Be Euro-Scared, Very Euro-Scared

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I have spent the past two days at the annual retreat for Canada's finance minister, Jim Flaherty, at Gatineau near Ottawa. Participants included prominent Canadian business and financial leaders, economists and academics, experts from the nonprofit sector, and officials from the Ministry of Finance.

The retreat is conducted on "Chatham House rules," ie, no quotation of any particular person. But I can share some general observations I carried away from the conversation.

1) Step outside the United States, and America's debt problem rapidly tumbles down the list of things that people worry about. They worry above all about a crisis in the Euro, secondly about a double-down US recession, thirdly about a lost half-decade of slow growth through the Western world.

2) How scared are you about the Euro? Be more scared. The world can probably cope with a default by Greece alone, but if a Greek default triggers defaults elsewhere in the Euro periphery, the shock could topple banks around the world. Portugal, Ireland, Greece and Spain have issued huge amounts of Euro-denominated debt. That debt has been bought by banks throughout the world, not just European banks. For example, the big US banks have exposure to PIGS debt that altogether amounts to about two-thirds of their capital.

3) The 2009 stimulus failed to deliver the results it should have, largely as a result of bad program design: it arrived too slow and too much of it sustained existing state government programs, rather than being invested in projects that multiplied their effects through the economy. The economists and the business leaders agreed that government stimulus spending can work-if it arrives fast enough, if it is spent right, and if it is terminated promptly. Canada's 2009 stimulus spending passed the test, participants believed; America's stimulus did not.

4) Even very conservative minded business leaders outside the US are baffled by the sudden US enthusiasm for balancing budgets in the throes of the recession, tighter money in the face of collapsing domestic demand, and the dogmatic opposition to any new revenues at any time for any reason.