BOE's King Says Growing Global Imbalances Should Spur Leaders Into Action
Bank of England Governor Mervyn King said a resurgence of imbalances should motivate governments to tackle instabilities in the global economy to prevent a e repeat of the financial crisis.
“The most obvious problem at the global level is that the imbalances are growing again,” King said in a speech late yesterday in Stanford, California. “The current pattern of demand in the world economy is unsustainable. The political tension generated by the divergent preferences of surplus and deficit countries risks moves toward protectionism.”
Finance chiefs from the Group of 20 plan to meet on March 31 to address overhauling the global monetary system. Finance ministers and central bankers concluded talks on Feb. 20 by listing gauges such as budget deficits and private savings rates that they will monitor to see whether imbalances are forming.
King also said that the “challenges of sustainability are most evident in vulnerable euro-area periphery countries.” European Union leaders met in Brussels yesterday to forge a permanent mechanism to support its debt-laden members.
“They face a major challenge to raise output by enough to service existing debt and to bring unemployment down,” he said.
A failure on the part of world governments to bring saving and borrowing nations into balance leaves those with the biggest debt levels at risk of rising interest rates and falling asset prices in case savings suddenly dry up, King said.
Unsustainably Low
He also said the “unprecedented” response of central banks and governments to counter the recession isn’t an alternative to a rebalancing of the global economy.
“Output was cushioned only through an unprecedented policy response around the world. That did bring an end to the sharp falls in output, and allowed confidence to recover somewhat,” he said. “Yet this extraordinary policy response has simply postponed much of the required adjustment in spending patterns around the world. And long-term real interest rates are unsustainably low.”
The vulnerabilities need to be addressed at a time when officials are working on new rules to bolster the stability of banks and support economic recoveries. Financial systems remain at risk because they’re still burdened with banks that are “too important to fail,” King said.
“None of the underlying causes of the current crisis have been removed,” he said. Though nations were able to coordinate to contain the financial turmoil in 2008, “the challenge now is to prove that we can also work together when we are no longer in an immediate crisis, but still facing deep-seated problems.”
To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
Rate this Page