11/01/2011 04:23 EDT | Updated 01/01/2012 05:12 EST

BoC governor Carney says Greek referendum on debt deal could be useful

OTTAWA - Greek government's plan to hold a referendum on its European bailout package is injecting a dangerous level of uncertainty and placing the global economic recovery in peril, Finance Minister Jim Flaherty warned Tuesday.

Pointing at the plunging markets in Canada and around the world, Flaherty said he was concerned about the delay that a referendum would cause.

"It's not for us to dictate terms to the Europeans — it is for us to say that delay endangers the global economy," he told reporters late Tuesday after meeting with the Commons finance committee.

"We have interdependent economies in this world. What affects Europe, affects the United States, affects Canada ... this kind of turmoil in Europe is not good for anyone around the world. Our point is let's get to the conclusion."

The finance minister's frustration with Greece put him somewhat at odds with Bank of Canada governor Mark Carney, who while meeting the same committee earlier in the day, appeared to try to downplay the crisis.

Carney conceded the referendum brings in new risks, but said he respected the Greek prime minister's surprise call, adding the vote could be useful if it helps build support for necessary austerity measures.

"It is imperative that there is widespread support, broad democratic support for these measures because they will unfold over a period of time," Carney told the MPs.

"If this is a judgment of the Greek government that this is the best approach to validate that support, we fully respect that."

The European plan calls for backstopping banks to prevent a financial crisis and credit squeeze as occurred with the Lehman Brothers collapse in 2008, and would allow other indebted foreign nations, like Italy and Spain, to keep borrowing at reasonable rates.

But the surprise referendum announcement by Greek Prime Minister George Papandreou appeared to catch everyone off guard, including members of his own party and European leaders.

Conflicting reports out of Greece had the referendum idea shot down and then revived. Several members of his own party called on Papandreou to resign, meanwhile European leaders summoned the Greek prime minister to a meeting as early as Wednesday to explain himself.

The Greek government appears set for a confidence vote on Friday, which could result in it falling, bringing the country closer to default.

The crisis atmosphere comes as Prime Minister Stephen Harper prepares to travel to France for what is turning out to be an even more critical meeting of the G20 where Europe's broiling crisis will be issue No. 1.

The summit, that will take place in Cannes on Thursday and Friday, is also expected to confirm Carney as the new head of the Financial Stability Board, placing the Canadian central banker at the forefront of measures to reform global financial markets.

The challenge for the leaders will be to try and reassure markets in a climate of increasing uncertainty and even political chaos.

Flaherty and Carney were in agreement that while the situation is filled with risks, the most likely outcome is that the Canadian economy will not fall into a recession, although growth will be modest.

And they were of like minds on the need for European leaders to move quickly from plans to implementing their trillion euro emergency package.

Papandreou's controversial announcement comes amid growing and even violent dissent in the country over strict austerity measures, including cuts to pensions and tens of thousands of public sector jobs, the country would need to agree to in order to receive its bailout package.

Amid the confusion, global markets tumbled Tuesday. European markets fell as much as five per cent, while Toronto's main index shed almost 137 points, but at one point dove 338 points. New York's Dow industrials fell 297 points. The Canadian dollar also took a pounding, dropping 2.18 cents to US$98.15.

Earlier in the day, Carney told the Commons committee the European crisis was already impacting the Canadian economy.

He was invited to speak on the central bank's latest forecast, issued last week, which says growth in Canada's gross domestic product will slow to below one per cent as the year winds down, and grow only by 1.9 per cent next year.

Most private sector economists are not as pessimistic, noting that the latest data for July and August GDP, released Monday, suggests a slightly higher growth profile.

But Public Budget Officer Kevin Page unveiled his own projection Tuesday and it was bleaker than both the private sector economists' and the central bank's. He said Canada's economy will only grow 1.5 per cent next year.

Carney stuck to his earlier prediction, however, saying Canada's economy faces considerable headwinds, but it also has strengths, including a solid financial system.

One upside possibility, he added, is if the U.S. passes President Barack Obama's $447-billion jobs package, which he said could lift U.S. GDP by as much as 1.3 percentage points. That would likely translate in higher growth in Canada as well.

Reporting on the upcoming agreement between the bank and the government on a new five-year mandate, Carney suggested that his main job will continue to be keeping inflation within a strict range.