King warns over growing dependence on central banks

23 December 2011 10:00 am | By Natalie Holt

Bank of England governor Sir Mervyn King has warned the ongoing European debt crisis is causing an over-reliance on central banks to resolve economic problems.

The Daily Telegraph reports that King raised concerns about the growing reliance on central banks following the European Central Bank’s move earlier this week to provide a record £407bn of cheap loans to 523 European banks.

Speaking in Berlin after a meeting of the European System Risk Board yesterday King said: “Dependence on central banks has risen and signs are intensifying that stressed financial conditions are passing through to the real economy.”

King added that while the refinancing move would help ease European debt pressures in the short-term, longer-term solutions were also needed. He called for the European Financial Stability Facility, what is essentially a bailout fund, to be established.

Separately ECB executive board member Lorenzo Bini Smaghi has called for quantitative easing to be used if there was a risk of deflation across the Eurozone. He said Britain should back the move as “the European Union and ECB would certainly contribute to help Britain if London was in difficulty.”

According to Peter Bofinger, a member of German chancellor Angela Merkel’s council of economic advisers, the future of the euro will be decided in the next six months. He added the future of the currency depended on decisive German action.

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