BANK of England governor Mark Carney has issued a thinly-veiled attack on German austerity by warning the eurozone faces “another lost decade” unless the region eases its hard-line policies.
In a speech in Dublin, Mr Carney accused the 19-nation bloc of being “relatively timid” in some of the reforms needed to drag it out of stagnation and urged it to embrace “mechanisms to share fiscal sovereignty”.
He said: “It is difficult to avoid the conclusion that, if the eurozone were a country, fiscal policy would be substantially more supportive.
“However, it is tighter than in the UK, even though Europe still lacks other effective risk sharing mechanisms and is relatively inflexible.”
Mr Carney’s remarks come days after Greece elected the radical Syriza party into power on a platform of ending the austerity policies imposed on it as part of the debt-laden country’s bail-out - a result that threatens to destabilise the currency union.
It also follows the announcement of a 1.1 trillion euro (£820 billion) asset purchase scheme to try to lift flatlining growth and pull the zone out of negative inflation - which threatens a damaging spiral of falling prices.
Mr Carney described the weakness in the eurozone as “potentially dangerous” with the fear of stagnation holding back spending and investment, adding: “Now is not the time for half measures.”
Some of his remarks, in a speech entitled “Fortune favours the bold”, are likely to be seen as critical of the austerity policies in Europe being pushed by Germany.
He said they risked driving the single currency area deeper into a debt trap.
“Since the financial crisis all major advanced economies have been in a debt trap where 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.
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“As difficult as it has been, some countries, including the US and the UK, are now escaping this trap. Others in the euro area are sinking deeper.”
Mr Carney said last week’s quantitative easing package announced by the European Central Bank had shown “monetary boldness”.
But he said: “The currency union has been relatively timid in putting in place the other policies and, crucially, the institutions necessary to deliver sustainable prosperity for its citizens.”
Mr Carney stressed that the fate of the eurozone - the world’s second largest economy - was also important for the UK. It is the UK’s largest trading partner.
He said: “Europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt trap.”
Mr Carney gave the example of how Scotland’s North Sea dependent economy had been cushioned from the blow of plunging oil prices by its union with the rest of the UK.
He said: “There are few clearer illustrations of the benefits of sound fiscal arrangements in a currency union.”
Mr Carney recently told MPs that the plunge in oil prices represented a “negative shock” to the Scottish economy.
But last night he said: “Because this risk is shared across the entire UK (which on the whole is a net beneficiary of lower oil prices), the net impact on the Scottish public finances is a mere one tenth of what it would been if there had been no risk-sharing.”
Mr Carney said the plan to revive the European economy “begins but does not end with the monetary policy boldness of the ECB”.
He added: “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.
“But that plan also needs to recognise that private risk-sharing will never fully replace public risk-sharing so that plan should include what every other successful currency union has at its heart: mechanisms to share fiscal sovereignty.
“Europe’s leaders do not currently foresee fiscal union as part of monetary union. Such timidity has costs.”