Carney Europe can learn lessons

Mark Carney, incoming Bank of England governor has warned Europe is at risk of a Japanese-style 'lost decade' in his final statement as governor of the Bank of Canada.

Carney Europe can learn lessons


In a speech to the Board of Trade of Metropolitan Montreal, entitled ‘Canada Works’, Carney spoke of the deep challenges that still exist, six years into the global financial crisis.

Suggesting he may support further quantitative easing on taking his seat as BoE governor next month, Carney called Japan’s method a "bold policy experiment".

He said: "Europe remains in recession, with economic activity constrained by fiscal austerity, low confidence and tight credit conditions. Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens.

"Europe can draw lessons from Japan on the dangers of half measures. It is now more than two decades since the Japanese financial crisis erupted. To end its debilitating legacy, Japan has just embarked on a bold policy experiment. Its success or failure will have a major impact on the outlook over the coming years."

Carney has also proposed a pan-European employment insurance scheme, based on the inter-provincial system cited as one of Canada’s successes.

He said: "In the medium term, one of the building blocks of European fiscal federalism could be a pan-European employment insurance scheme built on a common European labour market. This would reduce impediments for those looking across the continent for work, while providing a cross-country automatic stabiliser."

Europe could also benefit by emulating Canada’s more flexible labour market."By some estimates, the Canadian labour market is almost four times as flexible as the European labour market."

Carney drew comparisons with Canada regarding the exchange rate inequalities within the eurozone, highlighting Spain’s dilemma.

He said: "It is interesting to compare developments in the Canadian and European internal exchange rates. For example, since the euro was introduced, Spanish competitiveness has fallen by about 30 per cent relative to Germany.

During the same period, the Alberta exchange rate moved even more dramatically, rising 40 per cent relative to Quebec. Intra-regional exchange rates in Canada have generally been more volatile on average than most internal exchange rates in the euro area.

"And yet, the challenges of regaining competitiveness are central to the economic travails of Spain. This is because Spain is experiencing a balance of payments crisis. In the years following monetary union, Spain ran large intra-euro-area current account deficits, funded in part by foreign purchases of real estate and inflows to the Spanish banking system. When these dried up, domestic activity collapsed. There are few institutional mechanisms within the Economic and Monetary Union at present to offset the shock."

He cited four cornerstones to Canada’s relative success at navigating the crisis as "responsible fiscal policy, sound monetary policy, a resilient financial system and a monetary union that works."


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