OTTAWA – Bank of Canada Governor Mark Carney stressed Canada’s economic stability on Tuesday, while highlighting the importance of a Greek move to hold a referendum on austerity measures.
“Obviously in times of difficult structural adjustment, major fiscal austerity and tough decisions such as the Greek government is considering, it is important there is widespread support, democratic support, for such measures…,” he said, appearing before a House of Commons committee on Tuesday.
The austerity measures will impact Greece from years to come and broad support will be necessary to help them work, according to Carney.
Greek Prime Minister George Papandreou shocked the world and the markets late Monday by announcing that he would hold a referendum on country’s latest rescue package. The move erased any optimism caused by a European plan to contain the debt crisis last week.
Finance Minister Jim Flaherty said the delays are not helpful and have gone on long enough.
“I would encourage the Europeans to get to conclusion and implementation,” he said, in a separate appearance before the committee on Tuesday.
He added that was the message Canada would be bringing to the G20 later this week.
“It is not for us to try and dictate the terms to the Europeans,” said the finance minister. “It is for us to say delay endangers the global economy and we have interdependent economies in this world. What affects Europe, affects the United States, affects Canada as well.”
Carney said those potential effects are the biggest risk facing Canada’s immediate economic well-being, according to Carney.
In his quarterly monetary report released last week, Carney unveiled an updated and weakened outlook, forecasting modest growth into 2012 before the economy returns to full capacity by 2013. He also predicted sluggish growth in the United States and a mild recession in Europe.
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Carney told parliamentarians he is confident the crisis will be contained, although there is always a risk it will not.
The risks to the Canadian economy, he said, won’t be known until the details in the European recovery plan are revealed and implemented – details that could and should take years to address the depth of the structural problems facing the monetary union.
“Our expectation for the measures that are being taken by European authorities is that they will contain the crisis, but that’s different than resolving the issues,’’ he said. “Resolving the issues is going to take years, and there may need to be additional steps in the near term in order to ensure containment.”
He told parliamentarians that Canada’s direct link to Europe is relatively small and that the most likely effects, if any, of the European crisis are to the overall financial environment and to global confidence.
It’s the American banks, which have deeper relations with Europe, that could have Canada feeling the pinch, Flaherty said on Tuesday.
Canada’s economic strengths
Carney said that Canada’s banks are more liquid, have more capital and are better prepared for economic shocks than in 2008.
“The system has strengthened at a time when that strength may be called upon,” he said.
Carney’s testimony comes two days before leaders from the Group of 20 nations meet in France to again attempt to bring some resolution to the problem and to restore confidence in the global economy.
It is rumoured that Carney will be named at the meeting the next head of the Financial Stability Board, the body tasked with spearheading international banking reform.
Along with its banking system, Carney said the Canadian economy had other significant advantages including continuing monetary policy stimulus (i.e. low interest rates) and businesses with money to invest.
He also touted the need to pursue trade deals with the emerging economies of Brazil, China, Russia and India – places he said signified the “best opportunities” for Canadian business.
One significant risk identified by Carney was the level of household debt being racked up by Canadians thanks to low interest rates. He warned that Canadians need to think about whether they could afford that debt when interest rates rise to more “normal” levels.
Government must do more to prepare: opposition
Opposition members at the committee said the Canadian government has to do more to buffer Canada against the brewing economic storm in Europe.
Liberal Ralph Goodale said he understands the Greek government needs to garner support, but holding a referendum runs the risk that its citizens will turn down the hard measures that need to be taken.
He said that the Canadian government has to act with the understanding that the world economy is in a “precarious” situation.
“Countries have been pushing very hard for concerted and coordinated action at the international level, but they have to mind their Ps and Qs at home,” he said.
To that end, he urged the Conservatives to ditch an increase in Employment Insurance estimated to cost employers and employees $1.2 billion.
NDP MP Peter Julian also said the Greek plan to hold a referendum makes “good sense,” but urged the Canadian government and the G20 nations to focus on creating equality as well as financial stability.
He said Canada needs to introduce stimulus spending as well as a plan to cut costs for middle-class families.
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