Canada, the IMF and the G20

The Harper government decided to attack Thomas Mulcair on the issue of Canadian support for additional IMF resources to deal with the euro area crisis, implying that Canadian taxpayers should not be asked to “bail out” a rich area of the world.

As recounted in Macleans here, on June 8, “Before QP yesterday, the Conservatives used four members’ statements—from Shelly Glover, Randy Hoback, Bernard Trottier and Pierre Poilievre—to lament that Thomas Mulcair would prefer to bail out the “sumptuous European welfare state countries and the wealthy bankers that lend to them”—a “reckless” plan that would apparently “kill jobs and put a huge burden on the economy here at home.” Finance Minister Jim Flaherty then criticized Mr. Mulcair during QP, in response to questions from the NDP leader, and after QP, in a scrum with reporters.”

Mr. Mulcair was, in fact, mainly concerned to sensibly argue that Canada should have a Plan B to deal with the possibility of a new global crisis, and only quite tangentially, if at all, endorsed Canadian assistance to the IMF. What he said was this:

Mr. Speaker, the Prime Minister pretends to be concerned now, but two months ago in Washington the Conservatives were singing a different tune. At the G20 meeting in April the Minister of Finance led the effort to block an international plan to resolve the European economic crisis. He told European countries “to step up to the plate” and fix the problem on their own, as if our fate were not intimately connected to theirs, and he gets applause for that from the peanut gallery. When will the Conservatives stop lecturing European countries and put forward a real plan to protect and create jobs here in Canada?

The Harper Government does – quite reasonably – argue that the euro area has the internal resources to deal with the issue. After all, the euro area as a whole has a manageable overall public debt to GDP ratio, and no significant balance of payments deficit. If the euro countries as a whole and the European Central Bank were to backstop euro area wide public debt, there is no risk of default, and every reason to believe government borrowing costs in the peripheral countries at risk would fall to sustainable levels.

But that does not mean that an IMF role would not be helpful.

In an informed post that is well worth reading, Scott Clark, former Deputy Minister of Finance and former chief Canadian representative  to the IMF  makes the case that we should not stand aloof from an international efforts to forestall  a new financial crisis and possible relapse into global recession.

“Lecturing from the sidelines and refusing to join a G-20 initiative at the IMF is not contributing to a resolution of the EURO crisis and the threat of contagion to the world economy.”

He notes that  Canadian taxpayers would not really be on the hook, since Canadian support for the IMF would come in the form of a temporary, repayable loan from special drawing rights from the IMF now parked in the Bank of Canada’s foreign exchange stabilization fund.

“There would be no use of taxpayers’ money and there would be no budgetary impact.”

I would add that IMF involvement in a euro area rescue might help insofar as it might make it politically easier for Germany to participate in a “bailout.” For Germany to effectively take the lead in a co-ordinated international response is surely an easier sell at home than acting alone. And that is before taking into account the very real dangers of Germany imposing its unilateral will on its European “partners.”

On balance, I think it is unwise for Canada – and the US – to refuse the IMF request for new resources. And I suspect that Mr. Harper, who very much appreciates the gravity of the looming disaster,  might yet change his mind.