Eurozone construct was flawed, says FSA’s Turner

Adair Turner, chairman of the Financial Services Authority (FSA), says “radical reforms” are needed to address the “excesses of the private financial system and the structural faults of the eurozone”.

Adair Turner
Adair Turner

Turner says policies are needed to “smooth the path of deleveraging” in Europe, with “clear recognition” of a number of issues.

He says: “The level of debt in an economy is fundamental to its financial and economic stability, and free markets can result in aggregate debt levels far above optimal levels, in volatile levels of debt, and in sub-optimally allocated debt.

“Sovereign debt is a very particular form of debt and subsidiary sovereign debt quite different from full sovereign debt. The eurozone construct was flawed because of a failure to face that fact.”

He adds: “Deleveraging is a huge challenge, which cannot be smoothly achieved unless aggregate demand is adequately maintained.”

Turner says private leverage and bank maturity transformation “has to be constrained by capital and liquidity standards far higher than those which had developed pre-crisis”.

The chairman says European regulators should not divert from Basel III reforms and called for “powerful macro-prudential levers to contain credit and asset price cycles”.

Turner says “tight political and market discipline of subsidiary sovereign debt with the creation of eurobonds” are also needed and with acceptance that if necessary the European Central Bank can conduct quantitive easing.

He adds that aggregate demand should be maintained and, if necessary, be the ultimate tool of central debt monetisation.

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