OTTAWA (MNI) – Europe is stagnating, rebalancing the global economy between debt and growth is stalled, and the public taxpayer should not have to pay for private banking excesses,Bank of Canada Governor Mark Carney said Thursday.
Carney laid out stiff medicine, in a speech at Halifax, Nova Scotia, for a European Union whose president said rather angrily at a meeting of G-20 nations in Los Cabos, Mexico, that Europe needed to take no lessons from others there.
Jose Manuel Borroso was responding to public statements there by Canadian Prime Minister Stephen Harper and some others that solutions to Europe’s bank and debt crises should be found in common, centralized, highly-funded Europe-wide action to fundamentally remake the EU. Harper and Finance Minister Jim Flaherty have been pungent in their comments, and have kept Canada from joining other nations in providing more funding to the International Monetary Fund to bail out problem situations.
Much of what Carney said, in the text of a speech to the Atlantic Institute for Market Studies, goes over known ground although the tone is strong.
“Europe is now stagnating. Its GDP is still more than 2 percent below its pre-crisis peak, and private domestic demand sits a stunning 6 percent below,” he said.
At the same time, “the rebalancing of the global; economy is stalled, as much of the advanced world remains mired in a prolonged deleveraging (reductions in spending and deficits),” he said.
What is needed both for Europe and the world “is an open, resilient financial system” in which “financial reform is a must.”
For Europe, “a sustained process of relative wage adjustment will be necessary, implying large declines in living standards in one-third of the euro area,” he said.
“A comprehensive adjustment is necessary,” he added, not only with falling wages and employment in countries such as Spain, but rising wages and rising private demand in Germany. “It is striking that German real wages barely grew in the two decades before the crisis,” he said.
Europe must go ahead with its current proposal to create a banking union. What Carney called “the increasingly toxic links between banks and sovereigns” has to be broken. That would come from “centralizing bank restructuring, re-capitalizing banks with European rather than national resources, moving toward centralized (or federalized) supervisory oversight and harmonizing (or better still, mutualizing) deposit insurance.”
Carney said Europe is showing greater resolve in these areas. Christine Lagarde managing director of the IMF, did not go quite so far in her statement after the Los Cabos meeting. She said “the seeds of a pan-European recovery plan were planted” at Los Cabos. She added: “Their intention to consider concrete steps towards a more integrated financial infrastructure is important,” and she wanted to discuss it further with the Europeans. So, a somewhat different tone.
The second flawed monetary union, for Carney, is the global monatary system, “a hybrid of, on the one hand, mainly major advanced economies with floating exchange rates and liberalized capital flows, and, on the other, a group of countries that actively manage their exchange rates.” The system, he said, “is centred on China and the United States.”
What must occur there is for debt to be paid down in the U.S.in a climate also of growth enabled by tax compeititiveness and sound infrastructure investment. “It needs a sound financial sector that is diverse, resolient and open,” he said. That would come from global reforms in which he is engaged as head of the Financial Stability Board of the G-20 and which, he said, “must address, once and for all, the unfairness of a system that privatizes gains and socializes losses.”
Bondholders, shareholders and managements must henceforth bear the brunt of financial institution’s losses, not be bailed out by taxpayers, he said. Shadow banking had to be tightly supervized and regulated, and the old idea of bailing out institutions that were considered “too big to fail” had to go effectively.