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Citing irreconcilable differences, Prime Minister Jean Chrétien yesterday dumped his popular finance minister, Paul Martin, as his government lurches from crisis to crisis.

A week to the day after he fired one minister and demoted another over ethics, Mr. Chrétien said that he and his long-time leadership rival could no longer work together and that Mr. Martin had to go.

Replacing him is Deputy Prime Minister John Manley, who adds the powerful Finance portfolio to an already heavy load as Mr. Chrétien's de facto chief operating officer.

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Mr. Manley was sworn in as Finance Minister at Rideau Hall just hours after Mr. Chrétien held a brief telephone conversation with Mr. Martin.

The Prime Minister said he and Mr. Martin had agreed he would leave cabinet; Mr. Martin said he believed that nothing had been settled in the brief conversation, although he acknowledged the handwriting was on the wall by that time.

The stunning loss of such a senior cabinet member and mainstay of the government is certain to rip apart the governing Liberal Party. Mr. Martin's legion of supporters in caucus and throughout the country are reacting angrily to the news.

Both Mr. Chrétien and Mr. Manley moved to calm nervous financial markets, saying the government's agenda of already announced tax cuts, paying down the debt and maintaining spending discipline would continue.

Mr. Chrétien praised Mr. Martin's work as finance minister but acknowledged that the two men had reached a critical juncture.

"This has nothing to do with the situation in the Department of Finance and the economic policies of the government," he said. "There were other problems that existed that were making it difficult for him and difficult for me and we mutually agreed that he was to leave."

Last night, Mr. Martin echoed Mr. Chrétien's sentiment that the two no longer had a viable working relationship, though neither would comment on the exact nature of their differences.

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The 63-year-old Mr. Martin said he would continue to sit as a member of Parliament for the Montreal riding of Lasalle-Émard. But he gave no indication as to whether he would continue to organize for the leadership despite an edict from the Prime Minister that all would-be candidates must stop these activities.

Nor would he say whether he will actively campaign against Mr. Chrétien for the leadership review that will be held at the party's biennial convention in February.

"I'm not even going get into that tonight," he told reporters in Ottawa. "This has been a very difficult couple of days and I have thought long and hard about this . . . and I really haven't thought about anything else.

"I've really been very much focused really very much on the country and on the government."

Mr. Martin said he had always been able to patch over his differences with the Prime Minister and have a good working relationship, until the last little while.

"Unfortunately in recent months, and certainly during the last few days the working relationship between myself and the Prime Minister had deteriorated," he said.

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"I was worried about the effect that would have on my ability to perform my duties." Asked whether he was fired or resigned, Mr. Martin said he believed he had been given more time in his conversation with Mr. Chrétien and then, less than an hour later, he heard on the radio that a new finance minister was to be sworn in.

Throughout the day, Mr. Martin's supporters and the Prime Minister's Office engaged in an aggressive effort to paint Mr. Martin as either having been fired or having resigned.

Both sides claimed the other was responsible for the demise of the one minister who is a household name to Canadians and remains highly popular both in the country and the party.

Last night, Eddie Goldenberg, the Prime Minister's chief adviser, took the virtually unprecedented step for him of going on television and phoning reporters. He insisted that Mr. Martin had clearly signalled that there was no way he could stay in the job and knew by the end of the conversation with the Prime Minister that the deed was done.

Mr. Goldenberg -- who joined in that conversation -- had had his own chat with Mr. Martin yesterday morning.

"The reality is, he had decided [to resign]" Mr. Goldenberg said. "I said, 'Is there anything we could do to change it?' and he said, 'No.' "

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The removal of Mr. Martin comes as the Liberal government has absorbed a series of body blows in recent weeks, including a steady stream of allegations of conflict of interest against key ministers and the firing of former defence minister Art Eggleton over a contract given to a former girlfriend.

The two pillars of the Liberal government have been open rivals since the 1990 leadership race won by Mr. Chrétien. The Prime Minister and his supporters believe Mr. Martin is working to defeat him at the leadership review vote and force him to retire.

In return, the former finance minister believes that Mr. Chrétien had allowed his subordinates to paint him as being openly rebellious and a likely source of damaging leaks that had dogged key ministers who are Chrétien loyalists.

Mr. Chrétien was concerned that leadership rivalries among his cabinet ministers -- who were preparing for a race to succeed him -- were hurting the government.

Yesterday, the Prime Minister complained that he even has to face a leadership review, given that he won a mandate from Canadians less than two years ago.

But party president Stephen LeDrew said there is no way the Prime Minister can avoid it unless the national executive cancels the convention, which, under the party constitution, must be held.

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"There is no discretion in having the vote," Mr. LeDrew said.

But Mr. LeDrew played down predictions that the party would descend into a chaotic leadership battle.

"No one wants a schism in the party. No one wants open warfare," he said.

On Thursday, the Prime Minister ordered all would-be leadership candidates in cabinet, including Mr. Martin, to end all organizing and fundraising for the leadership. He also told his ministers that they would have to reveal all donors to their campaigns, including those who have given in secret.

Mr. Chrétien's loyalists have suggested Mr. Martin quit because he did not want to be bound by those cabinet rules. Mr. Martin's supporters, however, say the minister was pushed out of cabinet because Mr. Chrétien wrongly believed he was being disloyal.

On Friday night, Mr. Martin set the stage for his departure by announcing he needed to "reflect on my options" as a result of what he saw as an orchestrated attack on him by Chrétien loyalists.

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After being sworn in, Mr. Manley said his colleague's departure was necessary and would allow the government to get back to business.

-***** 'But, unfortunately, matters unrelated to governing have gotten in the way of our working together on government policy. As such, we both understand, with real regret, that it is in the best interests of the government and the country that you step down from the cabinet.' Prime Minister Jean Chrétien in a letter to Paul Martin -***** 'Whenever you have two cabinet shuffles in a week, I think you're in disarray by definition.' Alliance Leader Stephen Harper -***** 'No, we did not fire him. You know, you heard his statement on Friday. It's not me. And we discussed the situation. This has nothing to do with the situation in the Department of Finance and the economic policies of the government. There were other problems that existed that was making it difficult for him and difficult for me. And we mutually agreed that he was to leave.' Prime Minister Jean Chrétien -***** 'There is no change in economic policy that will come from this appointment. We will be moving in the same direction.' Finance Minister John Manley
-***** 'There is no change in economic policy that will come from this appointment. We will be moving in the same direction.' Finance Minister John Manley -***** 'I'm not even going get into that [any plans regarding the Liberal leadership]tonight. This has been a very difficult couple of days and I have thought long and hard about this . . . and I really haven't thought about anything else.' Paul Martin -***** 'Unfortunately in recent months, and certainly during the last few days, the working relationship between myself and the Prime Minister had deteriorated. It was threatening to impede our focus on the very important choices that confront us as a nation.' Paul Martin -***** 'It's one thing for a government or a political party to go down. The trouble with this is, every time they go down, they can drag the country down. And sooner or later they've got to realize that this is bigger than the Liberal Party.' Conservative Leader Joe Clark

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