Bank of Canada's Carney Says Europe Needs Big Reforms

Incoming Bank of England Governor Mark Carney
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Incoming Bank of England Governor Mark Carney

Europe could face a decade of stagnation unless it makes big reforms and should heed the lessons of Japan, Bank of Canada Governor Mark Carney said on Tuesday as he highlighted Japan's bold moves to bolster growth.

In his final speech as Canadian central bank chief before taking over the Bank of England on July 1, Carney said Europe's recessionary economy is being held back by fiscal austerity, low confidence and tight credit conditions.

"Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens," Carney said in prepared text of a speech he was delivering in Montreal.

"Europe can draw lessons from Japan on the dangers of half measures," he said, adding that the success or failure Japan's massive monetary stimulus - which he termed a "bold policy experiment" - will affect the outlook in coming years.

Carney is also the chairman of the Financial Stability Board, the Group of 20 leading economies' task force on financial regulation.

A euro zone banking union is one of the major reforms Carney mentioned as a necessary step towards economic health in the region. He made no specific reference to the British economy or Bank of England monetary policy.

Nor did he provide any new guidance on Canadian monetary policy as he prepares to hand over the reins to his successor Stephen Poloz, currently the head of Canada's export credit agency.

He said only that the Bank of Canada had maintained a rate-hike bias for the past year in part to complement the efforts of the government and the bank regulator to curb record-high household debt.

The Bank of Canada cut its economic growth forecasts for Canada in April, but maintained its message that the next move will be a rate hike, not a cut. Analysts surveyed by Reuters in early April expected a hike in the third quarter of 2014.

While much of Carney's speech focused on the Canadian economy's relatively successful performance in the financial crisis and its aftermath, he warned that the country can no longer rely on consumer borrowing to fuel growth.

Instead, it should turn to business investment and exports, though these are expected to remain relatively weak in the short term.