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Yep. I was wondering that myself. This post needed to be written.

The other difference is that it's a bit clearer who's in charge in Canada than in the Eurozone. If there were a run on Ontario government bonds, I think the Federal government and Bank of Canada together would come up with a quick and appropriate response.

Yeah, this is one of those conjectures that would have produced a really interesting post if it were true, but one of the nice things about blogging - as opposed to writing for journals - is that you can publish negative results.

A currency union will give you distorted exchange rates.
What about the ability of ON to trade with the rest of the world?
What about overvalued EXR changing the import patter of AB?

When the Pairies provinces essentially went bankrupt in the mid-30's, there was a quiet intervention from the Feds. So efficient that everyone has forgotten and AB lectures everyone about fiscal rectitude. So does Merkel washing out her hair the European intervention of the early 2000's
Politically interesting that we begin to worry about that now instead of when it was a problem only for QC and the Maritimes.

It's true that a currency union means that Ontario can't adjust its exchange rate with the rest of Canada, but looking at the interprovincial trade flows, it's hard to see how that's as much a problem for Ontario as it obviously is for Spain.

"The other difference is that it's a bit clearer who's in charge in Canada than in the Eurozone. If there were a run on Ontario government bonds, I think the Federal government and Bank of Canada together would come up with a quick and appropriate response."

In addition to that, the EZ doesn't have the institutions to do this:


Monetary union is a broken arrangement in the absence of fiscal and political union.

Looking at the second Ontario chart, the problem appears to be a collapse in Ontario's exports to other countries, namely the US. This doesn't necessarily mean that trade volumes have dropped, but changes in the terms of trade could have resulted in reductions in the value of exports. I think the most likely culprits are the rising Canada-US exchange rate (effects of the Dutch disease?), and possibly structural changes in the automotive industry (long term weakness of the big 3 American automakers?).

There also appears to be a long term increase in Ontario's imports from other provinces. Could this be increasing imports of energy products from other parts of Canada?

That trade collapse reinforces my view that Ontario has caught Dutch Disease. I had a steady stream of starter jobs in manufacturing until 2008, starting in the late 1990's with the 60-cent dollar. It was impressed on me then by others that a cheap Canadian dollar was manufacturer's gain.

I thought it was the crack-cocaine of the business world; a wonderful high but the withdrawal it terrible. Currency markets always seemed a very fickle friend to me.

So a US slump and a petrodollar currency due to Alberta means Ontario gets the shaft.

ON is also paying the price for something else.
1)The financial disease. Any overdevelopment of the parasitic sector leads to distorted prices in the main city. It also insulates the elite from the manufactring sectors problems.

2) The overdevelopped manufacturing sector. The two world wars where Canada (ON mostly)was the arsenal of democracy led to an oversize manufacturing sector. Normally, manufacturing is about 20-25% of GDP and direct emplyment. In the '50's, it went up to about 30-33.
Moreover, the colonial structure of the Canadian economy, the West sending food and Québec sending light manufactures ( Maritimes being mere lifeboats stranded on the shores...) enabled the ON workers to be complicit in the ripping off of the rest of the country.

Then ,as it was about to contract. at least relatively, the Fed policy of "What's good for Ontario is good for...Ontario" went into effect. The feds did everything to boost the automotive sector, including the AutoPact. The blatant favoritism was a constant source of criticism from QC politicians from the mid-50's to the late 90's ( little did they know that we dodged a future bullet).

2 generations of young men (and women after equality came in) were led to believe that a grade 10 education ( 11 to 13 were just coasting to your diploma and off to the plant) would guarantee you a lifetime of riches. The AutoPact was a pact with the Devil and like all such pact, you can't outwit Satan. Mothers, don't let your sons grow up to be auto workers...
The banks gave enough to Queen's Park to make everyone think they were on the same boat. Today they are now divorcing the no-longer beautiful and useful prole bride.

