Bank of England governor Mark Carney has issued a thinly-veiled attack on German austerity, warning the eurozone faces “another lost decade” unless it eases its hard-line policies.
In a speech in Dublin, Mr Carney accused the 19-nation bloc of being “relatively timid” in some of the reforms needed to drag it out of stagnation and urged it to embrace “mechanisms to share fiscal sovereignty”.
“It is difficult to avoid the conclusion that, if the eurozone were a country, fiscal policy would be substantially more supportive,” he said.
“However, it is tighter than in the UK, even though Europe still lacks other effective risk sharing mechanisms and is relatively inflexible.”
Mr Carney’s remarks come days after Greece elected the radical Syriza party into power on a platform of ending the austerity policies imposed on it as part of the debt-laden country’s bail-out - a result that threatens to destabilise the currency union.
It also follows the announcement of a 1.1 trillion euro (£820 billion) asset purchase scheme to try to lift flatlining growth and pull the zone out of negative inflation - which threatens a damaging spiral of falling prices.
Mr Carney described the weakness in the eurozone as “potentially dangerous” with the fear of stagnation holding back spending and investment, adding: “Now is not the time for half measures.”
Some of his remarks, in a speech entitled “Fortune favours the bold”, will be seen as critical of the austerity policies in Europe being pushed by Germany which he said risked driving the single currency area deeper into a debt trap.
“Since the financial crisis all major advanced economies have been in a debt trap where low growth deepens the burden of debt, prompting the private sector to cut spending further.
“Persistent economic weakness damages the extent to which economies can recover. Skills and capital atrophy. Workers become discouraged and leave the labour force. Prospects decline and the noose tightens.
“As difficult as it has been, some countries, including the US and the UK, are now escaping this trap. Others in the euro area are sinking deeper.”
He said last week’s quantitative easing package announced by the European Central Bank had shown “monetary boldness” adding: “The currency union has been relatively timid in putting in place the other policies and, crucially, the institutions necessary to deliver sustainable prosperity for its citizens”.
Mr Carney stressed that the fate of the eurozone - the world’s second largest economy - was also important for the UK. It is the UK’s largest trading partner.
“Europe needs a comprehensive, coherent plan to anchor expectations, build confidence and escape its debt trap.”