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For Canada, crisis in the U.S. and Europe presents an opportunity

With much of the developed world in fiscal crisis, this could be Canada's moment.

While the deepening economic pain in the United States and Europe will inevitably touch this country, Canada's relative financial health will continue to rise as new tax measures and cutbacks engulf other nations.

"This is an opportunity for Canada," says former Prime Minister Paul Martin, who was finance minister in Jean Chrétien's government during the 1990s when the Liberals tackled this country's own fiscal mess.

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The tough path that Mr. Chretien and Mr. Martin embarked on in 1994 ultimately restored Canada's AAA rating, which had been downgraded to AA+. Now it's the turn of the United States. And as Europe continues to flounder under the weight of its issues, the need for it to undergo serious political reform is becoming more obvious by the day.

Canada too has a deficit that it should grapple with, and it must continue to bring down its debt-to-GDP ratio, Mr. Martin said. But it is not in need of the severe medicine that other economies must now take, medicine that will have long-lasting side effects and allow Canada to become even more of a positive outlier.

Mr. Martin would like to see Canadian governments use this time to make investments in infrastructure and education systems that will further distinguish the country. "We should be able to attract the best and brightest into our industries better than we ever have before, simply because of what's going on in other countries," he said in an interview Sunday.

The chance to capitalize on this situation might last for some time, as the full extent of the necessary reforms in Europe and the United States is still becoming evident, and those countries' political leaders are still mustering the will to act.

"What is giving a lot of people pause is not only the dysfunctionality of the United States – of Congress and its relationship with the administration – but the dysfunctionality between the European Central Bank, the European Commission and a number of the European countries beginning with Germany," Mr. Martin said.

"The Europeans should deal with their issues," he added. "I think what you're beginning to see in Europe is increasing pressure for a pan-European bond. You can't be half pregnant. Europeans have got to face up to the need for far greater economic integration, if in fact they are going to deal with these issues. They can't think that they can go halfway."

In the meantime, the United States is clearly going to have to raise revenue through taxes and rethink its entitlement programs. The administration still has time to prevent the economic nosedive that some pessimists are now forecasting, Mr. Martin suggested. But it must get down to work.

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The debt ceiling issue was simply a manufactured problem. "The U.S. problem is its large annual deficits and its steadily increasing debt-to-GDP issue," Mr. Martin said. "What they've got to do is bring forth a plan that is going to turn that debt-to-GDP ratio around."

The S&P downgrade of the United States' formerly stellar AAA rating did not tell market participants anything that they didn't already know. What is really having an impact on investors' psyches right now is "the last sputtering of hope that either Europe or the United States was going to deal with their issues," Mr. Martin said.

"If a rating agency's downgrading can get political forces to deal with these issues, that would be a good thing."

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