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Canada, Germany and the Eurozone crisis October 8, 2011

Posted by Dominique Millette in Euro-Canadian relations, fiscal and monetary issues, translatlantic relations.
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Within the stormy seas of international economic interdependence, Canada has stood out as a beacon of stability in contrast to the EU and the U.S. Its unemployment rate is two percentage points below that of the American labour market after a more-than-hoped-for gain of 61,000 jobs in September of this year.

In the U.S., the gross debt is about 98% of GDP in 2011, at $14.7 trillion, while in Canada the number was 84 % in 2010. As one source explains it, the difference lies in Canada’s structural approach to debt reduction as a proportion of GDP, while the U.S. relied on tax revenue increases which could not be repeated.

The eurozone jobless rate, meanwhile, climbed to 10 per cent in August 2011, as the Greek debt-to-GDP ratio of 166 % threatened to bring down other EU economies.

Germany remains the locomotive of European growth, with an economy 500 times that of recent EU member Malta. With its population of 82 million, Germany outweighs the 10 million people total brought in by the five latest members. Several German officials within the European Central Bank (ECB) and within the Bundestag itself have voiced dissatisfaction at the need to bail out Greece and perhaps other failing economies.**

However, as visiting speaker Harald Leibrecht explained at the Munk Centre for International Studies on October 6, Germany has little choice but to agree to EU assistance. “We have to save Greece, I’m convinced of that”, he agreed, even at the cost of a haircut which some have estimated could be 60 % of existing bonds. Mr. Leibrecht is the Coordinator for Transatlantic Relations of the German government, as well as a member of the Bundestag. “This is uncharted territory for all of us,” he said, adding that German voters are “simply staggered by the billions of euros we are required to provide.”

He compared Greece to the Lehman Brothers, the U.S. financial institution belatedly recognized as “too big to fail”. However, one wonders whether the more apt comparison might not be Goldman Sachs, which was bailed out, to the tune of $12 billion and to the chagrin of many in the U.S. population.

“The EU is a strange club. You can become a member but there’s no way out,” mused Mr. Leibrecht, noting that European unity is nevertheless not in question. Going back to the DM would be “easy, but would not solve our problems”. In the case of Greece, which represents only 2 % of the EU economy but could spread contagion to others, “we can only decide between two evils,” he said. However, he observed that Greece has always been a strong part of Europe. As for the domino effect, the German representative argued on a more optimistic note that Portugal and Ireland “did their homework.”

Concerning world economic stability, “I know our discussions are followed closely here in Canada”, since a failure of the eurozone would affect the whole world, acknowledged Mr. Leibrecht. “Europeans admire that Canada is much less affected by the financial crisis than the EU and the U.S.”, he observed.

Indeed, our regulatory culture has helped our banking system avoid the worst of what hit both the American and European banks. Even though the four pillars of financial transactions – banks, trusts, insurance companies and brokers – went through deregulation at the ownership level in the 1980s, this did not have the same effect as the Gramm-Leach-Bliley Act in the United States. In short, the Canadian financial sector remained conservative, with lower debt-to-asset ratios than its American counterparts.

What remains to be seen, of course, is to what point Canadian voices are genuinely heard at G20 and G8 summits and meetings. We have much to say. The key is to parlay words into collective action.

To Harald Leibrecht, Canada and the EU are closer to each other than any other partners on many positions, but have yet to make full use of this. “What I’m a bit anxious about is the way EU members internally and with North American partners are not taking decisions together.”


** Update: most recently, the Bundesbank has been reported as objecting to any haircut whatsoever for Greece.

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