The Euro will Survive - and Canada's Contribution to the Eurozone should be Trade, not Bailout Aid

OTTAWA, Oct. 17, 2012 /CNW/ - The euro will likely survive, but Canada should not offer any special financial support to the eurozone and it should stay out of the detailed discussions on how to resolve the European financial crisis.

The Conference Board of Canada argues that Canada's best contribution to the eurozone would be to conclude a free trade deal with the European Union.

"Canada can best contribute to an economic recovery by completing the free trade negotiations with the EU, thereby boosting growth potential on both sides of the Atlantic. The eurozone needs growth if it is to recover, but there is not yet any apparent, well-defined growth strategy. A Canada-EU free-trade agreement would be a leading element of such a growth strategy for the eurozone," said Glen Hodgson, Senior Vice President and Chief Economist, and author of The Endgame for the Euro: Fresh Insights, but the Options Remain the Same.

Canada's positions on the eurozone crisis - no financial support and a free trade agreement - comprise two of 10 points in the briefing. The briefing argues that the euro will survive more or less intact, and will not fragment into multiple currencies. But the resolution will take time and be very painful and costly.

In June, the Conference Board published an initial briefing The Endgame for the Euro: Three Unattractive Options. Option 1 was to muddle through the crisis in a reactive, step-by-step process—as has occurred for the past two and a half years. The muddle-through approach continues to be the default option, and appears more likely now to continue than it did during the summer.

Option 2 was for Greece to leave the euro. Since there is no mechanism in place to push Greece (or another heavily-indebted eurozone member) out of the eurozone, the likelihood of this option appears to be diminished. However, it is very likely that Greece will eventually require significant debt reduction relief from its eurozone partners - and will be shut out of financial markets for years. Greece could also still choose to default on its public debt, leave the eurozone, and restore its own currency at a sharply devalued level to try to improve its competitiveness.

Option 3 was for Germany to leave the eurozone and restore its own strong currency, perhaps with a few other fiscally solid countries, such as the Netherlands, Finland, and Austria. But despite the high and rising costs of bail-outs, Germany's deep political commitment to remaining an anchor member of the eurozone has not wavered. The Conference Board gave this option only a five per cent probably earlier this year, and it is even less likely now.

The publication is publicly available from the Conference Board's e-library.

SOURCE: CONFERENCE BOARD OF CANADA

For further information:

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