UK Prime Minister Keir Starmer welcomes Prime Minister Mark Carney outside 10 Downing Street on Mar. 17, in London, England.Carl Court/Getty Images
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
That Mark Carney opted to make his first prime ministerial visit to Europe rather than the United States may not only be symbolic, but timely. As Canada looks for ways to diversify its trade relations so as to reduce its asymmetric dependence on a newly volatile southern neighbour, it can look to a continent where things are looking up for a change.
After nearly two decades in which most of the economic growth in the Western world took place in the United States while Europe, Japan and Canada remained mired in stagnation, things have rapidly flipped. Some of the current slowdown in the U.S. has been cyclical. However, there appears little doubt that the volatile policy making of the Trump administration is accelerating the slowdown – something the administration is starting to claim was the plan all along.
But President Donald Trump’s warmth toward Russia’s Vladimir Putin, coupled with his administration’s hostility to Europe, has suddenly forced governments there to do what they should have done decades ago – stop free-riding on the United States and start taking responsibility for their own safety. In just a matter of weeks, several major developments have resulted from this abrupt pivot.
The new German government, recognizing it needs to rearm while also making up for two lost decades in which its predecessors allowed the country’s infrastructure to deteriorate, announced a major program of long-term spending. On Tuesday, the outgoing parliament voted to lift the debt brake Angela Merkel had placed in the constitution to limit how much the country could borrow. That will free the government to invest upward of a trillion euros over the next decade. By some estimates, this program will be twice as big as the postwar Marshall Plan was. As happened with the Marshall Plan, that money will fan outward across the continent.
Other European governments are also raising their defence spending targets, while calling for a prioritization of local defence contractors. Given how dependent most European governments have been on weapons imports from the U.S., this reorientation toward local producers will act as a further stimulus for the European economy.
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To date, outside the aerospace sector, Europe’s defence industry has been fragmented, with governments favouring their own companies. The resulting inefficiencies, which also exist in other industries – most notably finance – have inhibited the development of European champions able to compete with American giants, especially in emerging high-tech fields.
Recognizing the urgency of the moment, though, governments are looking for ways to co-ordinate by creating partnerships and consortiums, with Airbus’s successful development as a global producer of civilian aircraft being a model. The European Union is assisting this development by looking to organize joint defence procurement, whereby it would buy on behalf of several governments rather than each one negotiating its own contracts, enabling larger orders. It is even pushing the idea of common debt issuance, whereby it would issue bonds for defence spending and then allocate funds to national budgets.
Many governments, including Germany’s, remain reluctant about taking this last step. However, if they can overcome their reservations, common bond issuance would go a long way toward integrating Europe’s financial markets, creating a deep pool of capital that would make European bonds an attractive option for currency-reserve managers looking to reduce their dependence on the U.S.
The end result of all these developments is that Europe could be on the cusp of a years-long economic and investment rebound that will create opportunities for its trading partners. Thus, given the network of contacts he built there during his time as governor of the Bank of England, Mr. Carney does well to call on old friends.
To what extent will Europe welcome Canada with more than words? Many Canadians have been disappointed by the silence of European allies amid the trade war with the United States. But it isn’t really surprising. The contrast with the warm embrace Europe has given to Britain’s turn back to Europe after years of frosty relations with previous Conservative governments is revealing. Unlike Canada, Britain has something to offer – namely, a military with the capacity to launch major operations beyond its shores.
Having been among the worst free-riders on NATO, Canada needs to make itself a more attractive suitor, and will probably need to go further than pledging to spend 2 per cent of GDP on its military. It will need to show a readiness to defend Europe if it wants Europe to defend it. But to the extent it made Europeans more eager to open doors to Canada, such spending could prove a good economic investment.
Europe can never fully replace the U.S. as a trade partner for Canada, for reasons of geography, and also because its upside potential remains hemmed in by structural obstacles, such as an aging population. But in a world where opportunities continue multiplying outside the U.S., it’s a good first port of call.