Mark Carney, the Governor the Bank of England, has urged the eurozone to move towards fiscal union and end its hardline austerity policies in a bid to promote growth.
Carney praised the “boldness” of a recent announcement by the European Central Bank that it plans to buy €1.1 trillion of government bonds from eurozone members between now and September 2016.
However, he criticised hardline budgetary policies and a lack of progress on fiscal union, which risked leaving the eurozone in a “debt trap” leading to a second lost decade.
“Low growth deepens the burden of debt, prompting the private sector to cut spending further. Persistent economic weakness damages the extent to which economies can recover. Skills and capital atrophy. Workers become discouraged and leave the labour force. Prospects decline and the noose tightens,” said Carney.
“Europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt trap,” Carney said in his speech.
“It is difficult to avoid the conclusion that, if the eurozone were a country, fiscal policy would be substantially more supportive,” he said.
The completion of fiscal union would enable eurozone countries to share risk, allow money to be transferred around to make the eurozone more economically balanced and help increase competitiveness.
According to Carney, countries with large cash reserves (such as Germany) should spend more to help the eurozone as a whole to achieve stronger growth and avoid continent wide stagnation.
Such calls have previously met with resistance from Germany and other eurozone countries who fear their taxpayers could end up on the hook to pay for day-to-day spending in other countries and one-off bailouts.
In a newspaper interview published Thursday (29 January), Carney said fiscal union would benefit Germany as much as any other member of the eurozone.
“These types of issues; building greater private risk sharing and greater public risk sharing, are as much in the interest of German people as they are in any constituent part of the eurozone,” Carney told the Irish Times.
“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,” warned Carney.