The Bank of Canada is warning that growing concern over European debt could severely crimp financial conditions around the world and hit Canada with a "major shock" – a warning that comes as infighting broke out among the euro zone players with the most power to keep the crisis from spreading out of control.
With a key Greek election Sunday just as G20 leaders arrive in Los Cabos, Mexico, for a two-day summit, the cohesive economic plans that markets are demanding seem unlikely to emerge in the coming few days.
In their semi-annual assessment of Canada's financial system, Bank of Canada Governor Mark Carney and his policy team outlined the damage that Europe's worsening drama could do to the global recovery.
Specifically, they warned that more Canadian households could find themselves underwater with their debt payments if unemployment were to spike, and that banks and the wider economy could suffer through close ties to countries like the United States and the United Kingdom that have tighter links to Europe.
Prime Minister Stephen Harper will use next week's G20 leaders summit to urge decisive action from Europe, a message he recently expressed during visits to London and Paris.
Canada will argue that its own focus on free-trade deals, labour-market reforms and more business-friendly regulations are an example to others of a growth agenda that doesn't pile on new debt.
"The growing crisis in Europe will be the dominant concern in Los Cabos," said Andrew MacDougall, the Prime Minister's spokesman.
On Thursday, the two most influential powers in the euro zone – Germany and France – descended into public finger-pointing and are clearly at odds over the best way forward.
In a speech to Parliament, German Chancellor Angela Merkel warned against a growth agenda focused on new debt and replied to pressure directed toward her own country to do more.
"Yes, Germany is strong. Germany is Europe's economic engine and stability anchor," she said. "But we also know that Germany's strength is not infinite."
Shortly after, French Prime Minister Jean-Marc Ayrault shot back. "The situation in Europe is sufficiently critical not to give in to simplistic talk. We need to deal with things seriously and courageously," Mr. Ayrault said.
G20 summits are designed with the hope that leaders can largely rubber-stamp plans that have been worked out in advance by finance ministers and government officials. Yet this summit is shaping up to be particularly chaotic.
The Mexican hosts are concerned by the timing of Sunday's Greek election, which could easily come to dominate the two-day summit. After a May 6 vote failed to produce a governing coalition, Greeks must choose again among parties with varying views on the strict austerity plan Europe has imposed as the condition for a financial bailout.
Canada's Finance Minister, Jim Flaherty, expressed concern about the vote's timing earlier this week.
"The election is right on the eve of the G20 meeting," he said. "It could result in a disruptive moment if the Greek election were to result in a disassociation of Greece from the pact that our European colleagues have developed with respect to austerity."
Regardless of what happens in Greece, the euro zone appears increasingly at odds internally over how to fix itself. That doesn't bode well for hopes of a major breakthrough at the G20.
Germany, the largest economy in the euro zone, is increasingly isolated on two fronts. Its insistence on austerity as the way forward is now being challenged by some – particularly France's new Socialist President François Hollande – who favour shifting focus toward a growth agenda. Germany is also resisting calls for much deeper euro zone integration in the form of common euro bonds.
A central point of contention in Los Cabos will be the degree to which those outside Europe help out in the form of new pledges to the International Monetary Fund. Two months ago in Washington, the IMF said it had received more than $430-billion in new pledges for loans that could be used to rescue troubled states. Los Cabos is where the G20 nations are expected to confirm their specific individual pledges. Canada and the United States have said they won't contribute.