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As Europe cuts, the summer of its discontent takes shape

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Europe's hot summer This may be shaping up as the summer of our discontent in the weaker nations of Europe.

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Strikes and protests have been commonplace in Greece, for example, as demonstrations mount against the government's austerity program.

That can only get worse as Athens prepares to slash deeper, gutting its public service, hiking property taxes and shutting agencies, part of a plan to meets targets attached to bailout money from the European Union, International Monetary Fund and European Central Bank.

In Portugal, the populace is also bracing for tougher medicine after the election of the centre-right Social Democrats Sunday. They now have to move quickly on measures that would allow them to tap international aid.

Economists aren't even certain whether Greece can meet its commitments, which the EU, IMF and ECB, dubbed the "troika" by markets, say will likely allow them to release the next tranche of rescue funds in July.

Prime Minister George Papandreou began meeting with ministers today.

"However, Prime Minister Papandreou has to convince his political allies in Parliament to pass the new round of measures negotiated two weeks ago," said Carl Weinberg, chief economist at High Frequency Economics.

"These include an additional €6-billion in fiscal deficit reduction and an acceleration of €50-billion in asset sales. We do not know what will happen if the opposition parties live up to their promise to reject these measures. So default risk is not entirely eliminated."

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Part of the plan, Mr. Weinberg noted, involves asking creditors in the private sector to take new, longer-term bonds instead of cash on maturity. "As long as this is 'voluntary,' there will not be a default event," he said.

In Montreal today, ECB chief Jean-Claude Trichet said the debt troubles do not constitute a crisis of the euro or of the monetary union, The Globe and Mail's Bertrand Marotte reports.

"Rather, the current crisis stems rather from insufficient monitoring of economic policies in a number of member states," he said in a speech at the Conference of Montreal. "Today, it's not the monetary pillar of economic and monetary union that is at stake but the economic pillar."

At the same conference, Angel Gurria, secretary-general of the Organization for Economic Co-operation and Development, said Canadians should consider themselves privileged to have a majority government in such difficult times.

Tims strikes deal with former chief The former chief executive officer of Tim Hortons Inc. is walking away from the doughnut and coffee chain with more than $5.7-million.

Tims said in a regulatory filing today that Don Schroeder, who left the company last month, will get $2.25-million up front, and the rest over two years, The Globe and Mail's Steve Ladurantaye and Marina Strauss report.

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The agreement still gives no details of why Mr. Schroeder left.

"The company previously announced the board had engaged in a comprehensive succession planning and review process in parallel with the company's strategic planning work," the company said in a statement. "As the next stage in its process, the board was planning to commence an active CEO search."

He is staying on as an adviser to focus on "sustainable farming for small holder coffee farmers in South and Central America, and will be available to work on other matters at the request of the board for a two-year period, renewable at the board's option."

There are consulting fees added in, which boosts the size of the overall package.

Raymond James analyst Kenric Tyghe cut his projections for the company's earnings per share this year to $2.32 from $2.34, and estimates for second-quarter profit to 58 cent from 61 cents. The company itself added the deal could affect its quarterly results.

"While the announcement by Tim Hortons that a consulting agreement has been finalized is an incremental positive, the total costs at $6.5-million and the imputed negative impact on our F2011E EPS are, in our opinion, material negatives," he said in a research note titled "agreement at a price."

"The materiality of the negatives is less the absolute impact to our F2011E EPS (which decreases from $2.34 to $2.32, and 2Q11E from $0.61 to $0.58), but rather it reaffirms that initial F2011 guidance of $2.30-$2.40, which appeared stretched after 1Q11 results, will likely be reset lower."

Budget day Observers expect little to have changed between Jim Flaherty's March budget and today's second run at it. And on many fronts, there's little need to change it from the pre-election version.

Jobs, however, are another matter, particularly as the United States hits a slow stretch.

The new majority government is in an enviable position compared to its counterparts across the globe. Consider Europe's struggles, for example, or the threat by Moody's Investors Service to put the U.S. debt rating under review if politics block a higher debt ceiling.

"Since last fall, Canada's domestic stability has made the expansion relatively easy to forecast and easier still to manage," said Mark Hopkins, a senior economist at Moody's Analytics.

"Unemployment has drifted downward, core inflation has remained low, and financial markets have been booming. All this has prompted fiscal and monetary authorities to act far more conservatively than their G7 counterparts, embracing inaction as their best strategy."

