European debt crisis having only modest impact in Canada, Carney says

Date: Tuesday, June 8, 2010
Author: Investment Executive

The impact of Europe’s debt crisis is barely washing ashore in Canada and will continue to have a modest impact as long as Europe takes decisive action to reduce the risks, Bank of Canada governor Mark Carney said Monday.

“What has been important in the past few months, as sovereign tensions have increased, is to gauge what the actual and potential effects of those difficulties could be in Canada, both on the financial side and on the confidence side,” Carney told an economic conference.

“At this stage, the spillovers have been modest. But it depends, in part, on the ability of the central banks and governments to co-operate and act decisively.”

And so far, he believes there has been that decisive action.

Despite the shocks in Europe, Carney said the health of the global financial system has substantially improved over the last few years.

After providing the necessary backstops for troubled financial institutions, G20 governments are working on necessary improvements such as reforms that will provide regulatory certainty necessary to get the sector back on track.

The risks for Canada and the global economy have once again returned to broader macro issues such as economic growth and deficit reduction, he told an audience of business and political leaders.

“We’re not back in 2007-2008 where there’s this very high level of uncertainty about the financial exposure of individual institutions and the system knock on of those exposures,” he said.

“It’s more where the economy is going to go, what big decisions are going to be taken by governments and so the timeline for these decisions is much more reasonable.”

Canada became the first of the G7 countries to raise interest rates last week, increasing its key rate a quarter point to 0.50%.

Carney said central banks must focus on keeping a lid on inflation or risk facing even higher interest rates.

Federal Finance Minister Jim Flaherty added that a new OECD report set to be published reinforces that Canada has strongly withstood the economic crisis.

Canada was last in and first out of the recession among G7 countries, but it must work with its G20 partners to assure continued economic growth, he said.

Europe once criticized U.S. action in allowing Lehman Brothers to fold. But bank failures in Germany, Britain and elsewhere made it clear that the problems weren’t only in the United States.

“This is emphatically a situation where we are interconnected and we need to work together globally because no country, including Canada, is an island,” Flaherty said.

The minister said it has become increasingly clear that Europe has to reduce its deficits -- known as fiscal consolidation -- or the markets will force countries to deal with it in much less planned and pleasant ways.

He said Prime Minister Stephen Harper has written to other G20 leaders seeking agreement for targets such as reducing deficits in half over a certain period of time or having a certain percentage of debt to economic activity.

“We’re going to work towards as many concrete results as we can at the G20 meetings.”

Quebec Premier Jean Charest said he hopes the meeting will further stabilize financial institutions through better regulations and capitalization requirements.

Canada’s banking system, once derided for being dull, came through the crisis in better shape. But as exporters, the province needs its partners to prosper and stabilize, particularly the United States.

While Quebec’s employment is 20% higher than before the recession, the U.S. still deeply lags.

“Until there is a recovery in the U.S., there will be no recovery in residential home construction which affects the regions of Quebec in lumber. There is a direct link between the two,” he told reporters.