Europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt trap, according to the Bank of England’s governor Mark Carney.
Speaking at a lecture in Dublin yesterday (28 January), he stated that this plan begins, but does not end, with the monetary policy boldness of the European Central Bank.
At the end of last week the ECB finally announced a quantitative easing programme of €60bn (£49.51bn) worth of asset purchases a month, starting in March and expected to last until May 2016. This move immediately led to an equity market surge that was only subdued by the Greek election news.
Mr Carney said: “That plan includes difficult structural reforms, but cannot be wholly reliant on them. That plan requires greater private risk sharing via banking and capital markets unions.”
He added that Europe’s plan also needs to recognise that private risk sharing will never fully replace public risk sharing, so that it should include what every other successful currency union has at its heart: mechanisms to share fiscal sovereignty.
“As of this evening, progress on structural reforms in the euro area remains uneven, cross border risk sharing through the financial system has slid backwards,” commented Mr Carney, adding that Europe’s leaders do not currently foresee fiscal union as part of monetary union.
Mario Draghi, ECB President, recently noted that: “In other political unions, cohesion is maintained through a strong common identity, but often also through permanent fiscal transfers between richer and poorer regions that even out incomes ex post. In the euro area, such one-way transfers between countries are not foreseen…”
Mr Carney argued that “such timidity has costs” and it is difficult to avoid the conclusion that, if the eurozone were a country, fiscal policy would be substantially more supportive, although he conceded that it is tighter than in the UK even though Europe still lacks other effective risk sharing mechanisms and is relatively inflexible.
“A more constructive fiscal policy would help recycle surplus private savings and mitigate the tail risk of stagnation. It would also bridge the drag from structural reforms on nominal spending and would be consistent with the longer term direction of travel towards greater integration.”
He espoused the benefits of fiscal risk sharing, pointing out that the euro area stands out from federal systems like the US, Canada and Germany, where the impact of localised shocks to income is reduced by between one tenth and one fifth by centralised fiscal transfers.
“Without this risk sharing, the euro area finds itself in an odd position.”
Mr Carney explained that possible options for sharing fiscal risks range from a transfer union to a pooled employment insurance mechanism.
peter.walker@ft.com
