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Why Draghi, Renzi, and now Greece, must prevail. A view from the Bank of England.

Europe Needs Reform

They don’t come any more conservative than the Bank of England. The old lady of Threadneedle Street, guardian of the Pound Sterling, protector of the gilts – Sterling bonds.

So is there a message for Europe when the governor of the Bank of England launches an offensive against Eurozone monetary policy?

The governor, Mark Carney, has confirmed the analysis of Eurozone problems identified by Italy’s Matteo Renzi and now accepted by Mario Draghi at the European Central Bank. A change of direction will be critical for Italy and for Europe as a whole.

Carney begins by attacking the German-led austerity policies that are driving the Eurozone deeper into a ‘debt trap’ that will lead to a second ‘lost decade’.

Firstly, what is a ‘debt trap’?

Carney defines it this way. Low growth makes debt reduction more difficult. The private sector cuts investment and spending; persistent weakness, fear of stagnation and deflation destroys economic confidence; workers become discouraged; a developing spiral continues downward. The prospect of reducing debt becomes more remote.

While the US and the UK are moving away from this trap the Eurozone is sinking deeper, the governor says.

Carney identifies the unfinished Euro project as the primary cause of the problem. There is no banking union and no fiscal union to stand alongside the monetary union. He says that if the Eurozone were one country policy would have been more supportive of boosting growth. In Europe rich countries resist transferring resources to poor countries. Europe lacks risk-sharing mechanisms and is inflexible.

Carney does not use these words but the implication is clear: the German approach has been selfish and has put the rest of the Eurozone at risk. Germany has no interest in risk-sharing or helping its fellow members of the Eurozone in times of crisis.

He does not use these words either: it is the ‘sovereign state’ mentality as opposed to a ‘one country’ approach that is working against recovery in Europe. The contrast between Germany’s integration of East Germany and its approach to Europe could hardly be more stark.

Secondly, how is the UK different? What can we learn?

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Mark Carney points to four main areas of difference between the situations in the UK and Europe.

  • An integrated financial system,
  • Flexible fiscal policy that allowed deficits to rise during downturns,
  • An open economy across the country allowing for capital movement,


  • A credible monetary policy run by the Bank of England.

The governor does not say it directly but the four policy pillars that allowed the UK to dig its way out of recession and the debt trap are not present in the Eurozone. The implications are clear and they are the result of the unfinished Euro project. It is important to say that he also acknowledges competitive reforms will be critical, as Premier Renzi has recognized in Italy.

Carney supports last week’s decision by the ECB to embark on a program of bond buying to inject money into the system – quantitative easing. He sees it as essential to boost demand across Europe as a whole. Without growth there will be no reduction in the Eurozone’s 11.5% unemployment rate and the prospects of breaking out of the debt trap will be bleak.

It is a simple message.

By Ex-Australian Politician in Tuscany Stephen Lusher

Stephen Lusher
Stephen Lusher

Stephen Lusher served five terms in the Australian Federal Parliament. He worked around the fringes of politics before setting up Lush on Bondi, a trendy bar on Sydney’s Bondi Beach.

Frequent trips to Italy led to an inevitable love affair with Tuscany. He and his wife Cathy sold up in Sydney and purchased Il Mulinaccio in 2008.

Within two months of moving to the Chianti Hills he was diagnosed with throat cancer. The experience led to him re-focusing his life and priorities. After a few uncomfortable years he thinks he has it beaten.

Stephen’s interests include wine, food, history, culture and travel. He struggles with the Italian language and indulges himself in some occasional writing.

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