The situation in Europe remains challenging, without question. We welcome the measures that European authorities have taken to improve economic governance, to put in place a fiscal compact, the major structural reforms that have been taken and are agreed and are beginning to be implemented in Italy and Spain particularly. We welcome also the moneys that Europeans have put into the so-called firewall through various measures, and that firewall potentially augmented, subject to the last discussion, by the resources in the IMF.
All of that, from our perspective, suggests that the situation in Europe, as difficult as it is, remains contained. And over the course of our projection, our expectation or assumption is that the situation will remain contained. Now, unfortunately, if you're European, if you're living in Spain or Italy, containment vis-à-vis Canada isn't going to feel that nice. A severe recession has begun in those countries. We see Europe only weakly coming out of recession later this year. The risks are still there, and there are risks around the eventual resolution of this, because fundamentally this is not just a fiscal challenge, not just a banking challenge. In fact, our view is that those situations are more a manifestation of a fundamental balance-of-payments problem that exists within the European monetary union.
What's the potential impact on Canada? In an environment of containment, where Europe is having a recession--mild growth, but not spillovers, because of potentially the example you used.... I'm not endorsing that example, but one can think of scenarios that would have spillovers across financial markets. We're not expecting that in the course of our projection. If that were to be the case, through both the financial channel—things tighten up in financial markets across a range of financial markets—and through the confidence channel, where businesses and Canadians would adjust because of uncertainty, it would be a material impact on our projection. It would have a potential to adjust, certainly, the outlook for activity growth in Canada and potentially the outlook for inflation, all other things being equal in Canada, which would potentially have an impact on the path of monetary policy in this country.
The last thing I'll say is just to assure the committee that we are engaged with European authorities, with authorities of the IMF, with my fellow central bank colleagues virtually on a daily basis on this issue and are as well informed as anybody about the potential evolution here.