Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Report on Business

Economy Lab

Delving into the forces that shape our living standards
Best Business Blog, EPPY awards, 2011 and 2012

Entry archive:

Economy Lab has moved

Only Globe Unlimited members will now have access to a wide range of insightful commentary
and analysis on the economy and markets previously offered on this page.


Globe Unlimited subscribers will be able to read these columns,
written by some of Canada’s most deeply respected economists,
such as Christopher Ragan, Sheryl King, Andrew Jackson, and Clement Gignac,
as part of our ROB INSIGHT section.


All of our readers will still be able to browse the Economy Lab archives and read our
broader coverage of economic data and news by accessing their 10 free articles a month.


Learn more about Globe Unlimited and how to subscribe.

Uri Dadush, a former director of economic policy at the World Bank, is arguing for a greater role for the International Monetary Fund in the European crisis. (TIM SLOAN/TIM SLOAN/AFP/GETTY IMAGES)
Uri Dadush, a former director of economic policy at the World Bank, is arguing for a greater role for the International Monetary Fund in the European crisis. (TIM SLOAN/TIM SLOAN/AFP/GETTY IMAGES)

Economy Lab

Should Canada, U.S., help fund EU rescue? Add to ...

The official position of Australia, Canada, and the United States through the European debt crisis has been constant: the European Union is a plenty rich and therefore has the means to fix things on its own; therefore, leave the Group of 20 out of it.







To some, this hard line is appropriate. A rush of aide from the rest of the world would only let governments such as Greece and Italy off easy. And indeed, the refusal of the G20 to contribute to an emergency euro fund at the Cannes summit last month was followed by changes of government in each of those countries, political shifts that increase the chances of successful programs to pare budget deficits.

More related to this story







Yet to others, the obstinacy displayed by Canadian Prime Minister Stephen Harper, U.S. Treasury Secretary Timothy Geithner and others is like putting a lid on your well while your neighbor’s house burns. Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace, says the notion that European countries can resolve the debt crisis on their own is “wishful thinking.”







At present, Europe actually doesn’t have the resources necessary to finance a bailout fund sufficiently large to secure the debts of Italy and Spain. The average debt of the 17 countries that use the euro is about 85 per cent of gross domestic product, which is right in the danger zone that economists such as Carmen Reinhart and Glen Hodgson say countries tend to get into trouble.







The debt of Germany, the region’s richest economy and the country everyone expects to finance the biggest share of any bailout, is more than 80 per cent of GDP. So is the debt of France. This is why Standard & Poor’s warned this week that it might downgrade the credit ratings of virtually the entire euro zone.







To be sure, there still is wealth in Europe, just as there is lots of wealth in the heavily indebted United States. Germany, France and others could raise taxes to finance a European stability fund, which is something they may well do. But with Europe already on the cusp of a recession, the reverberations of which are being felt in North America, South America and Asia, just how high would the G20 hard liners have European governments increase taxes? At home, the Obama administration is pushing hard for the extension of a temporary tax cut, and abroad has argued for fiscal stimulus. Surely then President Barack Obama would prescribe the same medicine for Europe, an economy that is demonstrably sick, as he would administer to his own economy, which, while feverish, actually is showing signs of renewed vigour.







Mr. Dadush, a former director of economic policy at the World Bank, is arguing for a greater role for the International Monetary Fund in the European crisis. Because the fund currently has only the equivalent of about €290-billion to lend, and the funding needs of Italy, Spain and Belgium over the next two years amount to more than €700-billion, the IMF is going need more money. Mr. Dadush says Canada, the U.S. and others should get over their reluctance to chip in for Europe and get behind a truly international rescue effort.





“These are loans that may never be dispersed. They are not gifts,” Mr. Dadush said on a conference call Wednesday. “This is an investment in stability.”



Economy Lab, winner of the 2011 Eppy Award for best business blog. Follow Economy Lab on twitter

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories