BoE's Carney slams euro zone austerity

Mark Carney

Governments in the euro zone should loosen tough budgetary measures in order to promote growth and help restore normality in the region, according to the governor of the Bank of England (BoE).

Speaking in Dublin on Wednesday evening, Mark Carney called for looser fiscal policy in the euro zone, and for its members to pool their resources.

"(Fiscal policy) is tighter than in the U.K., 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," he said, according to a transcript of the speech.

"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....it would be bold, and it would be favored by fortune."

His comments come as Greece's new government go head-to-head with officials in Berlin , who have long promoted a tough stance on austerity in return for financial support. The anti-austerity Syriza party is now expected to attempt to renegotiate the terms of its bailout, amid fears this could lead to Greece exit from the single-currency bloc.

Carney explained that monetary policy "boldness" by the European Central Bank (ECB) cannot be used in solitude. He called for difficult structural reforms in the euro zone and greater private risk sharing via banking and capital market unions.

Comparing the U.K. with the euro zone, he said that the private sector in the latter continues to generate surplus savings of 3.5 percent of gross domestic product (GDP) . He added that this must be recycled back into the economy to generate an expansion.

"The U.K. no longer faces that challenge. Its private sector is in balance," he said, also highlighting that the U.K. had a better unemployment rate.

The U.K. is heavily indebted compared to most of its peers, but has been praised by organizations like the International Monetary Fund for being the fastest growing G-7 economy following the financial crash of 2008.

The country's government - led by the right-of-center Conservative Party - has followed a path of austerity and fiscal restraint since coming to power in 2010 , although it has missed deficit targets during that period.

Criticized at first, the austerity policies have coincided with a significant drop in unemployment in the U.K., and the Bank of England is now looking to raise interest rates in the medium term. Opposition policymakers argue that the country has become unbalanced, with poorer citizens bearing the brunt of the spending cuts.

However, Carney's speech suggests that he feels euro zone austerity might have gone too far. In an interview to The Irish Times on Thursday, he said that Germany - the traditional powerhouse of the bloc - should accept that supporting poorer euro zone countries is in its own interests.

"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 euro zone," he told the newspaper.

"If you enter into a union, you should take steps to make that union as effective as possible, but also, in a way, that works for everybody. And the prosperity of all countries in the euro area is as much in Germany's interest as it is in those countries' interest, and the German government recognizes this."

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts