01 May 2012

Jim Flaherty: The eurozone should sort out its own mess

At the meeting of the IMF recently, Canada decided against contributing more resources to support the eurozone. Canadian Finance Minister Flaherty writes that the IMF is not there to give special treatment to Europe, which is now endangering the world economy.

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 per cent 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.

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