In 1962, Anglo-Montréal and Toronto bankers made another big mistake: they refused to fund Hydro-Québec nationalization. Forced to go to New York, QC then began to sell electricity to the U.S., both because of the new business contacts and the necessity to hedge foreign exchange risks. After which, ON refused to buy QC electricity (except marginally in the recent past). A big opportunity for mutually profitable trade was missed out of spite.

ON proles are paying the price while a now more educated QC workforce makes helicopters, flight and medical simulators, photonic devices and drugs while AB and SK revel in their unearned oil rent, god's reward for the righteous.

Of course, as soon as the early '40's, the guys at Finance recognized it could't work and, after the Rowell-Sirois Commission, set up the first effective mechanisms to deal with the effect of currency unions in a colonial economy: fiscal federalism, equalization and transfer payments, shared-cost programs and such. With a good dose of sneering toward the lazy recipients...AB is now returning the gift. As welfare recipients say in the movie "La grande seduction" ("Seducing Dr.Lewis") :"Money for two weeks and shame and contempt for the whole month".

Stephen, Jacques Rene is stuck in the spam filter.

If Ontario is Canada's Spain, is Quebec Canada's Greece?

Livio: Spain got there via an influx on the capital account used to fund a building boom, workers being diverted from exports to the building trades. Ontario got a real shock on the current account.
So Ontario not being Spain, Québec isn't Greece...

Stephen: let my people go!

Jacques, Quebec is hardly better and all of those sectors have plants in Ontario, thank you. Messier-Dowty in Ajax, Aventis in Toronto (lots of drug makers in Toronto), electronics stuff all over the place.

Second, Grade 11, 12 and OAC were among Ontario's great strengths. No other jurisdiction in North America to provide 2 High School Chemistry courses or 2 Physics courses. Release from High School at Grade 10 was only for the Basic stream, the truly bottom of the barrel academically. General required Grade 12.

Third, contrary to everyone's ideas, neither Ontario nor Canada have an education problem in our workforce. We don't. You can pile on degree after degree, it won't do you any good. We have a capital and market demand problem, not a supply-side education problem. Businesses that are really expanding will take anybody. Businesses that are not expanding are picky. The trick is to be picky while decrying that the unemployed are uneducated, thus diverting public attention from your real problems.

Fourth, Ontario went into nuclear power in the 1960's anyway, if you want to be provincial CANDU was an Ontario program, it always was. The uranium is refined in Port Hope, much of the reactor equipment and the fuel is assembled in Peterborough and then there is AECL itself in Mississauga.

The truth is that every manufacturing firm in Canada depends for its survival on American business. The more specialized it is, the more dependent on the Americans it is. It doesn't matter if its in Quebec or BC, there is an American address on most purchase orders.
Been there, seen that, it's not voodoo.

Anyway, you can make all the fancy products you want, most manufacturing firms have clamped down on wages and eliminated their DB pension plans. Anything white-collar will be on contract without any security whatsoever. Such is modern business.

Oh, and before you start in about jets, I had the delightful experience of going to a Bombardier recruitment booth in 2006 at university. They weren't actually hiring; they had announced layoffs and restructuring on the same day. I asked them about why there were there, they had no reply.

Oh yes Jacques, there is a problem with your spite analysis. Ontario Hydro was nationalized lock, stock and barrel and had been so long before Hydro Quebec was ever thought of.

Ontario did the same thing long before Quebec ever did, and Quebec's actions in the 1960's only copied Ontario in the 1920's.

JRG says "When the Pairies provinces essentially went bankrupt in the mid-30's, there was a quiet intervention from the Feds. So efficient that everyone has forgotten and AB lectures everyone about fiscal rectitude."

Albertans will rightfully continue to provide lectures on fiscal rectitude. The Feds bailed out Saskatchewan but refused to help Alberta. That is why Alberta remains the only province to ever default on its debt. Of course, being Alberta, all interest and principal was eventually paid off to the satisfaction of bondholders.

