Our expert Dr. Patrick Leblond disagrees and explains: "The risk for the Canadian financial system, as indicated in the Bank of Canada's latest Financial System Review, is that the European debt crisis, which is also combined with a banking crisis in countries such as Spain and Ireland, might lower demand for Canadian goods and services and therefore contribute to putting downward pressure on the growth of the Canadian economy, which would in turn affect the profitability of Canadian banks as there would be less demand for loans from Canadian business. Furthermore, the fragility of the European banking system as a result of the debt crisis could potentially reduce liquidity in the global financial system and, therefore, make the cost of capital higher for Canadian banks, which again would hurt their profitability. These are the two ways that the European crisis would hurt the Canadian financial system. However, these indirect risks between the crisis and the Canadian financial system remain small in comparison with the potential fiscal difficulties south of the border."
Furthermore, Dr. Amy Verdun comments: "The crisis in Europe is still being discussed and sorted out. There has been some good news in the last few weeks, and it seems that Europe is on the right track. It does still face lots of problems especially in the real economy (high unemployment and low growth or recession) which means that Europe will still be facing challenges as we move into 2013. It has been strange that the Canadian government has been so adamant to point to the fact that it would not want to help Europe out (via the IMF) should it be necessary, whilst at the same time (seeing this news) recognising that what happens in Europe will have a direct effect on Canada if it is large and nasty."