BUSINESS
11/09/2011 05:57 EST | Updated 01/09/2012 05:12 EST

Eurozone Debt Crisis: Could A Canadian-Style Equalization System Solve Europe's Woes?

PA

MONTREAL - A senior official with Quebec's massive pension-fund manager is suggesting a Canadian-style solution to help dig the European Union out of its deep financial crisis: an equalization system.

Roland Lescure, who is the No. 2 man at the Caisse de depot et placement, told a Quebec-France investment forum that "certain features of this model should be examined in the event of a fiscal union between members of the eurozone."

The suggestions were contained in the speaking notes for Lescure's remarks to the conference, which began Monday. He also described the equalization system as a "possible solution for the eurozone."

Introduced in the late 1950s, the system sees the federal government collect tax revenues from the entire country and redistribute a certain pool of money to so-called poorer provinces.

Currently, Quebec receives more than half of the $14-billion equalization budget although some Atlantic provinces receive much more money per capita.

The system became enshrined in the 1982 Constitution, which sets out a federal responsibility for ensuring that all provinces have a capacity to offer similar levels of service to their residents.

Equalization is not without its critics.

There are complaints that it leads to complacency in the provinces that receive it, there is some resentment in provinces that fund it, and there are frequent grumbles about the method in which the payment formula is calculated.

Lescure explained the system to his French audience.

He summarized it as a method in which the federal government makes special payments to poorer provinces so they can provide public services comparable to the richer provinces.

However Lescure, who immigrated to Quebec from France two years ago, noted that equalization does not force financial markets to treat every jurisdiction equally.

It was a message tailored to Europeans who may fear a one-size-fits-all solution.

It is the debt level of certain countries, especially Greece, Italy, Spain and Portugal — and the increasingly high interest rates on their debt — that threatens the financial collapse of some countries and a destabilization of the wider currency.

Lescure explained that equalization has not prevented the Quebec government from paying higher rates for its loans that the Government of Canada.

In fact, before the financial crisis the spread between interest rates on Quebec and Canadian bonds was much higher than the debt of Greece and Germany, he said.

He also encouraged French companies to invest in Quebec, which he said "is full of energy and untapped natural resources."