by Paul Martin
For me, this was a very personal issue. My father, half-Irish and half-French Canadian, was raised in French. I grew up in the middling space between the “two nations,” speaking English at home but being educated in French as a boy because of the depth of my father’s feelings about his francophone roots. When Sheila and I moved to Montreal as young people, it gave me a tremendous opportunity to reconnect with this francophone heritage in the midst of the flowering of the Quiet Revolution. As much as I shared the excitement of that period, for me, it was not only about Quebecers but about French Canadians across Canada taking control of their collective destiny. Naturally, given my upbringing, I was a fervent supporter of bilingualism. I remember the sadness I felt shortly after I was elected as an MP for Montreal when I was invited to speak at “Le Club Richelieu” in Windsor. These were the sons of the French Canadians with whom my father and I had picnicked with when I was a boy in Belle River, St. Joachim, and Pointes-aux-Roches. I began my speech in French only to be interrupted by the chairman after about five minutes. “Mr. Martin, would you mind switching to English?” he asked. “Many of us here don’t understand that much French.”
I do not have many regrets about my political career, but one of them is that I was not able to contribute more to addressing the mutual incomprehension between many among our anglophone and francophone populations. It pains me that the relationship between multiculturalism, which I fervently believe in, and its roots in the confederation of the two founding nations, is so widely misunderstood. Confederation was born out of the union of two peoples and two religions, English and French, Protestant and Catholic, historically perpetually at war with each other. It was the necessity of accommodating each other that created the space for multiculturalism, which is more than the tolerance of others; it embodies mutual respect and a recognition of the richness each wave of newcomers brings. Our society is always changing as a result. Thank heavens we have not been afflicted with some of the agonies that have troubled so many European countries in integrating new populations in the last few decades. In this country, true multiculturalism is a source of pride, and that fact is rooted firmly in our heritage — a heritage that includes the Aboriginal peoples of the continent.
My deliberate exclusion from the Quebec file by Jean Chrétien was not entirely a bad thing. It allowed me to focus on Finance, on issues where my weight could be fully felt, and where the prime minister and I could find a modus vivendi. Having the two of us working on the Quebec file was, to be frank, a formula for perpetual conflict, which would not have helped me in the principal task I had before me. I had few Quebec responsibilities and had neither the time nor the desire to take on any more. Still, with the election of a Péquiste government under the sovereigntist hard-liner Jacques Parizeau in 1994, everyone knew that it would not be long before there would be another referendum on Quebec sovereignty. As a Quebecer and a Canadian, I was naturally going to be involved in the referendum campaign. And as minister of finance, I had clear responsibilities.
One of the strongest arguments against separation had always been economic. Canada’s feeble economic performance in the late 1980s and early 1990s, however, combined with Ottawa’s fiscal crisis, had greatly undermined the force of that argument. The 1995 budget had been a significant element in reviving the economic argument as an effective weapon for federalists. And of course, the weaker the separatist cause became, the better off Canada, and indeed Quebec itself, would be fiscally and economically. Shortly after the 1995 budget, I gave a speech in New York aimed at reassuring investors that a sover eigntist victory was unlikely. I hoped to avoid having to pay a premium on our borrowing because of market fears of a “yes” victory.
The “no” side in the fall 1995 referendum was by law led by provincial politicians, which put those of us in Ottawa in a secondary role, at least officially. Nonetheless, like many federal politicians from Quebec, I was in demand in the province from the moment the campaign got underway. I gave several dozen speeches, and my message was well received. I talked, as others did, of the value of the Canadian passport and of Canada’s social safety network of pensions and old age benefits. More specifically, as minister of finance, I emphasized that separation, if it ever came, would come at a very severe financial and economic cost.
I also gave one major campaign address that did not go over so well. In a speech to a business audience in Quebec City, I attacked the separatist claim that trade had become internationalized and that the North American Free Trade Agreement (NAFTA) would guarantee Quebec continued access to its traditional markets in the United States as well as in the rest of Canada. I said three things. First, that separation was separation, and there was absolutely no guarantee that Quebec would be allowed to join NAFTA as a separate country. Second, that entry into NAFTA would be subject to a new negotiation with the United States and ultimately a Canadian veto. And third, that anyone who thought that NAFTA was sufficient to assure Quebec of the existing level of access to the Canadian market was deluded. You only had to look at the softwood lumber dispute between Canada and the United States to understand that being in NAFTA was one thing, and that being part of a unified country was quite another when it came to trade. Included in the speech were a few lines to the effect that separation would threaten 90 per cent of Quebec’s exports as well as close to a million jobs.
There is a difference, of course, between having your job threatened and actually losing it. But it was, in retrospect, a mistake to assume that such a nuance would stand up in the whirlwind of a referendum campaign. Parizeau had a heyday, immediately picking up on what I said, translating it into “Martin says a million jobs will be lost.” By the time I was able to react publicly, Parizeau had succeeded in spinning the Quebec as well as the national media and turning my intervention into a gaffe that dominated the news through a cycle of a day or two.
