Dec. 2 (Bloomberg) -- Canada’s opposition parties agreed to wrest power from Prime Minister Stephen Harper, forming the first governing coalition since World War I and proposing economic stimulus measures that may cost tens of billions of dollars.

Leaders of the Liberal Party, New Democratic Party and Bloc Quebecois signed an accord yesterday to form a government that may replace Harper’s Conservatives next week. Liberal Leader Stephane Dion, 52, would become interim prime minister and offer “stimulus” programs including increased spending on infrastructure and aid to automakers and forestry companies.

“I think the circumstances are beyond the prime minister’s control,” said Allan Tupper, a political science professor at the University of British Columbia in Vancouver. There’s “nothing that the government could do” to stop the opposition parties from banding together, he said.

The turmoil centers on a dispute over how to manage Canada’s first recession since 1991-92. Finance Minister Jim Flaherty said last week that he would cut spending, including subsidies to political parties, to keep the budget balanced, while waiting until early next year to decide on a stimulus package. Opposition parties want immediate help for hard-pressed companies such as automakers and lumber mills.

“We are ready to form a new government that will address the best interests of the people,” Dion said at a press conference in Ottawa after signing the coalition agreement, flanked by Bloc Quebecois Leader Gilles Duceppe and New Democratic Leader Jack Layton. “We will act much more promptly than Mr. Harper.”

3-Year Deficit

According to the accord, the proposed government would run a budget deficit for up to three years, pledging to return to surpluses within four. The stimulus amount, though unspecified, would be consistent with “understandings” developed at a summit of leaders from the Group of 20 industrialized and emerging economies last month, the accord said.

The G-20 agreed Nov. 15 in Washington that more must be done to shore up the global economy. International Monetary Fund Managing Director Dominique Strauss-Kahn called for stimulus packages worth 2 percent of countries’ gross domestic product. For Canada, that’s about C$30 billion ($24 billion).

“I won’t get into the dollars, but it has to be significant,” John McCallum, head of the Liberal Party’s economic strategy group, told reporters yesterday in Ottawa when asked how much opposition parties would be prepared to spend. “If you want to have a ballpark, I’d say at the G-20 meeting, they set out certain criteria so that would be the order of magnitude.”

Technical Recession

Gross domestic product will contract 1 percent in the fourth quarter and 0.4 percent in the first quarter of 2009, meeting the technical definition of a recession, according to government forecasts released last week.

Canada’s currency weakened as much as 0.9 percent yesterday to C$1.2513 per U.S. dollar and the country’s main stock index fell the most in 21 years, joining global declines in stock prices.

“Ottawa clearly doesn’t have its act together, and we’re in the midst of a significant economic and financial market dislocation,” said Stephen Malyon, co-head of currency strategy in Toronto at Scotia Capital, a unit of Canada’s third-largest bank. “It adds to the pressure on the currency.”

A coalition agreement between the Liberals and New Democratic Party would run to June 30, 2011, the party leaders said. While the Bloc Quebecois wouldn’t be part of a coalition government, they agreed to support it until June 2010.

Dion Leads

Dion, who planned to step down as party leader next year, would serve as prime minister until the Liberals choose a new leader in May. The Liberals would also appoint 18 of the 24 Cabinet posts, including finance minister, while the New Democrats would hold the remainder.

Harper, 49, is seeking to buy time. Over the weekend, after delaying a vote on his economic plan until Dec. 8, his government scrapped plans to end state funding of political parties and ban public sector strikes. The government also promised to expedite its budget next month.

The coalition proposal requires the backing of the country’s head of state, Governor General Michaelle Jean. If she refuses their request, the country would be forced into its fourth election since 2004.

Another option would be for Harper to suspend Parliament until his budget, a step Environment Minister Jim Prentice declined to rule out at a press conference yesterday. Harper, who won re-election less than seven weeks ago and has been prime minister since 2006, can also ask Jean to dissolve government and hold elections.

Governor General

The last time a governor general refused a prime minister’s request for elections was in 1926.

“The government will consider all steps that are reasonable to protect the interests of our country,” Prentice said, adding opposition parties are trying to “to impose upon the Canadian people something they did not vote for.”

Harper’s Conservatives went into Oct. 14 elections with 127 seats and increased their total to 143, still short of the 155 needed to control the legislative agenda. The government needs support of at least one other party to pass legislation and has relied on the Liberals to pass laws and remain in power.

The Liberals won 26 percent of the popular vote in October’s election, their worst showing. They have 77 seats in the 308- member legislature, while the New Democrats hold 37. The separatist Bloc Quebecois party has 49 seats. The three parties combined would hold a majority in the House of Commons.

Canada has never been led by a group of opposition parties since it was formed in 1867. The closest the country came to a coalition government was during World War I, when Conservative Prime Minister Robert Borden recruited opposition Liberals.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net.

Last Updated: December 2, 2008 00:01 EST