Europe attractive despite Greece

By Vikram Barhat | July 4, 2011 | Last updated on July 4, 2011
2 min read

The hugely unpopular and controversial €28-billion Parliament-approved austerity plan aimed to bring Greece back from the brink of economic disaster has caused much chaos in the country. But for a nation plagued by dire budget problems, the austerity package of spending cuts and tax hikes is only the tip of the iceberg, experts point out.

“[The austerity programme] will definitely hurt depending on the extent of the tax increases, the wage cut and spending reductions,” said Serge Pepin, head of investments, BMO Investments Inc. “The demonstrations we’ve seen so far [and] the wildcat strikes, that’s going to continue.”

For global markets, however, it was a welcome decision that removed a huge element of uncertainty, he added while warning “we’re not out of the woods yet.”

The bigger question to consider now is whether other economies around the Eurozone adopt similar austerity measures. Greece’s situation has to be managed extremely carefully, said Pepin in a reference to the challenging mandate that faces the new IMF chief Christine Lagarde.

The impact of the ongoing crisis in Greece, though, has only a limited impact on Canada and the U.S., said Pepin.

“If you take Canada and its exposure to troubled economies of the peripheral Europe, it’s extremely small, roughly $10 billion; it’s just a drop in the bucket,” he said. “But Greece is certainly like a submarine with a screen door, taking in water and sinking.”

What’s concerning instead is Canada’s relationship with the bigger banks in the U.K., France and Germany that have much greater exposure to Greece. A financial haircut taken by these banks will inescapably have implications for Canadian financial institutions.

The time may have come for the European Union, not to mention the Eurozone, to take a close look at the relevance of the economic and political union of its 27 member states.

“[For] the Eurozone now [it] is a matter of sitting down and looking at that model, the 1999 experiment, and thinking if this experiment has gone wrong and must be stopped immediately or if it is a crisis that was mitigated [and] shows the strength of the Eurozone.”

Either way any plans for the expansion of the EU will have to be put on the back burner for now, he added. “I’m sure a bunch of lessons have been learnt from this [which] could strengthen the Eurozone, but I think a lot of regional blocs right now are looking at this experiment and saying ‘not yet’,” said Pepin.

A self-confessed proponent of Europe, he says the continent still holds promise for Canadian investors. “There are amazing opportunities in Europe and hopefully these types of events will not send investors back and stuff their mattresses with their dollars.”

Vikram Barhat