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BOE’s King Says ‘Very Clear’ That Euro Area Needs Fiscal Union

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May 12 (Bloomberg) -- Bank of England Governor Mervyn King said it was “very clear” the euro area needs a fiscal union after members breaching the region’s deficit limits forced leaders to adopt a bailout package worth almost $1 trillion.

“Within the euro area, it’s become very clear that there is a need for a fiscal union to make the monetary union work,” King told journalists at a news conference in London today. “We rely on a prosperous European economy for us to rebalance our own economy.”

The European Commission said governments should toughen budget rules and speed up enforcement procedures for countries breaching the region’s deficit limits after the Greek fiscal crisis prompted leaders to rush together a rescue package for highly indebted nations. The predicament led some political leaders and economists to call for greater fiscal integration among euro members, which retain control over their public finances.

“As Mervyn King argued, the European rescue package put together at the weekend is not in itself a solution,” David Owen, chief European economist at Jeffries Group Inc. in London, said in an e-mail today. “What is required now is a significant tightening in fiscal policy in many economies, including the U.K. Much now depends on the relatively stronger economies taking up the running.”

The 27 European Union states should reinforce budgetary surveillance, improve compliance with budget rules and give a bigger focus to public debt, the Brussels-based European Commission said today. Countries with “recurrent breaches” of the region’s Stability and Growth Pact “should be subjected to a more expeditious treatment,” the commission said.

Competitiveness

The BOE’s King said rebalancing the economies in the euro area requires “a mechanism to enable other countries that have lost competitiveness to regain competitiveness.”

“That requires actions, probably structural reforms, changes in wages and prices in the countries that need to regain competitiveness, but it also needs a solid and expansionary state of domestic demand in the stronger economies in Europe,” he told reporters.

“Without more expansion of domestic demand in those economies that are well placed, there will be undoubtedly be challenges,” King said.

The vow to push budget shortfalls below the EU’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. While countries breaching the debt and deficit limits can be subject to economic sanctions, none has been fined so far. EU members overhauled the fiscal rules in 2005, easing penalties for deficit overruns.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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