, and some feel he should resign. Now, if he does not heed the voters' message by moving more quickly to meet Quebec's demands, he faces the same nightmare all over again. Already, the emboldened Lucien Bouchard, leader of the separatist campaign, is threatening to hold and win another referendum on sovereignty within as little as two years.

The close results also underscore the deep divisions not only within Quebec but throughout Canada. Most English Canadians were stunned that the separatists came so near to winning. It wasn't until the last 10 days of the campaign that English Canada even woke up to the separatist threat. And there's no consensus on how the federal government should respond now. While leaders in Ottawa, Toronto, and Montreal support some form of reconciliation, western Canadians oppose any special deals for Quebec and are instead calling for a radical decentralization of federal powers. Meanwhile, the depressed maritime provinces, which rely heavily on federal subsidies, worry that if Quebec goes, they will be geographically and economically cut off, as Canada becomes a kind of North American Pakistan.

The lingering bitterness between English and French Canadians will also spill over into budget-cutting efforts. Canada has to reduce hugely expensive social programs to relieve a crushing federal debt loan, amounting to 75% of gross domestic product. But if Ottawa now carries out cuts to such sensitive social programs as unemployment insurance and old-age pensions, Bouchard will viciously attack the federal government. The close vote "bodes ill for Canada's long-term fiscal responsibility," worries Stanley H. Hartt, CEO of Camdev Corp. and chief of staff to former Prime Minister Brian Mulroney.

"DETERIORATION." The continuing battle over separatism casts an even darker cloud over the Quebec economy. Quebec Premier Jacques Parizeau, 65, who announced his resignation the day after the failed vote, devoted all his energies to sovereignty. That has produced a "severe deterioration in Quebec's fiscal situation," warns Toronto-based Dominion Bond Rating Service. Indeed, while Quebec's debt burden is second only to depressed Newfoundland's, "it is the only province that has not vigorously attacked its fiscal problems," according to a DBRS report. Under Parizeau, Quebec ran Canada's highest deficit as a percentage of provincial GDP and imposed some of the highest tax rates in North America.

Given the near-victory, Parizeau's successors will now be sorely tempted to postpone any painful spending cuts until after another referendum. "But Quebec has no choice," says Thomas P. d'Aquino, president of the Business Council on National Issues, which represents Canada's largest corporations. Either Quebec takes its fiscal medicine, he says, "or Quebec will massively lose the confidence of the international business community."

That confidence has already been badly shaken by a class-war referendum campaign in which the separatists sharply attacked the Quebec business elite. Tensions were further exacerbated by Parizeau's claim that "we were beaten by the power of money and the ethnic vote," a reference to Quebec's English-speaking and immigrant minorities. Such bitterness explains a continuing exodus of young English-speaking Quebeckers that is weakening the province's economic vitality.

English Canada is equally split. Quebec has long been demanding changes to the Canadian Constitution that would recognize it as a "distinct society" needing more autonomy and powers to adequately protect North America's only large francophone culture. But the western provinces are especially leery of giving Quebec anything like preferential treatment. Says Alberta Premier Ralph Klein: "[Distinct society] cannot be construed in any way, shape, or form [to] give Quebec special status."

IRRESISTIBLE MOMENTUM. The lack of consensus in English Canada puts Chretien in an uncomfortable spot because he has almost no chance of striking a compromise with the separatists. They control not only the Quebec government but also two-thirds of the province's seats in the House of Commons. "Any proposals made to Quebec would be roundly rejected and countered by an impossible list of demands," predicts Camdev's Hartt. The reason: It's in the interests of the separatists to prevent any genuine solution from happening. What they want is another referendum--soon.

Before they risk holding such a vote, the ruling Parti Quebecois is likely to formally install Bouchard as premier after Parizeau leaves at the end of the year. In a provincial election, Bouchard would probably win by a landslide. He would then have a mandate to call another referendum as soon as he felt the sovereigntists could win.

For many Quebeckers, sovereignty now seems to have an irresistible momentum. In 1980, when the first Quebec referendum on sovereignty was held, the separatists were crushed by a 20% margin. This time, they lost by just 1.2%. The betting is that unless English Canada can somehow meet Quebec's aspirations, next time the Quebecois will finally get their own country. Far from healing the divisions that threaten to tear Canada apart, the close Non vote ensures that the epic struggle will continue. Meanwhile, the hard steps that both the country and the province need to take may be postponed.

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