Mark Carney, who will become governor of the Bank of England on July 1, told an event in Montreal that Europe risked problems similar to those faced by Japan. There, the country’s government has only recently begun taking action to address the ‘debilitating legacy’ caused by the bursting of the asset price bubble in the early 1990s, he noted.
‘Europe remains in recession, with economic activity constrained by fiscal austerity, low confidence and tight credit conditions,’ Carney said. ‘Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens.’
Carney said that Europe could draw lessons from Japan on the dangers of ‘half measures’. He explained: ‘It is now more than two decades since the Japanese financial crisis erupted. To end its debilitating legacy, Japan has just embarked on a bold policy experiment. Its success or failure will have a major impact on the outlook over the coming years.’
He also contrasted Europe and Japan’s experience of the global financial crisis with Canada’s. ‘As painful as our recession was, Canada suffered less,’ he said. ‘By the start of 2011, all of the output and all of the jobs lost during the recession had been recovered. A further 480,000 jobs have been created since, with the vast majority of them full-time and in the private sector. Nearly all the new jobs are in industries that pay above-average wages.’
Carney attributed this ‘outperformance’ to Canada’s responsible fiscal policy, its sound monetary policy, its resilient financial system and a monetary union ‘that works’.
In particular, he highlighted the benefits of the federal government's equalisation programme, which makes payments to less well-off provinces to offset any revenue shortfalls compared with better-off regions.
‘Canada’s equalisation programme helps stabilise the impact of asymmetric shocks,’ Carney explained. ‘For example, between 2006 and 2011, federal support programmes, including equalisation payments and Canadian social and health transfers, grew more rapidly for provinces whose economies were hardest hit by the crisis.’
He also highlighted the risk-sharing benefits of Canada’s Employment Insurance programme, which is funded by those in work and provides temporary support for people who have lost their jobs. This particularly benefits provinces with higher unemployment rates.
Carney suggested this could be adapted to the eurozone. ‘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 labour market,’ he said. ‘This would reduce impediments for those looking across the continent for work, while providing a cross-country automatic stabiliser.’
