The European debt crisis seems like a distant issue, but the fall out threatens to push the global economy back into recession. Steve Goetz explains what this means for you
The European Union
The European Union (EU) is a partnership between 27 countries on the continent. Some governments in the EU borrowed and spent hundreds of billions of dollars more than they earned in taxes, bringing down the economy of the union as a whole with some governments owing more than their economy can produce annually. So far this year, international ratings agencies have downgraded the credit ratings of Greece, Portugal, Ireland, Italy and Spain, confirming fears that those countries may not be able to pay their debts. Dexia SA, a Franco-Belgian bank, was forced to write-down the value of its Greek debt-holdings earlier this year, losing billions of dollars and leading to their collapse late last week. France holds close to $60 billion worth of Greek debt, reflecting the risk to other European states if Greece defaults.
The United States
The EU is the United States’ single-largest trading partner, ahead of Canada with $559.4 billion in trade in 2010. A major downturn in the EU could spell trouble for the already shaky U.S. recovery if it further weakens American exports and manufacturing. Another concern is that the US banking system is exposed to European banks vulnerable to a default by Greece or one of the other debt-depressed countries. If banks start collapsing, there may be a domino effect felt on Wall Street.
The EU is Canada’s second largest trade partner, representing 10.5 per cent of annual trade volume—a fraction of the business done with the U.S. But, the crisis will come home in a big way if both the EU and the U.S. hit the wall. Canada is an export-driven country and even if banks hold up, the country needs trade partners to do business with. Canada is already posting record deficits since the stimulus spending began in 2008 to combat the most recent recession. Finance Minister Jim Flaherty has lowered expectations for economic growth in Canada and has targeted the EU’s inability to get the debt crisis under control.
“It is important that Europeans take decisive action to resolve their debt issues and mitigate the market turmoil and uncertainty that is holding back growth,” Flaherty said to reporters last week.
Recessions hit youth employment especially hard. The unemployment rate for young Canadians is 17.2 per cent according to Statistics Canada—almost double the rate for the labour force as a whole. The European debt crisis could help push Canada back into recession, further hurting the number of jobs available to young Canadians and new graduates. With jobs hard to find, your personal debt may soar further on student loans, and some students may be forced to drop out or defer their degrees. People may start choosing work over the cost of post secondary school which will lead to poorer universities. With less funding, the schools will likely be forced to cut funding to faculties and resources as well as cutting classes. A return to recession and the resulting spike in deficits would put pressure on the Canadian government to start cutting back spending. Education and health care transfers to the provinces were some of the first things cut as part of the Liberal’s deficit-fighting strategy in the 1990s, but time will tell where the Conservatives will look for savings.