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BMO Bank of Montreal

October 27, 2011 13:06 ET

Europe Plan Could Boost Confidence-BMO Economics

TORONTO, ONTARIO--(Marketwire - Oct. 27, 2011) - One of the main concerns of Canadian business owners when it comes to global economic uncertainty may have been alleviated with the deal hatched by European leaders last night. According to BMO Capital Markets Economics, the agreement has the potential to contain Europe's debt crisis.

"Overall, last night's agreement is a big step forward for Europe," said Benjamin Reitzes, Senior Economist, BMO Capital Markets, noting that financial markets are surging in response. "If there are no speed bumps – such as unexpected flare ups – over the next few months, this plan could be sufficient to contain the European debt crisis and stabilize the European economies."

Stability in Europe is of particular importance to many Canadian businesses; total trade with the European Union – excluding the UK – amounts to $50 billion, representing 6 per cent of total Canadian trade.

A BMO poll of Canadian business owners has found that 51 per cent are confident about 2012. However, those that are less optimistic about the year ahead say poor business conditions, particularly in the U.S. and European economies, ranks as one of their main concerns.

The survey of Canadian business owners also found:

  • For business owners that do plan to expand outside of Canada, 34 per cent plan to expand in Europe.
  • However, the European market is second, only to the U.S., as the region that business owners see as most likely to underperform over the next five years.
  • For those that think Europe will underperform, they are looking at changing their business plans.

"Coming out of the past recession, many Canadian businesses took deliberate steps to mitigate their risk. Where possible they sourced alternative suppliers and diversified to ensure they are not overly reliant on a single customer, sector or market; while making strategic spending decisions to boost innovation and enhance productivity," said Cathy Pin, Vice President, Commercial Banking, BMO Bank of Montreal.

Mr. Reitzes did caution, however, that the details of much of what was agreed to still need to be hashed out. "There could still be some implementation risk. With respect to the European Financial Stability Facility, it is still in its infancy; there could be a meaningful delay before the EFSF is fully operational as envisioned in the statement from European leaders. Therefore, it will continue to be necessary for the ECB to buy debt on the secondary market in the short term."

Mr. Reitzes also said that Euro Area growth will likely still be very weak over the next year or two. "Even if confidence rebounds, austerity measures and some likely bank deleveraging – a part of improving capital ratios – will weigh on activity."

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