UPDATE 2-Bank of Canada's Carney says Europe needs big reforms

Tue May 21, 2013 3:58pm EDT

* Bank of Canada chief says Europe should learn from Japan

* Final speech before Carney leaves for Bank of England

* Says tightening bias aimed in part at household debt

* Says the considerable stimulus now in place is appropriate

By Leila Lemghalef

MONTREAL, May 21 (Reuters) - Europe could face a decade of stagnation unless it makes big reforms and it should heed the lessons of Japan, Bank of Canada Governor Mark Carney said on Tuesday as he highlighted Japan's bold moves to bolster growth.

In his final speech as Canadian central bank chief before he takes over as governor of the Bank of England on July 1, Carney said Europe's recessionary economy is being held back by fiscal austerity, low confidence and tight credit conditions.

"Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens," Carney said in the speech, given in Montreal.

"Europe can draw lessons from Japan on the dangers of half measures," he said, adding that the success or failure Japan's massive monetary stimulus - which he termed a "bold policy experiment" - will affect the outlook for the world economy in coming years.

Carney is also the chairman of the Financial Stability Board, the Group of 20 leading economies' task force on financial regulation.

A euro zone banking union is one of the major reforms Carney mentioned as a necessary step towards economic health in the region.

He made no specific reference to the British economy or the Bank of England. But in a news conference following his speech, he downplayed the influence he will have as an individual on policy decisions in his new job.

On Canadian monetary policy, he said little as he prepares to hand over the reins to his successor at the Bank of Canada, Stephen Poloz, currently the head of Canada's export credit agency.

Markets are keen to know whether Poloz will maintain the rate-hike bias the central bank has had for the past year even though growth has disappointed and there are signs excessive borrowing by Canadians is becoming less of a concern.

Carney made it clear there was no rush to raise rates from the current 1 percent.

"There is considerable monetary policy stimulus that's being provided every day to this economy, and it is appropriate and necessary," Carney told reporters.

The central bank is well aware that the economy faces "major headwinds" from abroad, poor export performance and a strong Canadian dollar, he said, and is calibrating policy accordingly.

Analysts surveyed by Reuters in early April expected a rate hike in the third quarter of 2014.

Carney said the central bank's rate-hike bias was, in part, to complement the efforts of the government and the bank regulator to curb record-high household debt, which he said had been moving in the right direction.

"It's an evolution. It's not finished," he said.

While much of Carney's speech focused on the Canadian economy's relatively successful performance in the financial crisis and its aftermath, he warned that the country can no longer rely on consumer borrowing to fuel growth.

Instead, it should turn to business investment and exports, though these are expected to remain relatively weak in the short term.

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