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Riot police are engulfed in flames as they are hit with a molotov cocktail near the Greek parliament in Athens (PASCAL ROSSIGNOL)
Riot police are engulfed in flames as they are hit with a molotov cocktail near the Greek parliament in Athens (PASCAL ROSSIGNOL)

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Can Canada go the way of Greece? Add to ...

Canadian politicians are patting themselves on the back as Canada has avoided many of the problems the rest of the developed world has experienced in recent years. They attribute this to the better fiscal management and regulatory system that they have stewarded in this country. Greece, on the other hand, has been a poster child of a mismanaged economy. But could Canada have just been lucky?

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There are distinct similarities between the two countries to justify asking the question: Can Canada go the way of Greece when our luck runs out? Canada may be on a higher deck, but we are on the same boat.

An overleveraged economy Attention has focused on the federal government debt in Canada as a percentage of GDP to signify the super solvency of the Canadian economy, but how about other government debt? How about household debt? The debt picture in Canada changes dramatically when we add total government debt to total household debt.

In this case, total debt to GDP looks quite similar between Canada and Greece: 203 per cent for Canada vs. 195 per cent for Greece. In fact, Canada is in the top five countries in the world when you include government and household debt; Greece is not.

And we should not forget the cost of the future promises made by governments, such as social security, health care, government pensions, etc. that have to be added to the official debt figures. For example, Canada’s net liability for unfunded pensions to all government workers amounts to $422-billion. Moreover, Canada Mortgage and Housing Corporation (CMHC), whose liabilities are fully backed by the government of Canada, has a mortgage insurance book that is equivalent to more than $500-billion. While Greece has huge unfunded liabilities, it has no equivalent to CHMC debt.

Declining manufacturing sector Trade employs more Canadians than any other sector in the economy according to recent figures by Statistics Canada. However, the same report showed that in October, factory employment and production hit a 35-year low as more plants closed. As a share to GDP manufacturing stands at 12.8 per cent.

The Greek manufacturing sector has also been on the decline, standing at 13.8 per cent as a share of GDP - the percentage of employees in manufacturing to total employment is 10 per cent. Services as a percentage of GDP account for 71.8 per cent in Canada and for 78.8 per cent in Greece. Employment in services to total employment is 78.4 per cent and 65.1 per cent, respectively.

Canada’s economy is dominated by energy and material producers, the type of companies most vulnerable to a global slowdown. Canada’s major export category is materials, amounting to 23.8 per cent of exports. The major import category is machinery & equipment, constituting 27.5 per cent of imports. Greece’s major export category is agricultural products and beverages, while the major import category is machinery & equipment and fuels.

Low productivity and high unit labour costs Unit labour costs are the best estimate of employee costs faced by firms. They are a function of hourly wages and productivity gains. Unit labour costs have been flat at the 2008 level for Greece (even though they have skyrocketed since the early 1990s), as opposed to their main euro partners whose unit labour costs increased by 5 per cent over the same period. In Canada, unit labour costs rose by about 6 per cent since 2008 vs. about 2.5 per cent for the U.S., Canada’s key trading partner. GDP per hour worked is about 26 per cent higher in the U.S. than in Canada and 50 per cent higher in Germany than in Greece, as per OECD statistics. Canada is not as innovative and productive as the U.S. The same applies to Greece vis-à-vis its main euro partners.

An over-bloated, highly unionized and handsomely paid public sector In Canada, public sector employment to total employment is 20.6 per cent. For public sector employees, the unionization rate is 72 per cent. In the economy as a whole, the per cent of unionized labour in total labour is 29.7 per cent. Public sector employment to total employment in Greece is 22.1 per cent. The unionization rate is 60 per cent for public sector employees. Overall, 23 per cent of the Greek labour force is unionized.

According to the Canadian Federation of Independent Business, federal government workers’ total compensation (which includes benefits and shorter week hours) is 41.7 per cent higher than similar jobs in the private sector, whereas municipal workers make 35.9 per cent more and provincial workers 24.9 per cent more. Figures are similar for Greece.

Both Canada and Greece regularly experience labour unrest and militancy in trade unions, especially public sector unions. According to Statistics Canada, 2010 saw 175 strikes and lockouts in Canada involving about 1209 person-days lost . The Economist reports that in 2010 Canada was at the top of selected countries for most days lost to strikes. The U.S. had only 5 per cent of the days lost compared with Canada. Greece, on the other hand, also fond of strikes with militant unions, is the country with more strikes and days lost to strikes than any other country in the EU.

Finally, government plays a big role in both countries. For example, total government spending as a percentage of GDP is 49.8 per cent in Greece vs. 47 per cent for Canada.

Canada thus far has been lucky to avoid the crises faced by other Western countries. It has been lucky because (a) the housing sector has not tanked due to significant inflow of foreign money in the sector, and (b) the commodity cycle has been on the upswing the last 10 years due to the increased demands on commodities by China and India. Both of these positive forces can change at any time. The over-investment in the housing sector in Canada -- and in many sectors, including housing -- in China is not good news for Canada. What will happen to the Canadian economy if these two vital sectors turn negative?



George Athanassakos, gathanassakos@ivey.uwo.ca, is a Professor of Finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, The University of Western Ontario.

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