What really turned the campaign upside down, and gave the sovereigntists their best shot ever at winning a referendum, was Jacques Parizeau’s decision to step back and allow Lucien Bouchard to become the de facto leader of the “yes” campaign. Bouchard was a much more appealing figure than Parizeau, and he had achieved a kind of secular sainthood among some Quebecers after his near-death encounter with what was known as a “flesh-eating disease.” I personally believe as well that he embodied Quebec’s disappointment at the rejection of the Meech Lake Accord. Whereas Parizeau represented a leap in the dark, which was the federalists’ greatest weapon, Bouchard represented the pain of rejection, which was the sovereigntists’ greatest strength.
It has become part of the mythology of the referendum that the government did not order the development of a complete set of contingency plans in case the referendum was lost out of fear that they might leak and affect the result. Whatever was happening at the PMO and the PCO — and I was not privy to that — at Finance we definitely were preparing for the worst. From early on in the referendum campaign, the department was working with the Bank of Canada on what had to be done to steady the markets the day after the referendum. About ten days before the vote, I got a call from David Dodge. He told me that it was more important for the minister of finance to be back at work in Ottawa, while at the same time preparing to react to anything that might hit us, than to remain out on the campaign trail. In particular, he was very concerned about a potential run on Canadian financial institutions, a number of which had very significant exposure in Quebec. If something like that started to happen, and it could happen any day, the government might have to react in a matter of hours — something that it would be difficult for me to effect if I was beating the bushes somewhere up the Saguenay. A run on a commercial bank, for example, would require the Bank of Canada to inject liquidity into the system. But the government might also have to organize a consortium of banks to backstop any institution in trouble. David felt strongly that a calm reassurance from the minister of finance that the system was sound could be critical in preventing panic from spreading across the system.
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We also had significant concerns about the government’s own balance sheet. The potential scenario was much worse than Canadians, and even most outside experts, ever realized. Indeed, had the markets understood how dicey the situation was, in all likelihood we would have experienced major problems in the latter part of the referendum campaign before the result was even known. Remember that we were still in the first year of the fiscal plan laid out in the 1995 budget and it was less than a year since the Mexican peso crisis. The reason for our vulnerability was associated with our huge debt but was quite technical, which may explain how it escaped notice at the time and since. Most of Canada’s debt in this period was in short-term instruments, which meant that we were exposed to a very rapid run-up in interest rates. To make matters worse, by coincidence, there was a “bunching up” of these loans coming due, and needing to be renewed, within the weeks immediately after the referendum. That meant we could be forced to refinance a large portion of our debt at the worst possible moment. In the view of David Dodge and Don Drummond, a “yes” vote in the referendum could very quickly result in a liquidity crisis with huge downward pressure on the dollar and upward pressure on interest rates. Don estimated that if there were an “investors’ strike” — that is, a situation in which the markets would not lend to us at anything but preposterously high rates — the government could actually run out of cash by mid-December and be unable to pay public servants or issue cheques to seniors. It was a disaster scenario and it was not at all difficult to imagine.
As bitterly as we had complained about the Wall Street Journal describing us as a Third World country in terms of our fiscal situation, the truth is that there was a very real danger that we might have to throw ourselves at the feet of the International Monetary Fund (IMF), if that became our only resort, in the case of a referendum loss. The department was actively considering what kind of approach it would make to the IMF if that became our only resort. Of course, even we did not understand how quickly and deeply we would have been plunged into a post-referendum crisis in the case of a “yes” vote. Finance officials had heard rumours that the Quebec’s Caisse de dépôt — the fund that manages the Quebec equivalent of the Canada Pension Plan — was buying up Canadian dollars, presumably on the instruction of the Quebec government, to give itself as much flexibility as possible in anticipation of an early declaration of independence. It was only later that we learned that Jacques Parizeau had prerecorded a televised statement that would have launched the province on a fast track to independence.
On referendum night, I could barely stand to watch the results come in on the television we had specially set up in the Department of Finance for the occasion. Terrie and David Dodge would poke their heads in my office from time to time to let me know how it was going. Mid-evening, as the results trickled in and the outcome teeter-tottered back and forth, David went to a meeting at the PCO to discuss plans for the next day. Whether there was a contingency plan at the centre or not, for our part, we had a thick binder, gaming out every possible outcome and eventuality.
Thank heavens, I did not have to go out that night and try to stem an economic and fiscal crisis. The “no” side won by a margin of 50.58 per cent to 49.42 per cent — saved by a margin of fifty-four thousand votes. But the close call left a deep mark on all of us. After the referendum, we accelerated the program of rolling much more of our debt into longer term instruments. We paid a premium for doing so, but it also allowed us to sleep more peacefully following the scare we had experienced in October 1995.