Non-Albertans may not appreciate a couple of things about AB. First, the PC's have moved hard to the center, and never where very far to the right (despite the rhetoric). Albertan like to tell congratulate themselves on their conservative credentials, but if you ask they "wanna cut spending on health, education or infrastructure spending?" the answer is almost universally "NO!". The mayor of Calgary is very liberal and quite popular, and the mayor of Edmonton is at most small-c with a good does of progressive in there. The PCs are in power mostly for historical reasons, and the party is very good at changing to with the electorates preferences, much like the federal Liberals used to do.

AB pours tons of money into education, health and infrastructure. I believe (too stuffy with a nasty cold to bother checking) that, per capita, AB is one of if not the top per capita spender. Despite some expansionary austerity rhetoric during the recession, what actually happened was some big spending while construction costs were down (because during the boom in the early 2000's it got stupid - projects where running treble their original estimated cost). They tried to cut a little on education and Redford immediately reversed it when she took office, much to everyones relief.

What AB really has is a taxation problem. Albertans HATE, HATE, HATE the idea of a sales tax, but they want daycare, education, health, and infrastructure on a Scandinavian scale. They think they can have it for free simply by soaking the oil & gas companies. So far, we're managing to pull it off. In the early 2000's gas revenue paid for it. When that disappeared thanks to fracking in the Bakken and Texas, peak oil (at least in Ghawar) rode to the rescue and investment has been pouring into the oil sands.

If/when oil-sands royalty revenue tanks, AB will be in for a VERY rough time if we don't broaden the tax base substantially (aka a sales/vat tax). We will make ON look like paragons of virtue.

I second almost everything that Patrick says, except the part about "soaking the oil & gas companies". Patrick is right in that Alberta's tax base is narrowly dependent upon royalties, but with oil running at $100/barrel, one can hardly claim that the oil companies are being soaked.

Steve Ridge: Yes. Commenting while preparing supper makes one write faster than one should.

Patrick: you're right. Bark worse than bite. Harper is interested in building prisons than closing hospitals. Nowhere anyone outside part of the elite wants to abolish the welfare state. And they won't as long as the electorate will punish them if they do it. Except in some parts of the U.S. where the middle is ready to sink as long as the THEM sink lower.

AB is a lot like TX. A lot of the original settlers came from there. They established the culture.

Determinant: I was not talking about the quality of available education. ON had a far better schol system than most US states and still does. PISA is clear on that.
But a lot just coasted because they knew they could have a good deal. We had the same thing on the North Shore till recently. And a lot of men in the Western world are currently going through the same historical process.
The process of getting back is long and painful. Elkhart IN ( a case I know about professionally) is currently going from the former capital of RV assembly to the capital of control panels design and manufacturing. The sons are making them. Not the fathers.

Drugs and airplane in ON are doing as good as elsewhere. They are not the problem. And they have a high level workforce.

Getting more schooling is no guarantee indeed. But being 45 and less educated will send you straight into the wall if you have the misfortune of being there when they no longer need you...As having a grade 3 in the 60's and working in a textile mill. Though you could go Simply acknowledging that a rational choice made 30 years ago is no longer valid for reasons outside your control is not blaming the victims. It makes you despair that they are left to fend for themselves.

The socio-political aspect of the Ontario government buying out the electric companies was vastly different than Québec doing the same.
In Québec, there was discussion about public service and oligopoly as in '20's ON. But the real point was enlarging management and technical staff sourcing. And that was the rub.
The behavior of the banking establishment in that episode ( and others)is well-documented.
I was young but I lived during that period and its aftermath.

Ontario developped a brilliant nuclear industry. Forging stronger economic ties between provinces would still have been a good idea, especially at the time. The reasons about not buying from HQ were not only about developing nuclear engineering. Again, I lived through that.

Many of the conflicts regarding electricity purchases go back as far the 1930s and the Beauharnois scandal. Up to that point the Quebec government and the private interests that were later nationalized into HQ were quite eager to sell substantial amounts of power from newly built hydro stations in Quebec to Ontario under multi decade fixed priced contracts. One early limited example of this cooperation was Cornwall Hydro(serving Cornwall, ON) signing an 85 year fixed price contract in 1915 to build the Les Cedres station, a contract that HQ and its predicessors honored right(Note to Newfoundland)until the end in 2000. For most of the life of this contract Cornwall had cheaper power than most of Quebec.

