Euro crisis should be wake up call for Canada: Economists

Europe’s sovereign debt crisis should provide a wake up call to Canada to focus on its budget deficit and tackle issues such as pension reform, economists said.

Canada, currently shining as a model of fiscal responsibility, still faces many of the longer-term problems at the heart of the crisis in Europe, where ageing populations are causing pension and healthcare costs to balloon. It can’t afford to become complacent, they said.

“We tend to spend our way out of crises, but the huge deficits that has caused is now raising red flags,” said Thorsten Koeppl, professor of economics at Queens University. “There are big problems down the road, with increasing education costs and a healthcare system that is unsustainable.”

If current spending trends continue, healthcare spending in Ontario will take up 80% of the total program budget by 2030, compared with 46% today, a report by TD Financial Group said this week. Other provinces face similar challenges.

The European Union and the International Monetary Fund have been forced to come up with an almost $145 billion bailout package for Greece, which has wracked up a government deficit of 13.6% of its Gross Domestic Product after years of spending more than it was earning.

The unprecedented stimulus spending following the 2008 financial meltdown pushed Greece’s debt problems over the top and are threatening to do the same to other highly indebted European nations, such as Portugal and Spain.

The crisis has shaken global financial markets on concern that Greece may default, a move that would create major problems for some of Europe’s biggest banks. The tough austerity measures needed to get European budgets under control may also crimp global economic growth and affect demand for commodities.

Canada’s booming economy is not at immediate risk from the crisis, economists said. Exports to the eurozone account for only about 9% of the country’s total, making it far less important as a trading partner than the U.S., whose economy is showing signs of steady recovery.

Banks here have minimal exposure to Greece and the federal government’s deficit stands at an enviable 3.1% of GDP. Yet, that rosy national picture may be masking a different story at the provincial level.

“There are big discrepancies in deficit reduction plans,” said TD Financial Group Director of Economic Analysis Derek Burleton. “Given Canada doesn’t have the same debt problems as other countries, there is a tendency to adopt a go-slow approach and let the stimulus measures take their course.”

That may pose a risk if interest rates rise faster than expected, pushing up borrowing costs at a time when spending is increasing, he said.

“Canada is in an odd situation as the federal budget is in better shape than the provincial,” Koeppl said. “A lot of debt is buried in the provinces.”

Ontario’s ratio of net debt to GDP is forecast at 34.1% this year, compared with 47.6% for Quebec and 39.3% in Nova Scotia, according to RBC data.

“It’s is true that provinces are carrying either quite high debt numbers or face somewhat protracted budget deficits in the next few years,” CIBC Chief Economist Avery Shenfeld said.

“But even adding in the provinces, Canada’s overall deficit this year is the range of 5% of GDP which is still less than half the U.S. or many European economies,” he said.