CARTNEY WARNS EUROPE FACES DECADE OF STAGNATION WITHOUT KEY REFORMS / THE WALL STREET JOURNAL

May 21, 2013, 5:33 PM ET

Carney Warns Europe Faces Decade of Stagnation Without Key Reforms

ByNirmala Menon

Europe faces a decade of stagnation without “sustained and significant reforms,” Mark Carney, the incoming governor of the Bank of England,

Mr. Carney, currently Canada’s top central banker, said Europe can draw lessons from Japan on the dangers of taking half measures.

It’s been almost six years since the global financial crisis, but Europe remains mired in recession, fiscal austerity, low confidence and tight credit conditions restraining economic activity, he said.

“Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens,” Mr. Carney said in his final public address as governor of the Bank of Canada.

He noted how Japan had struggled for more than two decades since that Asian nation was beset by its own financial crisis. Japan recently embarked on a “bold policy experiment” to end the “debilitating legacy and its success or failure will have a major impact on the outlook over coming years,” he said.

Mr. Carney, who also heads the Basel-based Financial Stability Board tasked by G-20 leaders with spearheading financial sector reform, said a key lesson from Europe’s experience is the critical role that a sound financial system plays in the transmission of monetary policy.

He said that Europe’s experience has shown the problems that a monetary union faces when banks are unwilling to lend across borders within the union.

“This fragmentation has reinforced the links between sovereign and bank solvency,” he said. “As European leaders now recognize, without major reforms to create a banking union,” the European Monetary Union is “fundamentally weakened,” he added.

Mr. Carney suggested that in the medium term, one of the building blocks of European fiscal federalism could be a pan-European employment insurance scheme built on a common European labor market. This, he said would “reduce impediments for those looking across the continent for work, while providing a cross-country automatic stabilizer.”

Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved