How far could this contagion spread? Could it affect Canada and the U.S.?
We know from our experience with the Asian debt crisis of 1998 that a little problem with the Thai currency set off a massive crisis which spread to Russia and triggered a major debt default, and that led to the collapse of a huge hedge fund in the United states. That could happen again if there are investors heavily exposed in these markets, but in terms of the effect on the Canadian economy, the Canadians should be winners from all of this because as investors look around for safer places to go, and if they're worried at all the soaring U.S. deficit, they'll say well, what gives me the same kind of safety in an economy that's sort of tied to the Americans who are recovering without the risk of those big budget deficits, well Canada, Australia, New Zealand, they're big commodity producers, they're tied to growth buyers of those assets, mainly Brazil and China, they might be the places I want to put my money, so in fact, Canada could benefit by having cheaper financing as more money pours into the country.
What about the high loonie? Is that better or worse when it comes to this crisis?
The strong loonie is what's attracting all of this capital, but it's terrible for Canadian manufacturers. The government has tried to pretend that we should be able to live with a strong currency now and it enables companies to make productivity improvements and to buy technology cheaper which is all true, but it definitely hurts our export markets and we are still heavy exporters. We rely enormously on the U.S. market and the strong dollar doesn't help central Canada at all. And it doesn't do a whole lot more for our resource producers because they've already been benefiting from the earlier strength in the dollar. The problem is that as the euro weakens, we'll see the Canadian dollar and the Australian dollar get even stronger.
You just did some travelling in Europe. Did you get a sense people knew they were in a crisis?
You certainly don't see that crisis mentality in the big capitals, and I was in Paris, London, and Scotland. There's still consumer spending and it's actually holding up quite well.
Housing markets in the big cities are still booming, the cost of living in these places is ridiculous... I was looking at apartment prices in London, and they're still ridiculous. But when you talk to individuals, there's no question there's deep concern. Unemployment rates are rising, entrepreneurial opportunities are getting smaller, there's concerns about heavy new taxes that will be needed to bring these deficits under control, because remember it's not just the Greeks that are required to reduce their deficits. Any country that's over the 3 per cent target set by the European monetary union really has to bring its deficit down and even Germany is at 3.2 per cent now. That's manageable, obviously, but they're worried about trade within Europe and we have to remember that Europe itself is the world's second biggest exporter, it's a huge market, and as it slows, it will affect the entire global economy, so those are the risks and people are aware of that.
And they're certainly worried about it. It's shown up in the election campaign in Britain, and the politicians are talking about spending more money, not less, which is really worrisome. There's nobody talking about reining in deficits, about bringing government costs down and that's an issue they're going to have to face, just as the Americans will down the road and that means trouble for future generations.