Canada coalition may be no quick fix for economy

By Louise Egan - Analysis

OTTAWA (Reuters) - The political crisis gripping Ottawa has brought opposition parties to the brink of power, but a solution to the other crisis they ostensibly set out to fix -- the economic one -- is much less certain.

The three opposition parties -- Liberals, New Democrats and Bloc Quebecois -- signed an unprecedented coalition deal aiming to unseat Prime Minister Stephen Harper in a vote next Monday for his alleged mishandling of the economy.

The first order of business, they say, will be a massive stimulus package to help Canadians through what some have called the worst global economic downturn in 80 years.

They say Harper -- reelected just weeks ago -- failed to deliver on a promise of fiscal stimulus in a budget update last week and they distrust his promise to deliver it in a January 27 budget.

Stimulus or not, the political upheaval frightens investors in the short term and may further rock financial markets, analysts said.

"The last thing we need right now in the midst of economic uncertainty is political uncertainty," said Craig Wright, chief economist at Royal Bank of Canada.

"It's yet another factor working against confidence in the economy ... It does pose some risks -- depending on how long it continues -- for growth prospects."

In the long run, there are so many uncertainties about a coalition government -- not the least of which is the involvement of Quebec separatists -- that some fear it could have a destabilizing influence on the economy rather than provide a quick fix.

"The whole thing just sounds unstable," said University of Toronto economist Steve Murphy. "Even if there's an agreement on paper, and even if you have these senior statesmen backing you, it's hard to imagine that that's stable."

Murphy worries that Liberal Stephane Dion, perceived as a weak leader who was punished by voters in the October election, may be seen as unable to stand up to New Democrat leader Jack Layton, a hard-nosed negotiator with an agenda further to the left.

CEMENTING SEPARATIST SUPPORT

There is also some speculation that the coalition will be obliged to boost spending in Quebec specifically to keep the support of the Bloc Quebecois, possibly alienating other regions. The specter of Quebec separatism is a sure way to spook foreign investors, analysts say.

"The inclusion of an explicitly separatist party in the ruling coalition in the form of the Bloc Quebecois would likely cause some trepidation in financial markets, especially on the part of international investors," said Eric Lascelles, economist at Toronto-Dominion Bank.

The Bloc will have no ministers but will have a say in setting the agenda and the budget, agreeing to back the Liberals and NDP until June 30, 2010.

The Canadian dollar, which fell to a 10-day low on Monday, could sink lower in a "knee-jerk reaction", Lascelles said.