The real issue began with the Beauharnois scandal(in which at least one element were Ministers in the Ontario Conservative Government demanding bribes to agree for Ontario Hydro to purchase power from the Dam). Out of this came the Liberal Mitch Hepburn government which backed away from any power purchase agreements with Quebec on the basis additional power would never be needed(from the perspective of the depths of the Great Depression).

My sense is the nuclear program in Ontario would have probably been more sucessful if they stuck to it to a greater extent after Three Mile Island like France did(To some degree they did with Darlington albeit with massive cost overuns). However notwithstanding the claims many Anglo Canadians make to Canadian nationalism they are heavily influenced by US media/cultural/political forces.

Jacques, your post sounded a little too much like a political rant and I wanted to rebut it.

When I worked in a call centre taking US calls we used to wonder at the quality of education available in US states. My coworkers were all twenty-somethings, either just out of high school or looking to launch a career and needing a tide-me-over. Some of the calls we took had people who were extremely averse to READING. It was explained to us that yes, some US states had schools that were that bad. Appalachia and going south were pretty bad in turning out quality graduates.

I don't argue that some of the Quebec private power companies needed to be cleaned out. My family lived in Quebec at that time and older members remember the Gatineau Power Company as the "Got-No Power Company" due to its frequent blackouts and brownouts.

The story of nuclear power in Canada is complicated due to the fact that we developed CANDU which uses heavy water and natural uranium. Nobody else uses this design. CANDU reactors work amazingly well at low cost until their midlife refit and then you have to spend a very large amount to fix them. Light water reactors have higher but steadier recurring maintenance costs.

The main export market for CANDU was going to be India but then India detonated a nuclear bomb in 1974. It is believed they used a research reactor that Canada gave them to obtain the fissile material. Canada suspended nuclear exports to India and CANDU's future was bleak.

Stephen, a related question that I have been wondering about: to what extent does the bond market believe that the Bank of Canada will act as a lender of last resort for Ontario (vs. the ECB and Spain)? Of course almost all of Ontario's debt is in Canadian dollars and thus the Bank of Canada could put an end to any self-fulfilling run based on fears about Ontario's ability to repay its debt. And the BoC undoubtedly would, though under what legal and political framework, I have no idea. And if this is true, then most of the discussion about the ratings agencies, and the need for austerity programs to satisfy these ratings agencies, is based on a false premise.

The best example is the threatened bond default of Saskatchewan in 1992. The Bank of Canada approached several primary dealers about their reaction to a provincial bond default and the federal Department of Finance prepared to step in to manage a defaulted province's financial affairs.


Legally it would have been an activation of Section 91's "Peace, Order and Good Government" clause used under that section's Emergency Powers interpretation.


In Canada it is the federal government that is inherently sovereign and possesses all powers not delegated to provinces. Jacques may disagree with me, but the Government of Canada can do an incredible amount when it wants to, generally under Reserve Powers, War Powers or POGG.

Determinant: I will certainly not disagree that the Federal Government has the power. I also believe that BoC will act ,indirectly, to do what is needed in contrast to the ECB.. The Boc and Federal Finance are possibly the world's most competent, and more importantly, sanest economic institutions currently active. They had been so for a long time. The market know that. That kind of credibility is far more valuable than the we-will-fight-inflation-till-the -Euro-disappears kind.
Canadian provincial govts are also generally far better run, on an intellectual basis, than most american state. All of them have good Finance staff that understand macro.And communications between them and the fed are way better handled than in the U.S.
Try imaginig nutcases like Scott Walker or Rick Perry elected Premier. You just can't.

For all our internal squabbles and competing interpretations of history, Canada is among the five or six better managed countries. That's a reason why The Economist once called it "The most boring country in the world." They meant it as a compliment.
And he markets also know that.

