Scott Clark is currently President of C. S. Clark Consulting. Prior to that Mr. Clark held a number of senior positions in the Canadian Government dealing with both domestic and international policy issues, including deputy minister of finance and senior adviser to the prime minister. He has an honours BA in Economics and mathematics from Queen’s University and a PhD in Economics from the University of California at Berkeley.

As a former G-7 Deputy, and Canada’s Executive Director at the IMF and the European Bank For Reconstruction and Development, I have become increasingly concerned by the approach Canada has been taking with respect to the EURO crisis and the implications it might have for Canada’s future role in the G20 and the IMF.

In his recent trip to the U.K. and France, Prime Minister Harper once again lectured EURO-area leaders on their need to develop a credible plan to resolve the EURO crisis. He correctly pointed out the systemic nature of the crisis and the serious risk of contagion not just for Europe, but also for the world economy. He warned Canadians that they would not be immune to the consequences of a continued worsening in the economic and financial situation in Europe, but the government was prepared to act to mitigate any impacts.

Mr. Flaherty was delivering the same message at home but using somewhat stronger language. He stressed that EURO-area countries had the resources to solve their problems and that Canada would not contribute to a G20 fund at the IMF to assist EURO countries. He reassured Canadians that their tax dollars would not be used to bail out wealthy European countries. It certainly helped Mr. Flaherty’s “tough message” that the U.S. was also not contributing to the G20 fund. It is highly unlikely that Canada would be taking the position it is, if the U.S. were taking the opposite position.

The Prime Minister and Minister of Finance are absolutely right to be frustrated with EURO leaders in their complete failure to deal with the crisis in a credible manner. But the EURO crisis has now become a world economic problem and the Prime Minister knows this. Lecturing from the sidelines and refusing to join a G20 initiative at the IMF is not contributing to a resolution of the EURO crisis and the threat of contagion to the world economy.

Europe is already in a recession. A deepening recession caused by a meltdown of the EURO would have worldwide consequences. Canadian economic growth would definitively suffer. Mr. Flaherty would be required to implement new stimulus measures, which in the end would cost Canadian taxpayers, as we saw with the recent temporary stimulus program.

By refusing to join the G20 initiative to augment IMF resources, Canada’s credibility within the G20 will be seriously diminished. Canada has been able to “punch above its economic weight” in international organizations and institutions because of the quality of its advice and the seriousness of it commitments to international institutions. Other members of the G20 will see Canada’s refusal to participate as a weakening of its commitment to the G20 and the IMF.

Another reason given for not contributing to the G20 fund is that this would require the use of taxpayers’ money. Presumably what the government is saying is that at a time when government spending is being cut it would be inappropriate to “give” taxpayers money to the IMF to help wealthy European countries.

This is completely misleading. Funds are not given to the IMF; funds are lent to the IMF. More importantly, the funds that would be lent to the IMF would not come from Canadian taxpayers. The funds would come from foreign exchange reserves held at the Bank of Canada. As of May 23, 2012 Canada had foreign exchange reserves of $68.7 billion. Of this, $36 billion was in U.S. dollars; $19.7 billion in other currencies; $8.7 billion in Special Drawing Rights (SDRs); and $4.1 billion in a reserve position in the IMF.

Were Canada to contribute to the G20fund the ”contribution” would involve a transfer of SDRs from the exchange reserves to the IMF in exchange for a commitment that the funds would be repaid. There would be no use of taxpayers’ money and there would be no budgetary impact.

Once again we see a situation where short-term politics is dominating good policy, in this case international policy. Canada is giving up its credibility in the G20 and its ability to play a serious policy role in the future, not just in the G20, but also in the IMF. Mr. Flaherty has stated that he knows that there are non-European counties in the G20 that feel the way Canada does. It would be surprising if there weren’t. But the fact remains that (other than the U.S.) these countries are nevertheless contributing to the G20 Fund, because they know that participation is essential to ensure influence and credibility within the G20.

What does Canada get in exchange for this lost credibility? Absolutely nothing.

To view other columns by Scott Clark, click here.

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