By Jonathan Spicer
NEW YORK, April 22 Establishing a pan-European
banking union is a "critically important next step" to
stabilizing that region's troubled economy, an influential U.S.
Federal Reserve official said on Monday, wading into a debate
that has split the euro zone.
William Dudley told a conference on transatlantic economic
interdependence that Europe's economic outlook "seems less
bright" and support for fiscal and structural changes could
further erode if growth does not "resume relatively soon."
Protracted recession and a series of banking crises in
Europe have hampered the global economy and the frustratingly
slow U.S. economic recovery. Still, higher taxes and lower
government spending at home remain the Fed's main concern for
the United States.
Dudley, head of the Federal Reserve Bank of New York, again
urged U.S. politicians to loosen fiscal policies.
He also repeated support for the U.S. central bank's
stimulative asset-purchase program, saying the efficacy of
quantitative easing has been "as high or higher than" he
originally expected and the costs have been "the same or lower."
Turning to the euro zone, Dudley urged Europeans - and "not
just in the periphery" - to take advantage of their opportunity
to reform labor and product markets to boost growth prospects.
Banking union aims to stabilize the euro zone by separating
ailing banks from state finances. It would clarify how to deal
with troubled banks, such as those in Cyprus that recently
But Germany and others have called for a change in the
European Union treaty to allow for the union, raising questions
about how fast it can be implemented.
"Banking union has the potential to make a powerful
contribution to euro zone stability and growth, both in the
short term and in the long term," said Dudley, a permanent voter
on policy at the U.S. central bank and a close ally of Fed
Chairman Ben Bernanke.
He argued a union would help fix the "impaired" monetary
policy transmission channels, especially to peripheral
countries; strengthen market confidence in the overall banking
system; and would highlight that "a euro is a euro and will
remain a euro throughout Europe."
Dudley added: "The bad news is that the euro zone is still
in recession and the political support for further rounds of
budget-tightening has clearly lessened."
The European Central Bank is to start supervising euro zone
banks next year as a first step toward union. A resolution plan
to close or salvage struggling banks should come next, followed
by a coherent framework across Europe for deposit protection.