Attention is now being focused on EURO zone leaders to take strong and credible action to strengthen the capital of private sector banks in Europe, ensure confidence in bank liquidity and interbank credit, and guarantee support for sovereigns’ debt. This won’t be easy and the situation is only going to get worse.

There is now a good chance that the advanced economies are about to enter another recession and, if not, certainly a protracted period of slow growth and high unemployment.

The Managing Director of the IMF summed it up very well in her speech to the IMF Board of Governors.    (

“You have seen our forecasts released earlier this week. Overall, we expect global growth to slow to 4 percent this year and next. But the advanced economies will only manage an anemic 1½ -2 percent. 

So, there is a recovery, but it is weak and uneven. And risks have increased sharply. They are propelled by a negative feedback loop—between weak growth; weak balance sheets among sovereigns, banks, and households; and inefficient political commitment.

This has led to a crisis of confidence. And it imposes not only economic, but also social costs.”  She went on to add:

“If countries have solid measures to anchor savings in the medium and long term, they can do more in the short term to accommodate growth. The amount of available space depends, of course, on country circumstances.”

On September 22, one day earlier, six heads of states, including Canada’s Prime Minister, wrote to the current chair of the G-20, stating their concerns over the “lack of visible political will” to address the structural imbalances facing many of the G-20 countries.  They argued that in the upcoming G-20 meeting in Cannes in November, “we must agree on the hard policy decisions that we should each take, validating our actions against strong objective analysis and recommendations from the relevant international institutions”.

They proposed a number of priorities, many of which had been stated before. But they went further. They also called for “surplus” countries “to increase their expansion of domestic demand”.  Who are these “surplus” countries or counties who “have solid measures to anchor savings in the medium term” within the G-20, and how much new stimulus could/should they provide?

According to the latest International Monetary Fund (IMF) World Economic Outlook, ( only South Korea and Saudi Arabia are expected to show a budgetary surplus in 2011.  By 2015, China and Germany join this “surplus” group and in 2016, Australia and Canada are projected to show a budgetary surplus, but Saudi Arabia drops out of this exclusive club.  Since action is required now and not four years hence, this leaves South Korea and Saudi Arabia as the only G-20 countries in a surplus position to expand their domestic demand.  These six heads of states can’t be serious in asking only these two countries to increase their domestic demand.

The number of “surplus” countries that could “increase their expansion of domestic demand” could be increased if one were to consider those in relatively sound fiscal shape i.e., a net debt-to-GDP under 60% and a deficit-to-GDP ratio under 3%.  These are the criteria for EURO membership under the Stability and Growth Pact.  For 2012, the list would now include Australia, Brazil, Canada, China[1], Germany, France, South Korea, Mexico, South Africa and Turkey.  Combined, their economies would account for about 40% of the GDP of all G-20 countries.

The President of the United States recently proposed a $450 billion Jobs Package to stimulate domestic growth in that country.  The US accounts for about 26% of G-20 GDP.  The table below illustrates how stimulus packages of $600 and $400 billion could be divided among the non-US G-20 countries in relatively sound fiscal shape. A stimulus package of $600 billion would be roughly equal to their share of G-20 GDP and a little less than the commitment of the US. In this scenario Canada would be required to contribute $41 billion of stimulus, which is only slightly less than what the federal government did under its Economic Action Plan.

A total stimulus package of $1 trillion would show bond markets that the G-20 are prepared to act in a strong and coordinated manner to support economic growth. Unfortunately, it may be difficult to get all G-20 countries to participate. In particular, Germany has been intransigent in its opposition to new stimulus measures especially when it is being asked to provide most of the additional resources for the EFSF.

Indeed, it is questionable whether Prime Minister Harper was aware of what he was committing to when he signed the September 22nd letter. Or is a new stimulus package of over $40 billion something that is within his view of “flexible” and “pragmatic”. Lets hope it is.

Stimulus by Country with Deficits at/below 3% of GDP & Debt-to-GDP Ratio below 60& in 2012

                       $ billions 
Australia                                                               23                                15
Brazil                               57                                38
Canada                               41                                28
China                            266                              177
Germany                              77                                52
Korea                              38                                26
Mexico                              41                                28
Saudi Arabia                              16                                11
South Africa                              14                                  9
Turkey                              25                                17
Total                            600                              400


Although Canada’s deficit to GDP ratio is 3.2% of GDP in 2012, we have included it because the ratio declines very rapidly after 2012 and its debt-to-GDP ratio is one of the lowest.



[1] Although the IMF does not present any net debt-to-GDP figures for China, we have included it because of their low deficit-to-GDP ratio.

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