Fed's Dudley: We Need Europe Banking Union

Establishing a pan-European banking union is a "critically important next step'' to stabilizing that region's troubled economy, the influential head of the Federal Reserve Bank of New York said on Monday.

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 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 urged Europeans, and ``not just in the periphery,'' to take advantage of their opportunity to reform labor and product markets to boost growth prospects.

A banking union would among other things clarify how to deal with troubled euro zone banks, such as those in Cyprus that recently needed bailouts, and is expected to strengthen the euro's stability.

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"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 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.''