January 28, 2015 / 7:05 PM / 5 years ago

Bank of England's Carney urges Europe to take plunge on fiscal union

DUBLIN (Reuters) - Bank of England Governor Mark Carney urged the euro zone to take the controversial step of turning its currency area into a fiscal union in order to escape its slow-growth debt trap - a call likely to be rebuffed by Germany.

Mark Carney, Governor of the Bank of England, gestures during the session 'The Global Economic Outlook' in the Swiss mountain resort of Davos January 24, 2015. REUTERS/Ruben Sprich

Carney praised the European Central Bank for the “boldness” of its plan announced last week to buy hundreds of billions of euros of government bonds to fight the “potentially dangerous” combination of weak growth and falling prices.

But he criticised the euro zone for failing to act on other reforms, including making the single currency area more like the United States, where states cushion one another against economic shocks via federal government transfers.

“It is difficult to avoid the conclusion that, if the euro zone were a country, fiscal policy would be substantially more supportive,” he said in a speech in Dublin.

Such calls have previously met with resistance from Germany and some other euro zone countries who fear their taxpayers could end up routinely on the hook to pay for day-to-day spending in other countries and one-off bailouts.

The victory in Sunday’s elections of parties opposed to the terms of Greece’s bailout deal has raised fresh questions about how to help countries hit hardest by the euro zone debt crisis.

“Europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt trap,” Carney said in his speech.

“Cross-border risk-sharing through the financial system has slid backwards. Europe’s leaders do not currently foresee fiscal union as part of monetary union. Such timidity has costs.”

Carney pointed to the way that fiscal risk-sharing worked in the United States, Canada and Germany. In Britain, the hit to Scotland from the plunge in oil prices had been cushioned by being part of the United Kingdom, he said.

“Without this risk sharing, the euro area finds itself in an odd position,” Carney said.

Options for sharing fiscal risks ranged from a transfer union — or a partial sharing of spending among member states — to a pooled employment insurance mechanism.

Carney also said a more constructive fiscal policy would help to better deploy surplus private savings and reduce the risk of stagnation, suggesting countries like Germany with big piles of cash should spend more to help the euro zone as a whole to achieve stronger growth.

Asked after his speech about the risk of a Greek debt default, Carney said the country’s new government had said it intended to honour its debts but the dangers of such a move were not alarming for the rest of Europe.

“The ability to avoid contagion from this is considerable if not overwhelming,” he said.

Carney also used to the speech to reiterate his view that the fall in Britain’s inflation rate was positive for the country’s economy.

Lower oil and food prices were “unambiguously positive” for Britain, he said, but he said that even after stripping out these elements, inflation was below target.

Writing by William Schomberg and David Milliken, Editing by Ralph Boulton and Angus MacSwan

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