Europe risks ’30s-era depression: Expert
BUSINESS Crisis ‘clear, present danger’: Flaherty
On the same day that Nobel Prize laureate Paul Krugman warned of a possible return to a 1930s-style economic depression in Europe, Finance Minister Jim Flaherty said Europe’s debt crisis represents a “clear and present danger” and has not improved despite helpful measures by policy-makers.
The U.S. and the European Union are “nowhere close to ending” the financial crisis, and German-led austerity efforts may lead to a 1930s-style economic depression, said Krugman, the 2008 recipient of the Nobel Prize in economics.
Five years into the continuing financial crisis, the U.S. needs “another round of stimulus” and Federal Reserve officials “should be doing whatever they can” to aid the recovery, while Europe needs a fiscal union to save its single currency, Krugman said in a speech in Belgrade Wednesday.
“Europe must accept there are limits to austerity and that additional austerity won’t do anything but bring societies on the verge of collapse,” said Krugman, an economics professor at Princeton University. “No country will have prosperity until Germany and the ECB have decided that too much pain has been inflicted.”
Flaherty, in some of his harshest language yet on the issue, stepped up the pressure days ahead of a meeting of finance ministers from the Group of Seven major developed economies on Oct 11.
“The overriding concern at the meetings? Europe is No. 1 — it has to be No. 1, because it is the clear and present danger, and it remains that,” he said.
“Things have not got better in Europe, because of the lack of action,” he added.
“There have been a couple of steps taken by the European Central Bank, by (ECB president) Mario Draghi, which are helpful and go in the right direction. But the fact that we still have under-capitalized banks in Europe and that we have issues with respect to sovereign indebtedness that persist — those facts haven’t changed.”
The G7 meeting will take place on the sidelines of annual International Monetary Fund and World Bank gatherings in Tokyo next week.
Flaherty’s tone contrasted with that of Japan, which is hosting the meetings and praised Europe on Wednesday for the tough reforms undertaken so far.
Canada’s Conservative government, billing itself at home as fiscally cautious, is resisting pressure from other countries to contribute extra money to the IMF so that it can help Europe, Flaherty said.
“We will maintain our position. These are wealthy countries in the European Union, and they can finance their own resolution of the issue,” he said.
Europe is set to tell the G7 that the U.S. fiscal troubles also pose risks to the global economy, but Flaherty was less gloomy about the U.S. future.
He believes most members of Congress understand the urgency of avoiding the “fiscal cliff,” which refers to the combination of spending cuts set to take effect on Jan. 2 and tax increases that could seriously dent U.S. growth.
“This must be dealt with because if it’s not dealt with, then the effect on U.S. GDP will be very significant, and that, of course, directly affects Canada,” he said.
For now, Canada has modest economic growth and is on track to meet its fiscal targets, but not surpass them, the minister said.
“I would not anticipate that,” Flaherty said, when asked whether he expected this year’s deficit to be smaller than the $21.1-billion shortfall the government has forecast.
“It is within the range of what we anticipated, but there are pressures we have on the spending side, some of which we had to deal with, so we’re OK. We’re on track.”
Meanwhile, Krugman said Europe needs to “contain immediately the financial threat to troubled countries and stabilize yields on their borrowing, which in the end requires the ECB to be ready to be the lender of last resort and buy sovereign bonds.
“And that is now sort of happening,” he said, adding “there are 60 per cent odds that they’ll save the euro.”