I wholeheartedly agree. FWIW I have been trying to join the Public Service of Canada. Anyone who thinks that nepotism, favour or corruption cut it in the Public Service is sadly mistaken. This is an organization that turns on merit, end of. The best advice to follow, aside from getting a Public Service-standard resume, is to not make any claims on that resume that you can't back up with proof. The Public Service doesn't do laxity and gratuitous claims.

While we are nearing the realm of that dead-horse issue, a National Securities Regulator, I think that it is a very good idea and needs to happen, but it needs a special constitutional amendment to make it happen, just like the amendments that allowed EI and the Canada Pension Plan.

Ultimately it will be the responsibility of the business community to pressure provincial governments into doing the right thing. A good cross-provincial securities scandal involving white-collar crime would help too.

Furthermore, given Canada's system of transfers from the Federal Government to the provinces, you have to be grossly incompetent to ruin a province's finances so much that it becomes shut out of the bond market or insolvent. A sitting government that incompetent would trigger a political crisis before a solvency crisis.

"A sitting government that incompetent would trigger a political crisis before a solvency crisis."
Absolutely. Given the basic sanity of provincial Public Service and politicians ( and politicians are way better than the public gives them credit, I have been among them for long enough to know), we would not even go there.

I put it down to the Riding system and our centralized political parties. They put a good deal of stock in selecting sane, i.e. electable candidates who are not going to say weird or stupid things that cause a media frenzy and undermine the party platform, the leader, and every other candidate.

You can reason with such people.

Look at the latest crop of NDP MP's from Quebec. That was the largest group of outsiders and unlikely candidates to get into the Commons in decades. But the NDP's staffers took over and made sure that none did themselves much public image harm. I would say that some of them even show potential.

Gregory - that's a question I would dearly love to get a better handle on. There don't seem to be any convenient, publicly-available numbers on provincial interest rate spreads. At least, none I can find.

Statistics Canada announced they were eliminating their paywall as of January 1.

Why this didn't cause an instant party here at WCI I will never know.


"Ontario developped a brilliant nuclear industry. Forging stronger economic ties between provinces would still have been a good idea, especially at the time. The reasons about not buying from HQ were not only about developing nuclear engineering. Again, I lived through that."

Churchill Falls? Quebec's refusal to allow Newfoundland to wheel power and Ottawa's refusal enforce the no-discrimination against natural resources clause of the Constitution?

Determinant: in any family quarrel, there are no totally innocent party. As they say in the Midddle East ( according to the Lebanese side of the family) if you understand the situation, you missed some informarion...

As long as we can stipulate that there are no innocents. Canada has been having family squabbles since before Confederation.

But squabbles don't amount to a vast Anglo-Ontarian conspiracy against Quebec.

I hate to break it to you Jacques but we Anglos just aren't that organized.

Let me see if I can remember these rough figures correctly:
AB per-capita GDP = about 90K . ON per-capita GDP = about 50K. Close to double.
AB median income = 84K; ON median income = 70K. About 20% higher.
How come Albertans are so underpaid relative to Ontarians?

All in all, considering that Germany has also run several deficits in the last decade, could we still say that Ontario is to Canada what Germany is to the EU?

henryc:"How come Albertans are so underpaid relative to Ontarians?
It comes down to the difference between GDP and GNP.
Oil production is capital intensive and in the case of AB there is a,lot of foreign ownership. Profits are, in real terms, exported through the delivery of oil. Exports are a plus in both GDP and GNP but remitted profits are substracted to get at GNP.
Personnal income comes GNP.
If all oil production was AB-owned, there could be a big difference between average and median income.
We have been into the habit, since 1986, of using almost exclusively GDP, mostly because it is faster to gather and compute. Big mistake.

Krugman has pointed a few times to the same phenomenon in Ireland. There are a lot of people who claim Ireland is getting out of trouble because GDP is up, though unemployment is high and Personnal Income is still way below pre-recession level. But Ireland export a lot of pharmaceuticals, a foreign-owned capital-intensive but low manpower industry.

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