Bank of Canada says Europe faces lower living standards

Mon Dec 12, 2011 2:28pm EST
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TORONTO (Reuters) - Bank of Canada Governor Mark Carney welcomed last week's European debt-crisis agreement but warned on Monday that a third of the euro zone should be ready to face substantially lower living standards to regain competitiveness.

Carney, also head of the G20's Financial Stability Board (FSB), said Europe's peripheral countries would have to restore competitiveness through fiscal and structural reforms, which he said are the responsibility of citizens, companies and governments but not of central banks.

"A sustained process of relative wage adjustment will be necessary, implying large declines in living standards for a period in up to one-third of the euro area," he said in the prepared text of a speech on deleveraging in advanced economies.

Carney's stark message followed an historic agreement on Friday by 26 EU member states - all of them except Britain - that they would pursue deeper fiscal integration as part of efforts to overcome the debt crisis.

In a meeting billed by some as a last chance to save the euro, the leaders also agreed to cap their permanent bailout fund at 500 billion euros and to provide up to 200 billion euros in bilateral loans to the International Monetary Fund (IMF) to help it combat the crisis.

Carney reserved his applause, however, saying much remains to be done.

"The challenge is deploying those means as effectively and efficiently as possible," he said. "We're encouraged by the potential for a more active role of the IMF that was signaled in last week's decisions, but we have to see the implementation."

Markets were likewise skeptical about the long-term plan's ability to quell the two-year-old debt crisis. Global stocks and the euro slid on Monday.

Carney's speech focused on the implications of the global shift toward debt reduction, saying it meant the world was entering a prolonged period of deficient demand.   Continued...

<p>Bank of Canada Governor Mark Carney speaks in Montreal, November 23, 2011. REUTERS/Christinne Muschi</p>