Prime Minister Stephen Harper took two questions from Canadian reporters just ahead of the opening of the G20 summit here in Seoul, South Korea. One key issue here is the coming showdown between the U.S. and China over currency and global economic leadership. China is devaluing its currency which makes its exports cheaper. The U.S. Federal Reserve, earlier this week, pumped $600 billion into the U.S. market — something central bankers call quantitative easing but which most might call printing money. Whatever it's called, the U.S. action helped devalue the American dollar, making American exports cheaper. When countries artificially fool around with their exchange rates and push them down that, in turn, makes Canadian goods more expensive and can hurt our economy. So, we asked Harper, is China wrong and will you back the U.S.? Here's what he said:
On the question of China, let me answer it a little more broadly which is that I believe, we believe, the government of Canada believes, that a global economy as a smooth functioning open-trading global economy requires flexible exchange rates and to the extent that the buildup of structural imbalances in the global economy was part of the reason that we had the recession in the first place, I think the persistence of these imbalances is a problem in the long-term and I think these things have to be addressed.
If you look at the statements we've made in Toronto, some of the statements made by the finance ministers recently, I think all have acknowledged, broadly speaking, these things and they have to be addressed. So I think they do have to be addressed. Will they be addressed at this conference? I'm not so sure but I think we're getting a more frank discussion on some of these matters. They do have to be resolved.
Specifically, on the question of U.S. policy — I don't normally weigh in on the policy of another country. But those who are criticizing the policy of the Federal Reserve, I'm not sure what alternative they're suggesting. The United States economy has a very slow rate of growth. The United States economy also has interest rates that are virtually at zero. Nobody is urging the United States to engage in fiscal expansion. In fact, in Toronto, we all agreed at goals towards fiscal consolidation. So I think under the circumstances, the quantitative easing policy is in the short-term the only option available to the federal reserve and I'm not sure anyone else has provided any compelling argument as to what alternative policy they would pursue at least in the short-term.
Now: Even without quantitative easing one has observed that there has been a depreciation in the American dollar and an appreciation in other currencies including our own. That is not particularly surprising given the relative state of these economies. The problem, in my judgment, for Canada is not the depreciation of the American dollar it's the fact that Canadian currency is accepting a disproportionate burden of the appreciation becuase other currencies are not appreciating the way they should.