Jim Flaherty: Fix your own mess

Special to Financial Post
Why Canada will not provide IMF funds for eurozone
By Jim Flaherty

At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.

We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.

In order for any IMF action in Europe to be successful, a sense of direction and a comprehensive blueprint to return to sustainability are necessary. The question of sustainability cannot be separated from that of the future of the European monetary union. As such, its members should take the lead in defining a comprehensive and credible blueprint. This requires more than incrementalism and wishful thinking. Europe has taken important steps in this direction with the fiscal compact, with economic and fiscal reforms in Italy and Spain, with an enhanced firewall, and with the recent actions of the European Central Bank to provide liquidity support. However, more is needed to return the eurozone to sustainability and to address the systemic internal imbalances that threaten the monetary union.

Since 2008, and throughout the European debt crisis, I have been telling my international counterparts that it is important to overwhelm the problem and get ahead of the markets. This is what the United States did in 2008, and it is what Canada did in 2009 by deploying a fiscal stimulus of roughly 4% of GDP over two years in response to a crisis originating outside our borders. These bold actions paid off. Rating agencies have reaffirmed Canada’s strong AAA credit rating, and we are now on track to return to balanced budgets over the medium term. By contrast, actions taken by the eurozone have fallen short of overwhelming the problem. The “muddle through” approach has led to an erosion of confidence in public leadership and too many missed opportunities.

Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.
The European debt crisis also raises a question of resources. The eurozone has sufficient resources to tackle its sovereign debt crisis, but there is an unwillingness to commit them to tackle the problem. In these circumstances, IMF loans are not an adequate substitute for a serious commitment by eurozone countries to resolve this crisis. We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400-billion, already has adequate resources to deal with imminent needs.

The manner in which the IMF provides support must also be fair. It has been very successful at resolving crises using its trusted model of time-limited lending agreements, with strict conditions imposed on the borrowing country. This is why I believe that all countries borrowing from the IMF should be treated the same. Canada’s position is that conditionality should be determined exclusively by the IMF, and not by the “Troika” of the IMF plus the European Central Bank and the European Commission.

If the eurozone is seeking assistance, it should not be setting the terms under which this assistance is provided. Further, Europe controls 34% of votes at the IMF. In that context, the simple majority required for the fund to make an investment is a relatively low threshold. Emerging markets play an increasingly important role in global economic issues. Canada has been a leader in recognizing changing international dynamics and advocating greater representation of emerging markets at the IMF. In this context, we believe that measures should be taken to ensure that major decisions about resources dedicated to Europe require more than a simple majority.

Canada believes in the eurozone’s ability to solve this crisis. We also believe in a strong and fair IMF where emerging economies can take their appropriate seat at the table. This is why we have decided not to provide additional resources to the IMF for the eurozone.

Financial Post
Jim Flaherty is Minister of Finance and the longest-serving finance minister in the G7. This article is also appearing in The Daily Telegraph, London.