Strategy

No end in sight for current malaise: Krugman

Canada not out of the woods yet, says Nobel laureate.

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Economist, Nobel Laureate and New York Times columnist Dr. Paul Krugman (Photo: Wally Trenholm)

American economist and New York Times columnist Paul Krugman is offering a vague and mildly pessimistic near-term prognosis of the global economy, including a hint that Canada’s fate may yet follow that of the U.S.

Speaking to an Economic Club of Canada audience in Toronto on June 29, the Nobel laureate admitted that the outcome of the current situation involving a sluggish U.S. economy and a wobbly Eurozone was difficult to foresee, save for Greece.

“The question for Greece is, will they default now or later?” he said.

News of the appointment of French finance minister Christine Lagarde as head of the International Monetary Fund would be welcome during what Krugman described as “normal” times, but could possibly lead to trouble, he explained.

“What I know of Christine LeGarde is that she’s smart, sensible and judicious—which is what has me worried,” he said. “We are in very strange times where things that would normally be the reasonable thing to do can actually be disastrously wrong. For the time being, virtue is vice and prudence is folly.”

Krugman said he believes the current slump is relegated to the North Atlantic and has left emerging markets relatively unscathed, save for a tighter flow of Western investment. And while the U.S. and Europe took different paths to the crisis, the end result is the same.

“People like to think of it as a U.S. sub-prime crisis, but there were comparable housing booms in Spain, Ireland and Eastern Europe. The run-ups in prices are similar, the run-ups in debt are similar.”

Where does Canada fit in?
Despite Canada’s image as a bastion for conservative banking laws and post-crisis economic stability, Krugman warned that the crisis has yet to play itself out globally, and that the other shoe has yet to drop.

In terms of net worth, he explained, Canada seems to be in much better shape than the U.S. But on the liability side, the two look very similar.

“Household debt in Canada has risen at rates comparable to the U.S., but housing prices have not plunged … yet. There’s a real question of whether Canada is just a delayed version of the same story.”