Harper's call for bold G20 action undermined

CANNES, France - Prime Minister Stephen Harper arrived at a crisis-atmosphere G20 summit late Wednesday prepared to preach the Canadian gospel of economic prudence, bank regulation and deficit reduction.

But Harper's central message to European leaders facing a sovereign debt disaster — get on with it, already! — was grievously undermined by the prospect of a Greek referendum sprung on the Eurozone by Prime Minister George Papandreou on the eve of the two-day Cannes summit.

Papandreou, who was called to an emergency meeting Wednesday in Cannes with German Chancellor Angela Merkel and French President Nicolas Sarkozy, defended his decision to call the vote despite the wrath it invoked, saying his country must decide whether it wants to stay in the 17-nation eurozone.

A "no' vote could break up the union, lead to the collapse of many European banks and send the global economy spinning back into recession.

Papandreou, in effect, may be calling Europe's bluff in an effort to sweeten the pot — without directly demanding as much.

Harper is expected to tell G20 leaders Thursday they can't afford to leave the room without solving the crisis.

The logical extension is that Greece will have to be offered better terms. The current, proposed writedown of 50 per cent of Greek debt, after all, will only lower the country's debt-to-GDP ratio to 120 per cent by 2020 — the same high levels currently considered unsustainable in Portugal and Italy.

Whatever transpires, the odds of bold and definitive economic decisions during talks Thursday and Friday seem like a high-stakes gambler's hope.

That political developments in tiny Greece — which represents less than two per cent of the eurozone economy — could put much of the continent in jeopardy, and by extension, the global recovery, speaks to a global economic interdependence that the relatively new Group of 20 association was designed to address.

"It is imperative that the G20 shows leadership in moving ahead on critical reforms," Harper said in a statement issued Wednesday as he departed Ottawa.

"Financial markets as well as the public will be looking for a concrete and ambitious action plan coming out of Cannes."

Harper again touted Canada's strong fundamentals, as he does in every public release or speech, to backstop his calls for international action.

But the importance of public perception that the prime minister cited Wednesday is precisely the dilemma facing Greece, and the wider eurozone.

The devil is in the implementation details of a recovery package negotiated behind closed doors by European leaders last week that includes a notional bailout fund of $1.4 trillion, creditors accepting 50 cents on the dollar of their Greek loans, and an increase in the cash reserves of the largest European banks.

Not only must Greek citizens accept dramatic cuts in pay, pensions and public services, but wealthier European taxpayers — principally Germans — must pay the freight.

Mark Carney, the governor of the Bank of Canada, took a phlegmatic approach to the Greek referendum bombshell during testimony Tuesday at a House of Commons committee.

"It is imperative that there is widespread support, broad democratic support for these measures because they will unfold over a period of time," said Carney.

What he didn't say, but might have added, was that when Canada put its own financial house in order in the 1990s, there was broad public support. In fact, the Canadian public might have been ahead of the politicians in recognizing that debt and deficits had to come down, and that the process would be painful.

It's not the only Canadian example worth considering.

Last year's G20 summit in Toronto, with it's hard-won, common commitment to deficit reduction in the mid-term, appears all but forgotten.

Harper felt compelled to call out the United States by name, imploring it to set mid-term deficit targets, in a speech last week to business leaders at a Commonwealth summit in Australia.

Again, Canada serves as a model but in this, too, the lesson is not so easily translated.

Canada's last deficit turn-around occurred during a decade of economic expansion, not in the midst of recession. It is this toxic mix of austerity combined with a crumbling economy that has so inflamed the Greek citizenry.

In fact, Finance Minister Jim Flaherty has spoken of "flexibility" in Canada's current, relatively manageable, deficit elimination timeline should global events warrant. That his government has such flexibility is in significant measure a result of Canadian decisions taken 15 years ago, when during a long period of growth the Liberal government of Jean Chretien resisted calls for bank deregulation, cut spending and raked in taxes to not only tame the deficit but reduce the national debt.

While G20 leaders might laud Harper's message and Canada's example, they're not in a position to turn back the clock.

And Harper's hope for currency reform in China, another of the four measures Harper espouses for future economic prosperity and balance, has been further knocked down the priority ladder by calls for Chinese state lenders to shore up the proposed $1.4 trillion eurozone bailout fund. Extracting any short-term promise of a floating Chinese yuan in the current circumstances would seem a distant hope.

What advice this leaves for the prime minister to offer at the G20 summit might boil down to "would have, could have, should have" — food for thought but not an immediate prescription as Europe struggles to hit the reset button.