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"We are now faced, across the vulnerable peripheral eurozone countries, with a dangerous combination: impaired banking systems unable adequately to support lending and demand growth; and governments attempting dramatic fiscal consolidation in order to control rising public debt burdens, fiscal consolidation which further strengthens the deflationary headwinds.
If the eurozone is to succeed it will have to pursue what George Osborne described last July as the ‘remorseless logic of integration’, with a common fiscal back stop for banks that cannot be resolved without tax payer support, with mutual deposit insurance, with banking supervision centralised under the authority of the European Central Bank, and with some category of joint eurobonds emerging as the undoubted risk-free asset. In other words, what has come to be labelled a ‘Banking Union’, plus some fiscal integration. Without such union and integration the eurozone cannot survive.
The UK, while remaining within the European single market, does not need to, and will not, be part of that eurozone Banking Union. But we have an enormous national self-interest in the eurozone either taking the steps required to succeed, or, if that is politically unattainable, dissolving in a controlled rather than chaotic fashion. We need to use what limited influence we have to help achieve the best possible way forward."
"When banking is badly regulated, crisis follows. When excess credit growth leads to bust and subsequent deleveraging, the headwinds to economic growth are very strong: when in addition we are struggling with an ill-designed eurozone, they are more severe still.
We need to build a sounder banking system for the future, and many of the reforms needed to achieve that are already in hand. But we also need to ensure that the stability we build is not the stability of the graveyard. The new structures which will be fully in place by next spring – and in particular the role of the FPC – are well designed, but we will need to use them well – and to be open to further policy innovations – if we are to overcome the deflationary headwinds we face. And we will need to support from outside and influence as best we can the redesign of the eurozone, to ensure that our domestic efforts are not undermined by headwinds from abroad."
"It is also important here at the Mansion House in the centre of the City of London to be clear that the roots of the crisis lay in one particular subset of financial services – in banks and shadow banks – in that specific part of the financial system which, if we do not regulate well, is capable of creating credit booms and excessive leverage. But there are many other parts of our financial system, of the City, which played no role in the origins of the financial crisis, and which have continued to provide important high quality services to the world economy throughout the last five years – equity research and distribution, asset management services, the wholesale insurance market of Lloyds and related companies, commodities trading – and it is essential that as we fix the problems of the banking system, we also celebrate the success of many other City services and firms."