OTTAWA — If the economic crisis ravaging Europe gets worse, it will hit Canada hard, leaving the country in worse shape than it was following the 2008 global recession, according to a leading economist.
“If Europe just goes through the hole, there’s no place to hide,” said Ken Rogoff, a Harvard economics professor, former chief economist at the International Monetary Fund and best-selling author, said during an appearance on The West Block with Tom Clark.
“It will hit Canada through commodity prices — it already has. It will hit through the financial markets, it will hit through trade with the United States… But there’s not a lot you can do to protect yourself against that eventuality. Europe is huge.”
While it’s difficult to say exactly how the crisis will play out, Rogoff said, one thing is certain — we are not near the end of the story.
“If you want to get hyperbolic, what’s going to happen if Europe really falls apart — and make no mistake, that could happen in a year or two or even sooner — it’s hard to know really how far it will go,” he said. “I think it will be worse than 2008.”
At home, the Conservative government has been kicking around a plan with shades of another domestic stimulus injection, should the effects of the crisis hit.
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As the last recession was underway in early 2009, Prime Minister Stephen Harper and Finance Minister Jim Flaherty ramped up spending by $50 billion over two years through measures such as tax cuts and fast-tracking infrastructure projects.
Should the “the worst” happen in Europe, that sort of stimulus would likely be beneficial, Rogoff said.
“But the debate now, is what to do here and now,” he said.
The silver lining on this ominous storm cloud, however, is that Canada’s economy will rebound faster than in 2008, he said.
The crisis in Europe has been brewing for years, calling to question the force and effectiveness of the euro plan.
Over the weekend, Spanish government conceded to tapping into the 100-billion euro ($125 billion) bailout fund eurozone finance ministers struck in an attempt to help the country’s struggling banks and restore confidence in the eurozone.
The announcement followed months of public denial from the government, adamant it required no bailout.
Spain is the fourth, but largest, eurozone country to request help from its neighbours.
Combined, the European Union has committed close to 500 billion euros in bailout funds for Greece, Portugal, Ireland and now Spain.
Spanish officials haven’t yet said how much they will use of the 100-billion euro fund committed to them this weekend.
Elsewhere in the union, Greece remains in turmoil, with voters headed to the polls next week, and the country’s exit from the eurozone still of concern.
Meanwhile the Italian economy, the third largest in the eurozone, the economy continues to slip deeper into recession.
Now Spain is at the centre of the storm.
The country is back in recession, with unemployment at nearly 25 per cent.
Further, Spain’s credit rating was bumped down to BBB — just three notches above junk status, and the cost of borrowing continues to climb, edging dangerously close to a level experts say is unsustainable.
And at the same time, the banks are in serious trouble.
With troubles mounting, Europe has asked for help building a bailout fund. So far, some G-20 countries have contributed $430 billion — but two countries, Canada and the United States, have refused to donate. That’s a decision Rogoff supports.
“From a political point, I can’t judge,” Rogoff said of Canada’s decision. “From an economic point, I find it reasonable. Europe is a very rich place and this is a domestic problem. They need to write down some of these debts.”
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