Europeans must take "decisive action" to resolve the debt issues that are plaguing the continent and threatening a global banking crisis, Finance Minister Jim Flaherty said Thursday before a Group of 20 gathering in Washington that starts later today.
"There's some justified frustration with the lack of political decisiveness in Europe," Mr. Flaherty told reporters in the foyer of the House of Commons, adding that Canada also will use the meeting of G20 finance ministers to push countries to proceed with medium-term deficit reduction. "We need to resolve the situation in Europe, because it is causing a great deal of uncertainty, and uncertainty is the enemy.''
Mr. Flaherty said a failure to adequately address Greece's debt problems puts the global economy at risk, sharpening his criticism again as he and other top Canadian officials have in recent days. The pointed remarks will help shape the tone of discussions when finance ministers from the G20 meet tonight, he said.
"One wants to get ahead of the issue rather than react to a crisis," he said. "I think the Europeans have to be prepared to ensure that countries that need to move forward with medium-term fiscal consolidation do it," and also must be prepared to ensure the continent's banks have enough capital, he said.
Prime Minister Stephen Harper, British Prime Minister David Cameron and leaders of Australia, Indonesia, Mexico and South Korea sent an open letter to French President Nicolas Sarkozy this morning calling for "decisive action" at the G20 leaders' summit in November to safeguard the global recovery.
"We need decisive action to support growth, confidence, and credibility," the leaders wrote. "We have not yet mastered the challenges of the crisis. Global imbalances are rising again. External risks to the stability of our banks and our economies are reaching pre-crisis levels. And volatile and high energy prices are hurting our citizens and acting as a drain on world growth.''
Echoing Mr. Flaherty, they added that the "confidence of citizens, businesses, and markets has been damaged due to the lack of visible political will," and said, "Euro zone governments and institutions must act swiftly to resolve the Euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy.''
On Wednesday, Mr. Flaherty told Canadian Broadcasting Corp. that European officials could "get ahead of the game" by increasing the euro zone's bailout fund to €1-trillion from the current €440-billion.
At the press conference Thursday, Mr. Flaherty said the leading emerging economies – Brazil, Russia, India, China and South Africa, or BRICs – have a role to play in resolving uncertainty in Europe, without specifying.
Mr. Flaherty's comments came hours after global markets plunged on the back of a fresh report that indicates the euro zone economy is on the brink of recession and Wednesday night's gloomy outlook from the U.S. Federal Reserve.
Investors fear that European banks lack the capital to absorb the twin threats of a slowing economy and a Greek default. In an interview with France's Le Figaro, Michel Barnier, the European Union's financial services commissioner, that he can't rule out the possibility that some European banks will need bailouts.
Also, the Fed's announcement Wednesday that it would launch "Operation Twist" damaged market confidence, even though its immediate goal – flattening the yield curve by pushing down long-term interest rates – worked. In announcing that operation, the Fed signalled "significant downside risks" to the American economy. The warning triggered a retreat from growth-focused investments.
The global market selloff was one of the steepest this year and included commodities like copper which is considered a key barometer of growth and development prospects.
Mr. Harper told Bloomberg Television Wednesday that he still believes governments can "muddle through and keep the recovery going, although admittedly we are looking at a period of very low growth.''
Mr. Harper also said if the problems facing the world economy are ``tackled" then "we can continue to move forward." At the same time, he said, "I don't think anybody around the G20 table underestimates the magnitude of the challenges that face our economies, particularly those in the advanced industrialized world.''