After the referendum, given the agonizingly close results, the government had to respond in some way. Ironically — and this has largely been forgotten with the passage of time — Jean Chrétien’s initial response was to enact many of the elements of the Meech Lake Accord. He ensured that Parliament belatedly recognized Quebec as a “distinct society” and adopted a statute that gave the regions, including Quebec, a veto over major constitutional change. He also offered to hand over skills training to exclusive jurisdictions (something I was concerned about as finance minister because I felt it limited the federal government’s ability to ensure job mobility). The entire package was no more than an echo of the Meech Lake Accord because it was done by federal statute and not embedded directly in the Constitution, which is part of the reason it has subsequently been forgotten. It has also been forgotten, I believe, because much of what seemed so controversial in the late 1980s had become obvious common sense in the aftermath of the referendum.
Following the referendum, the prime minister decided that the rules needed to be set for what many feared could become a never-ending series of such events — the “neverendum,” as it was called. I fully agreed with him that it was intolerable for the sovereigntists to be permitted to set the rules of the game as if no one else had a legitimate stake. The question in the 1995 referendum was, if possible, even fuzzier than the question fifteen years earlier. It was outrageous to think that a PQ government might try to effect separation with a razor-thin mandate on a question whose precise meaning even constitutional lawyers had trouble figuring out.
As a Quebecer myself, I felt strongly that the government of Quebec had no right to tear my province out of my country on an unclear question with an uncertain mandate. For all those reasons, I completely agreed with Jean Chrétien’s decision to refer the issue to the Supreme Court of Canada in 1996. Some of those most closely associated with me in Quebec, notably Dennis Dawson, felt very differently about the federal government’s attempt to impose clarity for future referendums. He spoke out against it in public, as was his right, which the Chrétien people regarded as an act of defiance related to our rivalry over the leadership. It was not, but so be it.
Where Jean Chrétien and I parted ways was not on the question of the Supreme Court reference but on whether it was wise to have Parliament legislate on the matter after the court’s very strong judgment in 1998 laying out the requirements necessary for separation in response to the government reference. My feeling was that the Supreme Court judgment, with its reliance on international as well as Canadian law, supplied federalists with a more compelling case than any piece of federal legislation, which might appear to be just another volley in the continuing exchange between sovereigntists in Quebec City and federalists in Ottawa. The argument the court made that sovereignty was not something that could simply be grasped or proclaimed by the government of Quebec but would have to be granted by the international community, of which Canada was an important part, was incredibly powerful in Quebec. It constituted the high ground from which we as federalists were best positioned to fight. My concern was that the Clarity Act advocated by the prime minister would rob the Supreme Court judgment of some of its authoritative power. That being said, I agreed that clarity was an absolute requirement for the future. And so, once the cabinet decision was made to proceed with legislation, I supported it fully.
CHAPTER FOURTEEN
Into the Virtuous Circle
During my post-budget tour of the financial capitals after the 1994 budget, I gave a speech in New York, as is the custom for Canadian finance ministers. Afterwards, Jim Wolfensohn invited me up to his office high in a tower near Wall Street. Jim and I had been good friend for decades. Even before I joined Power Corporation in the 1960s, he had been recruited by Maurice Strong to be chairman of Power’s Australian subsidiary, and that’s how we got to knew each other. His career as an investment banker took him first to Britain and eventually to the United States. He would later become the president of the World Bank — one of the ablest to ever hold that position. But at the time, he was running an investment firm along with his partner, Paul Volcker.
Volcker had been chairman of the Federal Reserve Bank in the 1980s and had wrestled inflation to the mat by jacking up interest rates to unprecedented levels. In fact, it was thanks to Volcker that interest rates hit 22 per cent back in 1981, the day Ladi Pathy and I bought Canada Steamship Lines. Needless to say, the memory of this fact crossed my
mind as we shook hands. Volcker is a towering man who looked all the more imposing looming over Terrie, who just clears five feet in heels. At the time, Bill Clinton was early in his presidency and deeply engaged in his own struggle to combat the deficit, which turned out to be one of his great accomplishments as president. Volcker seized the opportunity to impress on me some of his thoughts about what had been going wrong in the industrialized world.
His central point was that fiscal and monetary policy had been at odds with each other. Fiscal policy refers to the way governments try to manage the economy by changing taxes, spending, or borrowing. Monetary policy refers to the actions of central banks — such as the Bank of Canada — to manage the economy by changing the money supply. When they go hand in hand, fiscal and monetary policy can be powerful tools. When they work at cross-purposes, they can cancel each other out — or worse, they can have unintended negative effects. This had been my precise concern when I decided not to renew John Crow’s term as governor of the Bank of Canada. Crow was inflexible in pursuing his own monetary policy, and appeared to feel he did not need to take account of the government’s fiscal policy. Volcker argued that the way out of our economic doldrums was to bring fiscal and monetary policy back into concert. If governments could get control of their deficits, there would be less inflationary pressure in the economy and that would allow central banks to ease interest rates. Although he didn’t use the phrase, he did speak to the concept of a virtuous circle, as officials at Finance called it, which could emerge if we got ourselves out of the vicious circle of bigger deficits and higher interest rates. In other words, just as the negative features of our existing economic practices built on one another, if we could turn the momentum around, it would be the positive elements that would multiply.