Halifax—Sustained global economic growth and the benefits of globalization are at risk should financial reforms in Europe not take hold, according to the head of Canada’s national bank.
To preserve the advantages of an open and globally integrated financial system, Bank of Canada governor Mark Carney said the implementation of agreed reforms is necessary across G20 nations.
According to Carney, experience has shown when mutual confidence is lost the retreat from an open and integrated system can happen quickly.
“A return to a nationally segmented global financial system would reduce both system resilience and financial capacity for investment and growth,” Carney said.
There are four main components to the global financial reform agenda suggested by the governor: building resilient institutions; ending too-big-to-fail; creating continuously open markets; and moving from shadow banking to market-based finance.
Carney stressed that reform of the financial system must take into account its global nature.
Updated June 21, 2012 at 3:21 p.m.
Euro Zone crisis
Carney heaped praise on the European Union while in Halifax, crediting it with transforming a number of southern and eastern European economies, but warned its growing crisis is threatening the pace of global growth.
“This process lifted hundreds of millions of people out of poverty and created the potential for hundreds of millions more to follow in their path,” he said. “The gap between rich and poor countries has narrowed dramatically and soon the global middle class will outnumber the poor.”
However, Carney said the problems facing Europe today can partially be blamed on the early success of its single currency.
“After the euro’s launch, the European financial system quickly became integrated and cross-border lending exploded,” he said. “Easy money fed booms, which flattered government fiscal positions and supported bank balance sheets.”
Another issue further hampering the Euro Zone is large differences in national inflation rates.
“In the eight-year run-up to the crisis, inflation in the crisis economies was about twice that of the core countries,” Carney said.
Steps to recovery
With the European financial system renationalizing in recent months—intra-European cross-border lending has been falling at a rate of 10 per cent per annum after growing by 25 per cent per year in the run-up to the crisis—Carney said bold steps are required to restore the Euro Zone financial market.
One example of the proposed steps is to create a European banking union.
“By centralizing bank restructuring, re-capitalizing banks with European … resources, moving towards centralized supervisory oversight and harmonizing deposit insurance, Europe can break the increasingly toxic links between banks and sovereigns,” Carney said.
As the recent agreement to recapitalize the Spanish banking system marks progress towards a greater financial resilience, Carney hopes the move will reinforce the monetary union and act as further evidence of Europe’s resolve to fix its problems.