In Canada, we are so far away from the problems that they are having in Europe. With our unemployment rate at 7.4% and with vast stretches of Western Canada actually importing labor, it would seem maybe the recession is finally over. I say that because here in southwestern Ontario there are many people who believe it never ended. Regardless, every day we seem to wake up from some dire economic warning that the sovereign debt concerns in Europe may bring us back to earth.
It all has to do with the interrelationships within the global economy. Where one time a small problem in an obscure European country might be dealt with locally, now it reverberates throughout the world. That is Greece’s problem. Over a period of years they have mismanaged their economy, with their government borrowing continually to satisfy the needs of the people. The only problem is that debt has not been serviced properly and it is further complicated by the fact that Greece is part of the European union with their currency, the Euro. So the Greek people are finding themselves having to pay all this money back in Euros and what’s worse somebody who isn’t in Greece is telling them what they have to do.
That wouldn’t be so bad but when you’re facing a drastic lifestyle change like some people in Greece are contemplating, these changes don’t go down easy. The inconvenient truth is Greece and the Greek people do not have the money to pay back all those Euros to Europe’s central bank as well as its other debtors around the world. So who is in trouble, Greece or all the debtor banks, which ruled that debt or the taxpayers in places like Germany who will gladly be asked to bail the Greeks out? Yes, it is a long complicated story, one coming to fruition soon.
It is certainly caught the attention of Canadian finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. They know that if the European debt problem cascades through central banks in Europe, it will ultimately be bad for the Canadian economy. So it looks like with Canadian inflation hitting 3.7% recently and with all the uncertainty, we might be able to avoid a Bank of Canada interest rate hike. Minister Flaherty continues to say that “Canada is not an island” when it comes to problems washing up on our shores. He’s talking about the European sovereign debt problems and unfortunately, increasingly I’m sure he’s concerned about the failed debt ceiling negotiations going on currently in Washington DC.
And in the United States is complicated further by the polarized American political environment. For some people in the United States it’s all about being “American” versus everybody else. In other words for some, if you are Republican, the Democrats are not only wrong, they are evil. So we have an American President wanting a change in the US debt ceiling, usually a routine thing, being pulled apart on the 24-hour news cycle in the United States about what that “really means.” With an August 2 deadline to getting the deal done, the political rhetoric just gets shriller.
On one side of the debate you have Pres. Obama who was gifted the economic mess of 2008. On the other side of the debate is the Republican Party, which is increasingly being hijacked by the right wing tea party movement. Nobody wants to blink first. So that means many on the Republican side are saying what does it matter if the United States cannot pay its obligations. On the Democratic side, I’m sure there are more than a few who would like to raise taxes and never the twain shall meet. All of the analysts that I work with in the United States have assured me a deal will get done. However, real cutbacks in the United States seemed so far away.
I wrote about this subject last week and am writing about it again this week shows you how concerned I am. As many of you know I write professionally about agricultural commodities. Increasingly, like every morning I hear about these debt problems, which are throwing considerable headwinds into the commodity market. At a certain point these headwinds will be a deep negative to global economic growth, which ultimately will impact our healthy Canadian economy. This may ultimately throw friends and neighbors out of work making it not so good for everybody else. I don’t want to go there. I just hope our American and European friends come to grips with this.