Toronto's rise as a global finance centre

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Maybe Toronto really is the centre of the universe.

At least, in terms of world finance.

Canada's Toronto-based banks have done exceptionally well through the financial meltdown of 2008 and subsequent volatility and uncertainty in global markets. Mark Hopkins of Moody's Analytics believes their growth trajectory will mean Toronto will have more employment in its financial services industry than London by 2017.

Eschewing the riskier profit-chasing innovations of their U.S. counterparts, Canadian banks stuck to more traditional lending practices, emerging from the recession in fine shape and – helped by a strong dollar – able to take advantage of fire sales of distressed U.S. banks and other assets, he notes.

"Rather than suffering from the widespread layoffs seen in other financial capitals such as New York City and London, Toronto experienced only a small downturn and has been enjoying two banner years since then, with steady job growth, exploding downtown real estate prices, and a construction boom that is making cranes as prevalent a feature as skyscrapers on the city's skyline," he writes.

Europe's public sector dilemma

For countries looking to get their fiscal houses in order, austerity measures may look like a workable solution.

But their implementation can face a significant challenge: public sector employment.

In a nation with high public payrolls, cutting costs in government services usually means slashing jobs. That, in turn, dampens consumer spending, notes Tobias Levkovich, chief U.S. equity strategist with Citigroup Global Markets Inc.

Viewed from that perspective, the United States and Canada look pretty good. The U.S. has less than 16 per cent of the labour force employed in the public sector while Canada has about 20 per cent.

In contrast, France is in the 35-per-cent range, Germany around 30 per cent and Portugal, Greece and Italy are under 30 per cent. (China beats them all, with about 50 per cent.)

The high percentage of public sector employment in Europe illustrates both the economic and political risks its leaders face.

"There is some degree of inability to slash European government spending when so many workers can be affected and organized workers generally have huge impact on elections," Mr. Levkovich writes in a recent note. "It makes the challenges even greater than the U.S. would face if it had to [implement similar austerity measures]" he said in an interview.

Euro zone breakup?

For some observers, the European debt crisis has reached the point where it's now just a question of how and when a breakup of the euro zone occurs.

Jonathan Loynes, chief European economist with Capital Economics, believes it will come sooner rather than later.

"We expect Greece to leave the euro in 2012, with at least one further departure in 2013. And there is a clear risk of a bigger breakup," he says in a recent analysis.

Although some of the troubled southern and peripheral economies have made modest progress in addressing their severe fiscal difficulties, data show that budget deficits fell only slightly in the first nine months of this year and remain dangerously high, writes Mr. Loynes.

"Meanwhile, levels of outstanding public sector net debt have continued to climb."

The problem is that these troubled states – with the possible exception of Ireland – have failed to address their underlying economic problems and lack of competitiveness within the single currency, he says.

At this stage, whatever action is taken will likely be insufficient to keep the zone intact, he says.

"We would judge the chances that the euro zone will survive entirely in its current form have now fallen as low as 10 per cent."