We suggested two weeks ago that a rapid response by Canada to deteriorating economic conditions--along the lines of measures announced by the other seven G-8 nations--would give the sponsoring political party a strong platform to launch a governing-majority bid. Our reasoned assumption, based on his aggressive public statements, was that Prime Minister Stephen Harper would lead the effort.

For all his cunning, Mr. Harper proved himself doubly cold, though perhaps a little dumb, with the official fall economic and fiscal update delivered by Finance Minister Jim Flaherty on behalf of the minority government last Thursday. It was widely hinted that Mr. Flaherty would put off any stimulus plans until the February 2009 federal budget period, and there was no upside surprise there.

However, one new measure, included among other spending cuts designed to stave off a federal budget deficit, drew plenty of attention. The controversial proposal: tighten the belt by ending the practice of paying parties CAD1.95 for each vote they received in the most recent federal election. The move has the modest benefit of saving about CAD27 million a year; but the real impact is to cripple the Conservatives’ proximate rivals. Mr. Harper backed off almost immediately, his spokesman saying Saturday that the proposal wouldn’t be part of the mini-budget to be put before parliament for a vote next week.

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Leaders of the Liberal Party, the New Democratic Party and the Bloc Quebecois--angered by the failure to include new economic stimulus plans in the update, insulted by what they perceive as the prime minister’s political power grab (an end to subsidies would hurt the opposition parties more than the Conservatives, who have been more successful in fundraising)--signed a formal agreement yesterday seeking to install a Liberal/NDP government with the explicit support of the Bloc. Although cash-poor relative to the Conservative Party, what the Liberal Party, New Democratic Party and Bloc Quebecois do have in the aggregate is parliamentary power. And they may exploit parliamentary procedure to bring down Harper’s minority government and establish a coalition with lame duck Liberal leader Stephane Dion in charge.

There’s nothing Mr. Harper can do to prevent the three opposition parties from opposing his budget; because budget votes are by definition matters of confidence, if it fails the government falls. The prime minister has one serious option to prevent a vote of no confidence, but the end of that path is pretty murky.

Mr. Harper could ask Governor General Michaelle Jean that Parliament be prorogued. When Parliament is prorogued, it’s still constituted--all members remain as members, and a general election isn’t necessary--but all legislation is expunged. The Governor General would then summon the body back to session.

Proroguing would prevent any confidence votes being held until Parliament reconvenes, most likely Jan. 26, the day before Mr. Flaherty is to deliver the 2008-09 federal budget. Proroguing may only delay Harper’s demise: The three-party coalition could still topple the government by voting against the budget. But the Conservatives would have nearly two months to rally the public--and to finally introduce, with some specificity, what it plans to do to stimulate the economy.

If the governor general doesn’t agree to suspend Parliament, the government will likely face a confidence vote Monday, Dec. 8. The government would lose because the Liberals, the NDP and the Bloc together have more seats in Parliament than the Conservatives. Assuming a vote of no confidence, Mr. Harper will visit Ms. Jean to request that she call another election.

At this point the Governor General has a choice: accept the coalition proposal, or send Canadians back to the polls. If she agrees to an election, Jan. 19 is the earliest one could be held.

If Jean refuses to call an election, she would turn over power to a coalition headed by Dion, who already agreed, in the wake of the Oct. 14 drubbing the Liberals took at the polls, to step down as party leader May 2, 2009. If Jean installs the coalition, Dion step down May 2 and hand off power to whichever Liberal succeeds him as party leader. The Liberals would take 18 cabinet posts and the NDP six, each appointed by Dion.

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The first order of business for the coalition would be passing a large stimulus package, including new funding for infrastructure projects as well as assistance for automakers and other manufacturers.

Beyond that, there’s not much substance for investors to base expectations of a Liberal/NDP governing coalition. Liberal shadow finance minister Scott Brison said the coalition wouldn’t roll back the corporate tax cuts passed under the minority Conservative government. Even a CAD30 billion stimulus package won’t change that, nor will the NDP’s previous criticism of the cuts as benefiting only the energy and banking sectors.

All three members of the coalition have endorsed green initiatives, so there could be some negative impact on the oil and gas industry, particularly oil sands producers. The Canadian dollar took a steep dive yesterday in the face of all the political uncertainty, and the weakening could continue. But that could actually benefit energy producers because it would result in higher realized prices.

We’ll also be interested to know whether the Liberals’ affection for the income trust structure endures.