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Carney says Europe is making strides towards steady bank system

Financial reforms will be combined with bold steps in Europe, according to Bank of Canada’s main man.


June 12, 2012
by The Canadian Press

MONTREAL: Europe is taking important steps to resolve weaknesses in its banking system that threaten one of the world’s largest economic powerhouses, according to Bank of Canada governor Mark Carney.

“This weekend’s agreement to recap the Spanish banking system marks important progress towards greater financial and fiscal union that will reinforce the monetary union and it’s further evidence of Europe’s resolve to address its problems,” he told an international forum in Ottawa.

He said efforts to strengthen the financial reforms can be combined with bold steps in Europe to rebuild the single European financial market on a more robust foundation, including consideration of a banking union.

Carney said moves to centralize and recapitalize banks on a European rather than national basis will help to “break the increasingly toxic links between banks and sovereigns.”

Earlier Monday, the International Economic Forum of the Americas was told Europe faces severe challenges but is taking the right steps by solidifying the banking system of its weakest members.

Michel Barnier, European commissioner responsible for internal market and services, told the conference he didn’t think Europe is at “one minute to midnight.”

“I think Europe is making the right decisions,” Barnier said.

The big challenge flowing out of the 2008 financial crisis has been to ensure that financial institutions are solid in order to serve the real economy, he said.

In Europe, regulators are working to ensure that its 8,300 banks were well capitalized to meet the latest standards, Barnier added.

Haruhiko Kuroda, president of the Asian Development Bank said further deterioration in Europe could drag the world economy back into recession.

He called Spain’s recent decision to recapitalize its banking sector by borrowing money a significant step forward and could pave the way toward a banking union or fiscal union.

Spain became the fourth European country to seek a bailout, receiving up to US$125 billion for its banks in a deal announced on the weekend following help provided for Greece, Ireland and Portugal.

Asia isn’t immune to a full crisis in Europe, but strong growth in the developing Asian region is imperative for its own prosperity and also to help the global economy, Kuroda said.

Political, economic and regulatory officials from around the world are meeting at the four-day conference amid the financial crisis in Europe and concerns about economic growth around the world.

Riot police also kept a watchful eye on protesters while security officers blocked the entrance at the downtown Montreal hotel hosting the conference. The city has been gripped by months of demonstrations since the Quebec government announced an increase in post-secondary tuition fees.

Prime Minister Stephen Harper will address the conference in the afternoon.

Presidents of the US and Canadian chambers of commerce will speak Tuesday, followed on Wednesday by former US Federal Reserve chairman Alan Greenspan.

Mark Zandi, chief economist Moody’s Analytics, said European unemployment will rise this year reflecting the region’s slowing economy, but he was optimistic that the global economy will perform better next year.

“I think 2014 and 2015 should be very good years,” he said.

Zandi said he’s most optimistic about North America beyond 2012.

“We’ve got some issues to nail down but by this time next year I do expect growth to pick up quite significantly and we will see growth that’s above potential,” he told delegates.

The US is facing a fiscal cliff, with taxes slated to rise Jan. 1 and spending to be cut unless a political deal is reached.

Zandi said he’s optimistic that a political deal will be reached to develop a “credible path” to reduce deficits in the future that avoid severe austerity.

Meanwhile, he said it was imperative to relax fiscal austerity in hard pressed European economies.

“There is a fiscal speed limit and we’re over it in some of these countries and we need to have a more balanced fiscal austerity path,” he said. “Everyone agrees that fiscal austerity is needed. It’s just the path over which that has to occur—we’re trying to do this too quickly.”