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The Globe and Mail
Kevin Carmichael
Sunday, February 19, 2012

Finance Minister Jim Flaherty and his counterparts in the Group of 20 nations have it within their power to contain the European debt crisis this week.


But only the boldest of gamblers would bet that they will do so. That’s because some of the world’s most powerful countries are locked in a game of chicken, and it’s extremely difficult to guess which ones will blink first.


Economic leaders from the G20 will gather for the first time this year in Mexico City on Saturday and Sunday. As always, the agenda will be full, but one issue will dominate: an international rescue for Europe.


It’s been a touchy subject since the Cannes summit in November, when the non-European members of the G20 turned their backs on European requests for help.


The European Union wanted loans to create a financial backstop that would be big enough to convince bond traders that countries such as Spain and Italy would be saved from collapse.


An infusion of cash from abroad would have gone a long way in calming global financial markets. Yet the response from Europe’s allies was filled with ridicule. The EU was told to do more on its own, and come back only after it had put more of its own resources on the table.


Three months have passed and Europe is ready to give it another try.


The object now is to bolster the resources of the International Monetary Fund, which says it needs an additional $500-billion (U.S.) to confront the worst-case scenario of having to prop up a big European economy, while being left with enough cash to perform its mission of safeguarding poorer countries.


European countries have pledged to provide the IMF with the equivalent of about $198-billion. This weekend in Mexico City, the EU will press its G20 allies to provide the rest of the money that the IMF seeks, Bloomberg News reported Friday, citing a leaked copy of an internal planning document.


It’s unclear whether the Europeans will get a warmer reception this time. The host of this weekend’s meeting, Mexican Finance Minister Jose Antonio Meade, expressed doubts earlier this month that an agreement is at hand. The U.S. remains adamant that increasing IMF resources is unnecessary and that it will not participate. The Harper government says Europe has the means to clean up its own mess.


“These are some of the wealthiest countries in the world,” Mr. Flaherty told Business News Network from Rome on Friday. “They’re fully capable. They have the fiscal capacity to do so, instead of coming to the non-European G20 countries asking us to pony up, quite frankly, when they’re capable of doing so themselves.”


The U.S. and Canada aren’t the only ones resisting fresh loans to the IMF.


Saudi Arabia’s Finance Minister, Ibrahim Alassaf, said earlier this month after meeting with IMF managing director Christine Lagarde that he doubted there would be agreement on the issue in Mexico City. “The other member states believe that the main and first role should be the European Union’s, and then the other states can provide support,” Mr. Alassaf said in Riyadh on Feb. 7, according to a report by Reuters. South Korea’s finance minister made similar comments this month.


On the surface, the position of the non-Europeans appears incredibly short-sighted. The debt crisis, which most forecasters assume has sunk the EU into at least a shallow recession, is undisputedly the biggest risk facing the global economy. A pledge to beef up the IMF’s firepower would assure investors that Spain, Italy and other debt-burdened countries will avoid default. That would lower borrowing rates and relieve pressure. Stability should follow, and with it a little economic growth.


But Mr. Flaherty and others appear to have decided to risk a little turbulence in order to coerce Europe into making institutional changes that would lessen the risk of future crises.


It’s not just the money. European nations formed a currency union without any means to redistribute wealth or keep member countries from running up their debt. Germany, France and other euro zone members are now talking about making these structural adjustments. The other members of the G20 appear willing to take a hard line until that talk becomes action.


“Agreeing to offer help too quickly only weakens the incentive on governments to do what needs to be done,” said James Haley, a former senior Finance official who is now director, global economy at the Waterloo, Ont.-based Centre for International Governance Innovation.


A new rescue package for Greece, which could be agreed Monday at a meeting of European finance ministers, would go some way toward softening the opposition to upping the IMF’s reserves of rescue funds. More important will be agreement by the EU on a bailout fund backed mostly by European countries.


With those measures in place, it’s difficult to imagine Canada sitting out a G20 rescue. Doing so would be a blow to the country’s international reputation. That’s likely why Mr. Flaherty, among the most bellicose in demanding more from Europe, always leaves open the possibility that Canada’s position could change. “The sine qua non is that Europe moves first,” Mr. Flaherty said.