“Time to Reduce Exposure to Europe”

CBC National News reconvened their “Bottom Line” economics panel (including yours truly) last night to discuss the twin debt crises (Europe and America) that are currently roiling financial markets.  Here’s the link to the webcast for aficionados.

In the last segment, Pater Mansbridge asked all the panelists how the debt problems should affect individual Canadians’ personal strategies and behaviour.  (My answer was to pray!  And to then get political, demanding serious reforms to stabilize the financial system.)  The others focused mostly on how individual investors might adjust their portfolios in light of what’s happening (buy gold, etc.).  I was interested to hear both Patricia Croft (ex-RBC) and Preet Bannerji (Pro-Financial Asset Management) suggest that investors should reduce their exposure to Europe.

This is ironic, because the other big news this week is that the Canadian government is now very close (after another round of talks in Brussels last week) to quickly inking a free trade deal with the EU.  Details of the talks (and, in particular, what Canada sacrificed in order to get so close to a resolution) were not released.  But the reality is that the Harper government is about to substantially increase Canada’s national economic “exposure” to Europe, at the very moment when financial advisors recommend we head in the other direction.

I think a NAFTA-style free trade deal with Europe is a bad idea at any time.  But it’s an especialy bad idea right now, for several reasons:

• Currencies: Debt concerns have pushed down the euro by over 25 percent versus the loonie since March 2009 — which is when the Canadian and EU governments first issued their joint declaration to work toward an FTA.  Note that the trade-weighted average EU tariff on imports from Canada is only 2% (and that includes agriculture tariffs, which are not likely to be removed in any event).  So even an FTA that eliminated all EU tariffs on all Canadian products would offset less than one-tenth of the damage to Canadian exports that’s already been done by the sagging euro.  Of course, the euro is going to fall a lot further in the months and years ahead.  Whatever “access” we gain to European markets through an FTA will be quickly clawed back, and then some, by the euro’s inevitable depreciation.
• Austerity:   European growth will slow to a crawl in coming years as the dramatic (and perverse) fiscal tightening dictated by the EU and ECB bureaucrats takes its macroeconomic toll.  Canada’s recovery is no great shake, either — but we will certainly grow a lot more than Europe over the next decade.  Our market is growing, theirs is not.  Guess who’ll get more new business from the deal?
• Export-Led Strategy:  The classic beggar-thy-neighbour response to economic difficulties at home is to try to export the problem to your trading partners, by generating and sustaining large trade surpluses.  Germany has done it in recent years — and now rivals China for the largest trade surplus in the world.  (Indeed, Germany single-handedly accounts for half of Canada’s large existing trade deficit with the EU.)  Korea did it, too, after the 1997 financial crisis.  (Interesting to note that Canada’s bilateral trade with Korea was balanced until 1997 — but since then we’ve incurred large, chronic, job-destroying bilateral deficits.)  Even America is trying it now, with President Obama’s audcaious plan to double U.S. exports.  That’s fine for the exporter, not so fine for the importer.  Until such time as we cultivate interplanetary trade relations with Mars, every country’s surplus is someone else’s deficit.  We’re already a big loser in this beggar-thy-neighbour competition, by virtue of our record current account deficit.  Expect the Europeans to push their exports out in coming years by hook and by crook, using every trick in their export-led book.  An FTA at this time hands Canada’s market to them on a platter.

The Harper government is charging ahead not because they actually believe their own CGE estimates that it will be a boon for our GDP.  (In fact, the government’s own studies confirm that the bilateral trade deficit will widen dramatically under an FTA — even more so in light of that factors I list above.)  They are charging ahead for political and geo-political reasons: to flex their new majority muscles in the forewign policy arena, to pretend that they have a plan for dealing with the worrisome global economy (and the continuing problems in America), and to show that they are players on a broader world scale (being the first developed country to sign an FTA with Europe).

In terms of bread-and-butter economics, however, their politically-motivated rush to sign a deal with Europe, especially at this point in time, will jeopardize tens of thousands of Canadian jobs, exacerbate our health care funding challenges (by pumping up prescription drug prices), and further undermine our international trade performance. 

So in this case, I throw my lot in with the financial experts.  I’d say it’s time to reduce, not increase, our national economic exposure to Europe.

PS: Here’s the link again to my CCPA study last year predicting between 28,000 and 150,000 lost Canadian jobs under a Canada-EU FTA.