Many commentators are disappointed at the Conservative government’s refusal to contribute to an eventual IMF loan program aimed at helping to resolve the crisis in the euro zone. To be sure, its stated reasons for doing so don’t withstand scrutiny: The euro zone crisis has its roots in the structure of the monetary union itself, not in a lack of fiscal rigour. Before the crisis hit, governments in Spain and Ireland were running surpluses and had comparatively low levels of debt; the only country where the narrative of fiscal profligacy fits is Greece.
If the euro zone crisis were, in fact, a result of unbalanced fiscal policies on the part of the euro periphery, an IMF loan program would make perfect sense: It would provide temporary financing while the countries in difficulty restructured their revenues and expenditures. Instead, the budget problems of the European periphery are a symptom of flaws in the structure of the euro zone itself. The Canadian and U.S. monetary unions are matched by fiscal unions that routinely transfer large amounts of income across regions. Roughly 6 per cent of Alberta’s GDP was redistributed by Ottawa to the other provinces between 2003 and 2008. Transfers on that scale are politically unthinkable in Europe. As long as the European Central Bank resists calls for more monetary stimulus, fiscal austerity will only deepen the euro zone recession.
Although the Conservative government’s case for staying out of an IMF loan program is not convincing, the case for participating is even less so. An IMF loan program would do little to prevent a euro-induced financial crisis. These measures are essentially a matter of kicking the can further down the road in the hope that the country in question – Greece or Spain or Italy (or France?) – will be in sufficiently strong shape to pick up the can the next time we trip over it. The euro zone crisis is in its fourth year; deferring reform has only made it worse.
Another puzzling claim is that not participating in a loan program hurts our bargaining position in the ongoing Canada-EU trade agreement talks. The only way the Europeans can translate their potential need for a loan into increased leverage at the bargaining table is if the Canadian negotiating team decides to let them. Would-be debtors are in a position to dictate terms only when their creditors cannot afford to write off their bad debts. Countries like Greece or Spain may have that power over their European partners, but Europe does not have that power over Canada.
The least convincing reason for participating is the notion that staying out diminishes our standing in the international community. Ignoring the economics and joining an international initiative because “all the popular countries are doing it” is how the euro zone mess got started in the first place. The countries that are going along with the loan program are not doing the Europeans any favours; they are indulging the fantasy that European policy-makers are simply facing a temporary cash-flow problem. That’s not the case. Any realistic solution to the euro zone crisis requires a fundamental change in its structure; a system of significant fiscal transfers between euro zone countries and a mandate for the ECB to behave like a proper central bank are only two components of an effective reform agenda.
The Conservatives have made a poorly reasoned case for not participating in an IMF loan, but they have made the right decision. The European leadership is on the wrong track, and it is time people stopped pretending otherwise.
Stephen Gordon is professor of economics at Laval University and a regular contributor to The Globe’s Economy Lab blog.