Mr. Hopkins is right that unemployment has drifted down, but "drifted" is the key word. Unemployment is running at 7.6 per cent - and that's not expected to change much when Statistics Canada releases the May jobs report this Friday - and the youth jobless level is above 14 per cent. Some economists believe Friday's report could even show an increase in the national unemployment rate to 7.7 per cent.

True, Canada has regained all the jobs lost to the recession, and economists believe Friday's report will show further gains. But it's that stubborn jobless rate that needs addressing amid Ottawa's promise for a balanced budget in four years. Doors must be opened for people - think of that next generation - who want to work but still can't find jobs.

Ottawa projects that unemployment won't dip below 7 per cent until 2014. Parliamentary Budget Officer Kevin Page takes an even dimmer view, projecting a rate above that level until 2016. Neither is acceptable.

"After a surprisingly perky gain of 58,300 in April, don't be shocked by a disappointing Canadian jobs tally for May," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

"Consider the forces stacked up against May employment: 1) U.S. job growth took a big step back last month, 2) the weather was awful through much of the country, including extensive flooding in some regions, 3) auto production dropped heavily, 4) the prior month's big gain was likely pumped up by election-related hiring, which will fall away," Mr. Porter said in a research report.

"Against this backdrop, we are pencilling in a tiny gain of 5,000 jobs, but a repeat of the small 1,500 decline in March certainly cannot be ruled out. The soggy job gain won't keep pace with underlying labour force growth (just over 15,000 per month), so the unemployment rate looks set to rise a tick to 7.7 per cent, which has been the average so far this year."

Other economists expect to see that between 25,000 and 30,000 jobs were created last month, though where it goes from here is a big question, which begs for Ottawa to take a deeper look.

"Canada compares more favourably to the United States, and leading indicators suggest further gains through the year," said Gorica Djeric and Alex Koustas of Scotia Capital.

"However, it still faces some challenges, including the need for continued solid private-sector hiring - especially amid upcoming fiscal consolidation - regional disparities and a future influx of more educated job seekers."

As for the budget overall, Mr. Flaherty has already suggested that there won't be much change from the first version.

"The only new significant measures that are anticipated are an allowance for compensation for Quebec for harmonizing its provincial sales tax with the GST (costing $2.2-billion) and the phasing out of the subsidy for political parties," Mr. Porter added.

"Finance has indicated that last year's deficit will be below the March forecast of $40.5-billion, and they are likely to continue to look for something just below $30-billion for the current year (FY11/12) and a balanced budget by FY14/15."

Savings expected from a strategic review are crucial to balancing the budget within the four-year timeline promised by the Conservatives in their election platform, added Scotia Capital.

"Program spending has risen by about 40 per cent under Minister Flaherty's watch," said economists Derek Holt and Karen Cordes Woods.

"Ending the $2 per vote federal subsidy to political parties will be among the more contentious elements from the opposition's standpoint, but the Conservatives will exercise their majority muscle in this budget. Knowing that the deficit was coming in better than expected provided flexibility for such goodies to be offered."

(For a look at how Canada's jobs market has performed, see the accompanying infographic or click here.)

Cenovus hikes targets Cenovus Energy Inc. is boosting its production targets, projecting "substantially more" than originally planned over the next several years.

The Calgary-based energy company now sees total oil production of about 500,000 barrels a day by the end of 2021, and oil sands output of more than 400,000 in the same time frame, or about six times more than it is now.

By the end of 2016, the company said, it expects conventional oil production of between 120,000 barrels and 130,000 barrels a day, almost double the current 70,000.

Where the oil sands are concerned, Cenovus envisions a new project phase to come on stream every year to 18 months.

"Based on the strong performance delivered by our teams over the past year, we believe we can bring on substantially more oil production earlier than initially planned," chief executive Brian Ferguson said in a statement.

"We plan to expand current conventional oil and oil sands opportunities and bring on new projects. Our industry-leading oil sands capital efficiencies and low operating costs will help us achieve even greater total shareholder return."

Capital spending is expected to average $3-billion to $3.5-billion a year over the next 10 years.

Ivey PMI gains Canada's Ivey Purchasing Managers Index bucked a global trend and shot up in May to 65.5 from 57.8 in April.

Readings of the factory sector have been down around the world.

A new purchasing managers index from Market and Royal Bank of Canada, released last week, showed manufacturing growth slowing, slipping to 54.8 in May from 56.3 in April.

Above 50 still marks expansion.

"Given the volatile nature of the series, a look at the broader trend of the index, which has remained above the 50-threshold for expansion since February, suggests the manufacturing sector could continue to see expansion in the months ahead," said economist Emanuella Enenajor of CIBC World Markets.

