Bank of Canada Governor Mark Carney says 'European authorities must create time to re-found their monetary union based on credible fiscal arrangements and more flexible economies,'
Europe's allies are becoming increasingly vocal with their frustration over the handling of the continent's sovereign debt crisis, setting the stage for tense negotiations when the world's economic leaders gather in Washington at the end of the week.
Bank of Canada Governor Mark Carney became one of the latest prominent non-European officials to weigh in on European affairs Tuesday, calling the situation "fragile, but fixable; manageable if it is managed," and warning that "if not quickly reversed, this situation could create a damaging negative feedback loop among the banks, lending and the real economy."
Finance Minister Jim Flaherty followed with a rebuke of his own.
"There's increased risk the longer this matter is delayed," Mr. Flaherty told reporters in Ottawa. "We've been talking about Greece since January, 2010, and the euro zone has not yet brought this matter to conclusion."
It's rare for old allies in the Group of Seven club of industrialized countries to apply so much overt pressure on another to change. But last week, Treasury Secretary Timothy Geithner flew to Poland to attend a meeting of finance ministers from the European Union, delivering a similar message to that of Mr. Carney, who made his remarks in front of a business audience in Saint John. On Monday, President Barack Obama discussed the debt crisis by phone with German Chancellor Angela Merkel.
Europe's governments have been struggling to implement a convincing financial backstop for struggling countries such as Greece and Portugal for more than a year. The situation has grown acute amid worries over the exposure of European banks to sovereign debt that would lose much of its value in the event of a default. The International Monetary Fund said in a new forecast Tuesday that failure to restore confidence in Europe could have "severe" repercussions on the global economy.
These interventions risk a backlash from European politicians. Austria's Finance Minister told reporters that Mr. Geithner had little business advising Europe on how to run its economy, given the U.S.'s own failure to come up with a coherent debt plan.
Mr. Flaherty and Mr. Carney are set to join their counterparts from the G20 major economies in a meeting in Washington on Friday and then again at the larger annual meeting of the IMF on Saturday.
Big emerging economies such as China and Brazil also have expressed concern about Europe's debt issues. Brazil will propose at a meeting of the BRICS club of countries – a group that also includes Russia, India, China and South Africa – that emerging markets make billions of dollars available to the IMF to help ease the strain in Europe, Reuters reported from Sao Paulo Tuesday, citing an unnamed official.
Mr. Carney said in Saint John that Europe has all the resources it needs to resolve the situation. What the continent's politicians are lacking, he suggested, is resolve. Mr. Carney took the unusual step of outlining specific measures that Europe should take to restore confidence in its ability to avoid a cascade of defaults, including a "comprehensive capital plan for banks" and a "sizable backstop" for cash-strapped countries.
"European authorities must create time to re-found their monetary union based on credible fiscal arrangements and more flexible economies," Mr. Carney said. "In our opinion, the existing European resources, including the European Financial Stability Facility and the European Central Bank facilities, can be used much more efficiently to create a multiyear window for these adjustments."
The IMF cut its forecast for global economic growth this year and 2012 to 4 per cent, down from previous estimates of 4.3 and 4.5 per cent respectively. The fund said the recovery has entered a "dangerous new phase" where the slightest jolt could knock the economy back into recession, and that confidence around the world has "fallen sharply."
Canada will suffer along with the rest of the world, the IMF said. The fund dropped Canada's economic growth outlook to 2.1 per cent in 2011 from 2.9 per cent in a June forecast. Canada's gross domestic product will expand just 1.9 per cent next year, compared with a previous estimate of 2.6 per cent, the IMF said.
For Canada, the issue is more the United States than Europe, Mr. Carney said. The Bank of Canada chief acknowledged that the threat of another U.S. recession has risen, and as such, Canada's prospects have darkened.
Still, Mr. Carney urged Canadian businesses to forge ahead with steps to make them more resilient, such as increasing links with faster-growing emerging markets and upgrading their equipment to become more productive.
"What can Canadians do about the situation in Europe, or the politics of the United States? Not much is the short answer," Mr. Carney told reporters. "But the basic point I'm trying to get across is, it doesn't matter, in terms of the bigger decisions that Canadian businesses, and businesses here in New Brunswick, have to make."
SCALING BACK
Volatility is causing many Canadian companies to pause in their decision making and activities. Aberfoyle Metal Treaters, for example, has suspended expansion and hiring plans.
The company, based near Guelph, Ont., coats metal for industrial manufacturers. It is holding off on plans to expand into a new building, which means delaying the hiring of eight or nine new people.
Exposure to ups and downs in the manufacturing industry is rendering decision making difficult.
"We're in a holding pattern," said president Harry Hall. "I wish I could say that three months from now this doom and gloom will be behind us, but I don't think anybody's in a position to say that."
FORGING AHEAD
Some companies, such as Ottawa-based Clearford Industries Inc. , are overhauling their strategies in the face of economic uncertainty. Twenty months ago, president and CEO Bruce Linton decided to focus his wastewater-treatment business on a handful of emerging markets such as Colombia, Peru, India, Sri Lanka and Kenya, rather than concentrating on North America.
That effort is now bearing fruit. On Tuesday, after a dozen trips to India in the past 14 months, the company announced its first foray in the country, into a suburb of Bangalore, a deal it hopes will be a springboard for further growth there.
"I'm more happy about this direction today than I am even 20 months ago," said Mr. Linton, who logged 300,000 air miles last year to spearhead Clearford's global efforts.
"It was our view that the Canadian equity markets and the Canadian business markets for what we do were both pretty constrained – but the international interest in what we do we think could be pretty substantial."
Tavia Grant