There was almost a wistful tone to Mark Carney's final speech as governor of the Bank of Canada. As he delivered Tuesday's farewell address in Montreal, the central banker with global Superman status must have known that his life and reputation may never be this good again.
As he heads into the lion's den as governor of the Bank of England and point man on the solvency of Europe's banks, Mr. Carney's job is about to get a lot harder. He is leaving peace, order and good government behind for the vitriol, decline and dysfunction of the Old World.
His final speech in his current post was much more than a self-congratulatory valedictory address. It was a technocratic ode to his native country and an admonition to policy-makers here that the institutional framework of Canadian federalism is not to be tampered with lightly.
For all our bellyaching about Dutch disease, equalization payments and employment insurance abuse, Mr. Carney's speech was as a timely reminder that "Canada works." Indeed, that was the title of his monologue and it served to underscore the European Union's fundamental design flaws.
In Canada, monetary and fiscal policy are largely in sync. Neither has to overcompensate for the other, rendering each more effective. The real linchpins of Canada's success as an economic union, however, are its interprovincial trade, federal transfer payments and labour flexibility.
Puncturing the myth of Dutch disease, Mr. Carney insisted that "when commodity prices increase, all provinces benefit." Yes, a higher exchange rate can hurt non-commodity exports. But a stronger currency also reduces the cost of productivity-enhancing equipment and imported inputs in Canadian manufactured goods. For instance, each car built in Canada contains about $15,000 worth of imported parts, double the global average of $7,400 (U.S.).
What's more, differences in "real provincial exchange rates" have helped manufacturing dependent provinces adjust to a higher Canadian dollar. Alberta's real exchange rate, Mr. Carney noted, has risen 40 per cent relative to Quebec's since 1999. As investment in Alberta drove costs higher there, goods and services from other provinces became more competitive.
"During the recession and its aftermath, the importance of interprovincial trade was clear," he said. "The increased demand from other provinces for Quebec's goods and services significantly offset lost international exports."
Where Canadian monetary policy has aimed to stimulate aggregate, or national, economic demand, federal transfer payments have helped compensate for regional inequalities of wealth. Equalization payments and transfers for health and social spending account for about a third of provincial government revenues in the three Maritime provinces and a quarter in Quebec.
Those transfers help stabilize the Canadian economic union in ways Europeans can only envy. The absence of large vertical transfers in Europe is one of the main reasons the euro zone's weaker members got into trouble in the first place.
Oil-rich Newfoundland is now the province least dependent on direct federal transfers, although its citizens still rely more than other Canadians on employment insurance benefits. Even so, the pernicious structural unemployment that once vexed Canadian policy-makers has been vastly reduced. Canadians have increasingly moved to where the jobs are. Our national labour market, Mr. Carney noted, is almost four times more flexible than Europe's.
"In Alberta's case, a rising tide has lifted all boats," Mr. Carney said. "That is because the Canadian monetary union has what Europe does not: a single financial market, a flexible national labour market and significant fiscal transfers."
For sure, there are dangers in the heavy dependence of some provinces on federal transfers, weakening incentives for fiscal discipline. The euro zone has imposed deficit and debt limits on its members, although they have systematically been ignored. Canada has relied on market forces and attentive voters to keep provincial spending in line, with better results. Even so, fast-rising debt levels in Ontario and Quebec carry risks for the entire Canadian economic union.
The next Bank of Canada governor, Stephen Poloz, and Finance Minister Jim Flaherty still face the considerable challenge of weaning Canadians off cheap mortgage debt and, as Mr. Carney put it, "to rotate the sources of growth" to exports and business spending. And much more investment in human capital, infrastructure and innovation is needed to keep Canada working.
Yet, for all its flaws, Mr. Carney is leaving a country that gets most of the big stuff right. His final speech was a warning to current and future policy-makers not to screw it all up.