"However, we expect that any growth in Canada's manufacturing sector in Q2 will be modest, given the outlook for a soft patch south of the border over that period, as well as the impact of supply-chain disruptions on Canadian auto factory output."

Building permits slip The value of building permits in Canada slipped more than 21 per cent in April, following two months of hefty increases, with both the residential and non-residential sectors taking a hit, Statistics Canada said today.

The plunge to $5.3-billion follows gains of 16.8 per cent in March and 9.8 per cent in February.

In the residential sector, the value of permits handed out by municipal governments fell 12.6 per cent from a month earlier, largely because of a drop in condos in Ontario, while in the non-residential sector it plunged 33.2 per cent.

"Municipalities issued $1.3-billion worth of building permits for multi-family dwellings in April, down 31.3 per cent from March, when the value of multi-family permits more than doubled," the federal agency said. "Ontario and Quebec accounted for much of the decline. In contrast, seven provinces posted increases, led by Alberta and British Columbia."

"Overall, a weak report, leaving overall permits down a sharp 19.7 per cent from the prior year," said Emanuella Enenajor of CIBC World Markets. "In particular, the softness in residential permits continues to suggest homebuilding activity will ramp down this year, with roughly a 10-per-cent drop in housing starts for 2011 from the prior year."

Vehicle production to rebound Global auto production has hit bottom after the devastating March earthquake in Japan, and is set to rebound with double-digit growth in the third quarter, Bank of Nova Scotia projected today.

Canadian plants are set to benefit the most, with a jump in output of 21 per cent compared to a year earlier, said analyst Carlos Gomes.

"The Japanese earthquake and tsunami continue to impact the auto industry and the global economy," Mr. Gomes said.

"Global vehicle sales softened in May, with purchases roughly unchanged from a year ago - a significant slowdown from a 6-per-cent increase during the previous four months," he said in a new forecast.

"In addition, the downturn in global vehicle output also accelerated in May, further dampening global economic activity. However, assemblies have hit bottom and will post a sequential double-digit increase in the third quarter, boosting economic growth."

CPPIB in Norway deal The Canada Pension Plan Investment Board is the biggest player in a consortium buying an interest in a gas transportation system in Norway.

The total deal is worth $3.18-billion, and CPPIB's portion about $738-million, the pension fund manager said today. The CPPIB holds 45 per cent of the company acquiring the stake in the Gassled Joint Venture from Statoil ASA. Others involved include Allianz Capital Partners and an arm of the Abu Dhabi Investment Authority.

The Gassled venture owns most of the gas transport infrastructure on the Norwegian continental shelf, including pipelines and other facilities.

The CPPIB-led group is taking a 24.1-per-cent stake.

"Gassled represents a highly promising investment for CPPIB, and an opportunity to enter into a long-term partnership with like-minded investors," Andre Bourbonnais, senior vice-president at the CPPIB, said in a statement.

Devil's in the details It's not just technology IPOs in the spotlight.

Prada, Italy's high-end fashion shop, has set a price range on its initial public offering in Hong Kong that could net up to $2.6-billion (U.S.), according to reports today. That would mark a valuation above rivals such as LVMH and Burberry, the reports said.

"Twenty-plus times PE looks expensive," Peter Elston, a strategist at Aberdeen Asset Management Asia, told Reuters. "But luxury goods companies such as Prada have got good, visible top-line growth for the next 20 years. There are high barriers to entry as you can't go out and create a luxury brand from nothing."

Airlines slash outlook The International Air Transport Association has slashed its profit forecast for the world's airlines to just $4-billion (U.S.) this year. That's down sharply from the $8.6-billion it had projected in March and would mark a plunge of 78 per cent from 2010's recorded profits of $18-billion. It expects revenues of just under $600-billion.

"Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4-billion this year," the group's chief executive officer, Giovanni Bisignani, said in a statement today.

"That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance. The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7-per-cent margin, there is little buffer left against further shocks."

In Economy Lab today

There's an ominous warning for Vancouver and Toronto in a report examining the U.S. property crash: Development restrictions played a large role in fuelling a housing bubble in large metro centres, the National Centre for Policy Alternatives suggests. Globe and Mail real estate writer Steve Ladurantaye reports.

In International Business today

Peru, which yesterday elected a new left-wing president, could be as crucial to the copper market as Chile over the next five years. Javier Blas of The Financial Times looks at the issue.

In Personal Finance today

In today's Report on Business

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